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This study aims to provide students an opportunity to analyze the financial performance of a publicly listed real estate company and estimate its instinct value by applying appropriate financial models and approaches.

Three major valuation models/approaches generated by financial theory and practice to estimate the intrinsic value of a security: discounting cash-flows valuation (DCF and NPV) – valuation through adjusted net asset and liquidation value (NAV) – relative valuation through price and value multiples (valuation multiple analysis and precedent transactions analysis). Wholly owned subsidiaries versus and joint venture ones.

Analyze financial information of all segments in a multiple-business firm, and apply suitable financial models and approaches among net asset value model (NAV), discounted cash flow (DCF) or net present value (NPV) model, valuation multiple analysis and precedent transactions analysis to estimate the intrinsic value of the whole firm.

This decision-based case allows students to explore the business valuation process for a public listed real estate company, Alexander & Baldwin, Inc. (NYSE: ALEX). Based on financial statements analysis and forward-looking financial expectation on ALEX, this case elevates students' understanding and practice of valuating this multiple-business firms by applying appropriate financial models and approaches among NAV, DCF or NPV, valuation multiple analysis and precedent transactions analysis and enable students to make their investment decisions of buying, holding or selling the company’s stocks.

This case is most appropriate for graduate courses such as corporate finance, investments, personal finance, real estate finance and financial markets and institutes.

This case is designed to present students with the challenges of formulating a discounted-cash-flow (DCF) analysis for a strategically important capital-investment decision. Analytically, the problem is representative of most corporate investment decisions, but it is particularly interesting because of the massive size of the American Centrifuge Project and the potential of the project to significantly affect the stock price. Students must determine the relevant cash flows, paying close attention to the treatment of input costs, selling prices, timing of investment outlays, depreciation, and inflation. An important input is the appropriate cost of uranium, which some students argue should be included at book value, while others argue that market value should be used. Although the primary objective of the case is to focus on the estimation of cash flows, students are provided with a straightforward set of inputs to estimate USEC's weighted average cost of capital. The case is designed for students who are learning, or need a refresher on, DCF analysis. Because of the basic issues covered, the case works well with undergraduate, MBA, and executive-education audiences. The case also affords the opportunity to explore a variety of issues related to capital-investment analysis, including relevant costs, incremental analysis, cost of capital, and sensitivity analysis. The case is an excellent example of the value of a firm as the value of assets in place plus the net present value of future growth opportunities.

In October 2004, Mr. Richard Sands, CEO of Constellation Brands, evaluated the potential purchase of The Robert Mondavi Corporation. Sands felt that Mondavi's wine beverage products would fit into the Constellation portfolio of alcohol beverage brands, and the opportunity to purchase Mondavi for a highly favorable price was quite possible due to recent management turmoil at that company. However, should it be purchased, strategic and operational changes would be necessary in order to fully achieve Mondavi's potential value. In making a decision, students need to consider the attractiveness of the wine industry, its changing structure, its share of the overall market for beverages, and rival firms' strategies. As rival bidders may emerge for Mondavi's brands, Constellation must offer a price that demonstrates its serious intent to acquire Mondavi.

This case serves as an introduction to the concept of economic value added (EVA). The student is placed in the position of Valmont's CFO to decide whether EVA can live up to its promise to motivate managers to act like shareholders and ultimately lead them to make value-enhancing decisions that can reverse Valmont's weak earnings and lackluster stock-price performance. The case works best if students are acquainted with the concepts of cost of capital and net present value. The teaching note that is available for registered faculty explains how to incorporate the accompanying six-minute video supplement.

The essence of discounted cash flow valuation is simple; the asset is worth the expected cash flows it will generate, discounted to the reference date for the valuation exercise (normally, the day of the calculation). A survey article was written in Parker (1968), where it was stated that the earliest interest rate tables (use to discount value to the present) dated back to 1340. Works from Boulding (1935) and Keynes (1936) derived the IRR (Internal Rate of Return) for an investment. Samuelson (1937) compared the IRR and NPV (Net Present Value) approaches, arguing that rational investors should maximize NPV and not IRR. The previously mentioned works and the publication of Joel Dean’s reference book (Dean, 1951) on capital budgeting set the basis for the widespread use of the discounted cash flow approach into all business areas, aided by developments in portfolio theory. Nowadays, probably the model with more widespread use is the FCFE/FCFF (Free Cash Flow to Equity and Free Cash Flow to Firm) model. For simplification purposes, we will focus on the FCFE model, which basically is the FCF model’s version for the potential dividends. The focus is to value the business based on its dividends (potential or real), and thus care must be taken in order not to double count cash flows (this matter was treated in this case) and to assess what use is given to that excess cash flow – if it is invested wisely, what returns will come of them, how it is accounted for, etc. (Damodaran, 2006). The bridge to the FCFF model is straightforward; the FCFF includes FCFE and added cash that is owed to debtholders. References: Parker, R.H. (1968). “Discounted Cash Flow in Historical Perspective”, Journal of Accounting Research, v6, pp58-71. Boulding, K.E. (1935). “The Theory of a Single Investment”, Quarterly Journal of Economics, v49, pp479-494. Keynes, J. M. (1936). “The General Theory of Employment”, Macmillan, London. Samuelson, P. (1937). “Some Aspects of the Pure Theory of Capital”, Quarterly Journal of Economics, v51, pp. 469–496. Dean, Joel. (1951). “Capital Budgeting”, Columbia University Press, New York. Damodaran, A. (2006). “Damodaran on Valuation”, Second Edition, John Wiley and Sons, New York.

