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The investment-strategy decisions of a Darden Capital Management student-portfolio management team in 2004 are examined. Case materials allow students to estimate CAPM-based expected returns using market data. The case focuses on introducing the portfolio-allocation decision; exploring the relevance of various investment-risk metrics; developing the intuition of diversification, market risk, and the capital-asset-pricing model; building judgment on how to appropriately estimate the CAPM parameters using available market data; and discussing the fundamental concepts of market efficiency.

After completion of the case, students will be able to understand the following: how to understand financial statements, income statements and cash-flow statements with the help of ratios; understand the concept of shareholding pattern along with different entities, namely, non-promoters, foreign institutional investor, domestic institutional investor and others; financial ratio analysis with traditional DuPont and extended DuPont analysis; understand the differences between comparable firms; how to analysis return, risk, covariance, correlation, market risk and capital assets pricing model (CAPM) and how to suggest an appropriate investment strategy.

The case presents company background and financial statements of four companies listed under departmental stores in India, namely, Vmart retail, V2 retail, Avenue Supermarts (known as DMart) and future retail. Students are asked to determine, which company is performing better to make a recommendation for investment. Students learn the tools of financial ratio i.e. profitability, efficiency, liquidity and market-based ratio along with the traditional DuPont decomposition and the extended DuPont analysis. Students also learn how to measure stock return, standard deviation, covariance, correlation, market risk and CAPM.

This case is suitable for management accounting, financial analysis and security analysis and portfolio management courses at the post-graduate or graduate levels. The case can be used in similar courses such as in financial statement analysis courses or security analysis and portfolio management courses.

Teaching Notes are available for educators only. Please contact your library to gain login details or email support@emeraldinsight.com to request teaching notes.

CSS: 1 Accounting and finance.

These are the three most important learning outcomes: discuss the relevance of capital asset pricing model (CAPM) as the methodology to estimate the cost of equity for an investment in an emerging market; analyze the different alternatives to estimate country risk discussing the pros and cons of each. Consider the additional complexity in estimating the cost of equity, contrasting the perspective of a local, non-diversified investor with that of a multinational company operating in 39 countries.

The Chief Financial Officer of a business group has to determine the correct discount rate for an investment in a new hotel in Guayaquil, Ecuador. The group has traditionally used the same discount rate for all projects and is now presented with several alternatives by his team. Estimating the correct country risk adjustment for the project is an important challenge. He knows that there is no clear solution to this challenge that is accepted by all practitioners and academics, but he has to present a recommendation to the board.

The case study is designed for corporate finance, appraisal or international finance courses in both MBA and executive training programs. To discuss this case study, students are assumed to have been already exposed to the weighted average cost of capital and the CAPM.

Teaching Notes are available for educators only. Please contact your library to gain login details or email support@emeraldinsight.com to request teaching notes.

CSS 1: Accounting and finance.

This case serves as a foundation for student discussion of the estimation of required rates of return (ROR) on investments in emerging markets. An associate in J.P. Morgan's Latin America M&A department (mergers and acquisitions) is assigned the task of valuing the telephone directory operations (“paginas amarelas” means “yellow pages”) of a large Brazilian conglomerate. All cash flows have been converted to U.S. dollars, and present values computed for various discount rates. The remaining step is to determine the appropriate target rate of returns for dollar flows originating in Argentina, Brazil, and Chile. The capital asset pricing model (CAPM) is used along with a political risk premium and country beta. The necessary figure work is comparatively light, leaving the student time to reflect on the need for various adjustments in estimating crossborder rates of return.

It was early 2015 and executives in iShares' Factor Strategies Group were considering the launch of a new class of exchange-traded funds (ETFs) called smart beta funds. Specifically, the group was considering smart beta multifactor ETFs that would provide investors with simultaneous exposure to four fundamental factors that had shown themselves historically to be significant in driving stock returns: the stock market value of a firm, the relative value of a firm's financial position, the quality of a firm's financial position, and the momentum of a firm's stock price. The executives at iShares were unsure whether there would be demand in the marketplace for such multifactor ETFs, since their value added from an investor's portfolio perspective was unknown. Students will act as researchers for iShares' Factor Strategies Group and conduct detailed analysis of Fama and French's five-factor model and the momentum effect, smart beta ETFs including multifactor ETFs, and factor investing with smart beta ETFs to help iShares make its decision.

Revisar el CAPM como metodología para estimar el costo de los recursos propios en una inversión e ilustrar, mediante un ejemplo latinoamericano, los retos de aplicar el modelo fuera de Estados Unidos. Presentar diferentes alternativas para estimar el riesgo país con una discusión de sus pros y contras. Introducir complejidades adicionales en el estimado del costo de los recursos propios contrastando la perspectiva de un inversionista local no diversificado con el de una multinacional que opera en 39 países

El caso Hotel Business Inn se enfoca en la estimación del riesgo país para determinar el costo de los recursos propios en una inversión fuera de los Estados Unidos. La teoría financiera indica que este costo debería determinarse en base al riesgo no diversificable de la inversión y para obtener este estimado, los libros de texto recomiendan el CAPM (Capital Asset Pricing Model). Los estimados del CAPM, sin embargo, generalmente se basan en el mercado financiero de Estados Unidos. Para aplicar este modelo en otros países, el consenso es que se debe ajustar por el riesgo país de la inversión pero existe un debate sobre cómo hacer este ajuste. El caso presenta las alternativas más utilizadas e introduce complejidades adicionales en el entorno de un país latinoamericano.

