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Harris, Robert S.

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A Comparison of the Weighted-Average Cost of Capital and Equity-Residual Approaches to Valuation

This technical note compares two methods of treating debt usage in discounted-cash-flow valuation of investment projects or companies. The note demonstrates that the approach using weighted average cost of capital (WACC) and the approach using equity residual (ER) yield equivalent results if consistent assumptions are used. General features are illustrated with specific examples, including a sprea ...

Applying the Capital Asset Pricing Model

This note discusses how some of the most financially sophisticated companies and financial advisors estimate the cost of equity capital. It focuses on areas where finance theory is silent or ambiguous and practitioners are left to their own devices. Survey evidence shows that the Capital Asset Pricing Model (CAPM) is the most widely used model. The note discusses methods companies use to estimate ...

Cash Flows and Pro Formas

This note links pro forma forecasting of financial statements with project valuation of cash flows. Students are shown the link among income statements, balance sheets, and cash flows. The exercise affords practice in forecasting and project analysis, including effects of inflation, changes in working-capital requirements, and calculation of a discount rate. ...

Catalyst Health Solutions: A Script for Success?

In February 2011, David Blair, CEO of Catalyst Health Solutions, was considering another acquisition. Catalyst was already the fastest-growing pharmacy benefit management company in the United States, and Blair had his eye on a subsidiary of Walgreen Co., the second-largest retail drugstore chain in the country. Walgreen Co. was focusing its corporate strategy on the retail business and had just p ...

Frank Spence

This case features an entrepreneur who must decide whether to sell his small distribution company. The case explores several issues for class discussion: (1) valuation of a private company, (2) assessing the entrepreneur's perspective and alternatives, (3) deal structuring (including earnouts), (4) risks and their effect on value, and (5) advice from a banker's perspective. ...

Fundamentals of Discounted Cash Flow

This note introduces the time value of money and the general discounted-cash-flow approach to valuation. It covers present value, future value, and effective interest rates, and includes specific examples. ...

Global Paper: The Aussedat-Rey Acquisition

This case examines the acquisition of a French printing company by a U.S. firm. Students are asked to value the foreign entity on a stand-alone basis and with the proposed merger synergies. ...

Hope Enterprises

This case is a relatively straightforward exercise in valuing a potential acquisition target. The case affords students an opportunity to use both discounted cash flow and multiples in their analyses. In addition, at the instructor's discretion, students can do a simple valuation of an option contract and analyze currency choice in a debt issue. The latter two objectives arise if the case is used ...

Inflation, Exchange Rates, and Required Returns

This note describes the links between inflation, exchange rates, and interest rates in an international setting. Students are introduced to the basic ideas, which are illustrated with data from four countries. The note emphasizes the managerial implications of these links and their relevance to forecasting exchange rates. It is useful as both background reading to supplement cases and as part of p ...

Interest Rates, Market Pricing, and Compounding

Using examples from financial markets, this note examines links among market prices, stated interest rates, and compounding assumptions. The note emphasizes how interest rates are expressions of market prices, and pays particular attention to the role of compounding assumptions. Market prices are converted into stated interest rates for different compounding assumptions. Guidance is offered on how ...

International Paper: The Aussedat-Rey Acquisition

International Paper is evaluating entry into European markets via acquisition of Aussedat-Rey, France's second largest paper company. The student is exposed to both strategic and valuation issues as much of the expected value of the takeover involves long-term position in the fast growing European market. The case also provides an opportunity to understand differences in cross-border takeovers as ...

Investment Decision And Cash Flows

A positive net present value (NPV) is a direct estimate of value creation for shareholders and is an operational way of carrying through on the strategy of trying to maximize shareholder wealth. To calculate NPV, however we need to estimate the cash costs and benefits of any decision at hand. In this note we discuss the evaluation of investment proposals. ...
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