All information is taken from public sources and with consented company interviews.

Opportunities for value creation may be found in awkward and difficult circumstances. Good strategic thinking and ability to act swiftly are usually crucial to be able to take advantage of such tough environments. Amidst a country-wide economic crisis and general disbelief, José de Mello Group (JMG) saw one of its main assets’ (Brisa Highways) market value tumble down to unforeseen figures and was forced to act on it. Brisa’s main partners were eager in overpowering JMG’s control of the company, and outside pressure from Deutsche Bank was rising, due to the use of Brisa’s shares as collateral. JMG would have to revise its strategy and see if Brisa was worth fighting for; the market implicit assessment about the company’s prospects was very penalizing, but JMG’s predictions on Brisa’s future performance indicated that this could be an investment opportunity. Would it be wise to bet against the market?

This study is excellent for finance and strategy courses, at both undergraduate and graduate levels. Company valuation and corporate strategy are required.

After completing this case, students should be able to: identify and compute relevant cash flows in relation to a real estate project and compute the net present value (NPV). Determine the target return or cost of capital (by looking at historical economic indicators). Design or formulate a sensitivity analysis to determine the drivers of the project value. Evaluate real estate and other investments taking qualitative and quantitative factors into consideration. Demonstrate the computation of a break-even rate to determine the minimum or maximum revenue or cost required for a project to be viable.

This case study is about the Golden Beak Securities Pension Fund that wanted to invest in a Hostel Project in one of the universities in Ghana. Most universities in Ghana faced an acute shortage of on-campus accommodation. Also, the Government of Ghana, in 2017, implemented a programme to make Senior High School in Ghana free. This was expected to increase the number of students who will enter the existing universities. The project was therefore seen as strategic, as it would help ease the pressure of on-campus accommodation while providing diversification for the pension fund. As part of the investment committee’s (IC) quest to improve the skill set available to it, especially in relation to real estate investments, Esi Abebrese was appointed as one of the members of the IC of GSB. Her main task was to collect information on key macroeconomic variables, as well as granular information on project costs and revenues and conduct investment appraisal. Esi was scheduled to make a presentation to the IC on the 15th of October 2019 following which the Committee will debate and make a decision. The project had an estimated cost of GH¢52m with a total number of 3,424 student beds and ancillary facilities. Undertaking the project required moving funds from investments in money market securities with one of the banks in Ghana. The investments in the money market securities were currently yielding about 16% a year. The determination of the cost of capital was critical and Esi and Nana eventually settled on a long-term weighted average cost of capital of 14%. This was after considering the trend of inflation, monetary policy rates, treasury rates, stock market returns and a report on returns on commercial real estate properties in Ghana. An exit capitalisation rate of 20% was also estimated for the purposes of determining the value of the property at the end of the investment horizon. Esi also obtained estimates of cost and revenue for the project and proceeded to carry out a feasibility analysis on the project. This consisted of an NPV analysis and sensitivity analysis on various factors to determine the drivers of the project value. The IC had to take several factors (both quantitative and qualitative) into consideration before making a decision. Esi believed that these factors included the diversification of the fund’s assets, the return on investment, potential oversupply of hostel accommodation, the social responsibility of providing student accommodation and the impact of any prolonged shutdown of the university.

Masters/advanced undergraduate.

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.

Teuer Furniture is a privately owned, moderately sized chain of upscale home furnishing showrooms in the United States. By the end of 2012, it had regained its financial footing and a number of long-term investors, including several of Teuer’s original non-management investors, now want to sell their shares. At the request of the board, Jennifer Jerabek, the chief financial officer of the company, and her team put together an extensive valuation of Teuer based on a discounted cash flow analysis. When the model was presented to investors, a number of them disagreed with the results. Some investors considered the value too high; others considered it too low. Not surprisingly, some of the differences of opinion were correlated with whether or not the investors wanted to sell their shares of Teuer. Jerabek was instructed to build a valuation of Teuer using a multiples approach instead.