El caso está diseñado para cursos de Finanzas Corporativas, Valoración o Finanzas Internacionales tanto para estudiantes de MBA como en programas de formación ejecutiva.

Teaching Notes are available for educators only. Please contact your library to gain login details or email support@emeraldinsight.com to request teaching notes.

CSS 1: Contabilidad y Finanzas

An estimate of the fair rate of return on capital is a critical input into tariff regulation. A too high estimate will lead to high tariffs for consumers; a too low estimate will not provide adequate incentives for investment. The Airport Economic Regulatory Authority of India has issued a consultation paper for finalizing the norms and procedure for estimating the fair rate of return. It now needs to reconcile the differing view and approaches of different stakeholders.

A business analyst at Mead Corporation had just begun the process of estimating Mead's cost of capital for the fourth quarter of 1990. As part of her analysis, she hoped to explain why the cost of equity had increased and recommend whether the company should consider the increase a problem.

This case was a real-life situation faced by the author. Names were changed, so students would not know that the author was the protagonist. The case had been developed over several years as a capstone to the capital budgeting section of an MBA finance course and an advanced undergraduate course.

Trey and Lauren Gallo were considering the purchase of a vacation condo that also generated rental income. The current owners were willing to sell at a lowball offer of $605,000 as the pandemic entered its 13th month. The Gallos felt they needed to act fast to get this deal. However, the risks were extraordinary, as the pandemic had reduced rental income by 50% and borders had just recently closed. The case provides all data needed to compute rental revenues, capital expenditure, operational expenditures and financing costs. Students are expected to compute the NPV and IRR of free cashflows. Students will compute and evaluate the cost of capital using the condo’s projected debt structure, a choice of several proxy betas and a project risk premium. The case also uses extensive sensitivity analysis. This case differs from corporate capital budgeting problems because it evaluates both levered and unlevered cashflows, and the cashflows include savings from personal use. The case has been successfully used in MBA finance courses and advanced undergraduate finance courses. The case can be used as a capstone case for capital budgeting or a comprehensive exam in undergraduate, MBA and executive programs. The case questions can also be spread throughout a course to cover the topics of financial statement forecasting, free cash flows, capital budgeting, cost of capital and sensitivity analysis.

Earlier versions of this case have been used in an advanced undergraduate corporate finance course and MBA finance courses. The case is generally used as a capstone to the material on capital budgeting. Students should have already covered material on financial statements, loan cashflows, levered and unlevered cashflows, CAPM, proxy betas, weighted average cost of capital, NPV and IRR. This case is also appropriate for courses in real estate finance and personal finance.

Grocery store chain Winn-Dixie had rapidly expanded in an effort to become a national retailer, and by 1999 it had more than 1,000 stores. The company began manufacturing its own products, reasoning that by owning more of the supply chain, it could offer the customer less expensive options. With its new geographic focus and manufacturing facilities, Winn-Dixie attempted to secure a position as a low-cost provider with a national presence. Instead of improving the company's position in the market, however, this strategy crippled both the short- and long-term prospects for Winn-Dixie. The company paid a high premium to expand and increased its leverage without ever realizing the purposed synergies. In fact, there were dis-economies of scale because the distribution, marketing, and administrative costs had risen along with the increased revenue. The expansion and inefficient manufacturing added complexity to its distribution network, and with a greater debt load and less cash, the company was unable to reposition itself in the market when its low-cost provider strategy failed. Not only was the company unable to pursue other opportunities but it also did not have the cash to properly maintain many of its existing stores, which quickly became run down. Winn-Dixie was stuck as a general grocer with few options at a time when the industry was rapidly evolving. Following faulty strategies of expansion, supply chain changes, and increased debt, Winn-Dixie declared bankruptcy. Students will take the view that Paul “Flip” Huffard, lead consultant from Blackstone LP, had in determining the valuation and new capital structure of the company. These decisions would be critical, as they affected what each creditor class would receive and whether Winn-Dixie could emerge from bankruptcy.

Students will: 1. Assess the importance and negative financial impact of past strategic moves, and suggest possible future strategic directions and the expected benefits of such changes. 2. Learn quantitative valuation methods for a company in Chapter 11 and their effects on stakeholders. 3. Learn the elements of a plan of reorganization, including the capital structure, treatment of multiple creditor groups, and management compensation. 4. Discuss sources and uses of capital during a Chapter 11 turnaround.