After reading and analyzing the case, students will be able to:

• Estimate the value of a firm using a multiples approach

• Select an appropriate group of comparable firms and defend the logic behind the selection

• Select a correct set of valuation ratios and defend the logic behind the selection

• Compare the valuations produced by a multiples and DCF approach and if the valuations do not match, explain why the two methods yield different valuations

Estimate the value of a firm using a multiples approach

Select an appropriate group of comparable firms and defend the logic behind the selection

Select a correct set of valuation ratios and defend the logic behind the selection

Compare the valuations produced by a multiples and DCF approach and if the valuations do not match, explain why the two methods yield different valuations

The case proposes a discussion of the time value of money and capital budgeting concepts, including determining the effective overall cost of capital, estimating working capital requirements, consideration of all relevant cash flows – including opportunity costs, finding the present value of future cash flows (annuities and lump-sum cash flows) by linking the concepts of weighted average cost of capital and working capital and net present value (NPV) and internal rate of return (IRR).

Jehan Wadia, a newly appointed finance manager of Tembo Global Industries Ltd., is facing a dilemma in recommending an investment decision to Mr Variava, Chief Finance Officer. Implementation of the project requires an investment of INR 82m. Ms Stella, funding division head, proposed financing through equity and term loans in the proportion of 3:2, respectively. Mr Shrinivasan, handling the short-term financial needs of the firm, suggested a finance mix having a higher weight-age of debt. Mr Variava desires to maximize the wealth by taping the opportunity. The case is written for an experience in the capital budgeting dichotomy faced by managers in real-life situations.

This case can be used in various contexts – as a preparatory case in a foundation course of Financial Management at the graduate level to instill the fundamentals for evaluating long-term investment decisions or in courses of Strategic Financial Management or Corporate Finance at the undergraduate or graduate level as a capstone case to reinforce the application of multiple concepts in strategic financial decision making.

Technology projects are inherently risky; research shows that large IT projects succeed as originally planned only 28 percent of the time. Building flexibility, or real options, into a project can help manage this risk. Furthermore, the management flexibility of options has value, as the downside risk is reduced and the upside is increased. The case is based upon real options analysis for an enterprise data warehouse (EDW) and analytic customer relationship management (CRM) program at a major U.S. firm. The firm has been disguised as Global Airlines for confidentiality reasons. The data mart consolidation or EDW marginally meets the hurdle rate for the firm as analyzed using a traditional net present value (NPV) analysis. However, different tactical deployment strategies help mitigate the risk of the project by building options into the project, and the traditional NPV is expanded by the real option value. Students analyze the different deployment strategies using a binomial model compound option Excel macro, and calculate the volatility using Monte Carlo analysis in Excel. A step-by-step tutorial is provided to teach students how to accomplish the real options analysis for a simplified project, and this tutorial is easily generalized by students to the case scenario. In addition to the tactical options, the case also has the strategic growth option of analytic CRM. Students must therefore analyze both the tactical and strategic growth options and make a management recommendation on funding the project and also recommend an optimal deployment strategy to manage the project risk.

The case teaches real options for technology projects. Students learn how to calculate real option values, where the key input of volatility is obtained by Monte Carlo analysis in Excel. Students also learn that the real option value is “real,” resulting from active management mitigating the risk of the project and improving the upside. Most important, students understand the difference between tactical vs. strategic growth options and the important management issues to consider.

Social entrepreneurship.

Students in the middle or at the end of their undergraduate studies (BA level) in management and economics, graduate students (MA level).

This case study deals with activities of the company, which has a direct social significance and social impact. Based on analysis of benefits and limitations of the stakeholders of the company, principles and tools of social return on investment (SROI) analysis, students should try to understand, how the company can ensure a stable market position and optimize its value proposition on the criterion of target stakeholders’ satisfaction in the implementation of social projects.

In this case study, students should learn to differ socially responsible companies and social entrepreneurs; be able to value and compare the costs and benefits of different kinds of companies’ activities for the stakeholders; be able to perform SROI analysis; strengthen their communication skills by summarizing the main arguments of articles from economic and business press, as well as from corporate sustainability reporting.

Bookbridge (2014): Impact Report 2013 – 2014, http://bookbridge.org/en/impact-downloads/SROINetwork(2012): A guide to Social Return on Investment, http://socialvalueuk.org/what-is-sroi/the-sroi-guide. Please contact your library to gain login details or email support@emeraldinsight.com to request teaching notes.

CSS 3: Entrepreneurship.