The inexplicable is all around us. So is the incomprehensible. So is the unintelligible. Interviewing Babe Ruth in 1928, I put it to him "People come and ask what's your system for hitting home runs—that so?" "Yes," said the Babe, "and all I can tell 'em is I pick a good one and sock it. I get back to the dugout and they ask me what it was I hit and I tell 'em I don't know except it looked good."
—Carl Sandburg

Managers are not confronted with problems that are independent of each other, but with dynamic situations that consist of complex systems of changing problems that interact with each other. I call such situations messes… managers do not solve problems: they manage messes.
—Russell Ackoff

Orientation of the Book

Practitioners tell us that much in finance is inexplicable, incomprehensible, and unintelligible. Like Babe Ruth, their explanations for their actions often amount to "I pick a good one and sock it." Fortunately for a rising generation of practitioners, tools and concepts of modern finance provide a language and approach for excellent performance. The aim of this book is to illustrate and exercise the application of these tools and concepts in a messy world.

Focus on Value
The subtitle of this book is Managing for Corporate Value Creation. Economics teaches us that value creation should be an enduring focus of concern because value is the foundation of survival and prosperity of the enterprise. The focus on value also helps managers understand the impact of the firm on the world around it. These cases harness and exercise this economic view of the firm. It is the special province of finance to highlight value as a legitimate concern for managers. The cases in this book exercise valuation analysis over a wide range of assets, debt, equities, and options, and a wide range of perspectives, such as investor, creditor, and manager.

Linkage to Capital Markets
An important premise of these cases is that managers should take cues from the capital markets. The cases in this volume help the student learn to look at the capital markets in four ways. First, they illustrate important players in the capital markets such as individual exemplars like Warren Buffett and Bill Miller, and institutions like investment banks, commercial banks, rating agencies, hedge funds, merger arbitrageurs, private equity firms, lessors of industrial equipment, and so on. Second, they exercise the students' abilities to interpret capital market conditions across the economic cycle. Third, they explore the design of financial securities, and illuminate the use of exotic instruments in support of corporate policy. Finally, they help students understand the implications of transparency of the firm to investors, and the impact of news about the firm in an efficient market.

Respect for the Administrative Point of View
The real world is messy. Information is incomplete, arrives late, or is reported with error. The motivations of counterparties are ambiguous. Resources often fall short. These cases illustrate the immense practicality of finance theory in sorting out the issues facing managers, assessing alternatives, and illuminating the effects of any particular choice. A number of the cases in this book present practical ethical dilemmas or moral hazards facing managers—indeed, this edition features a chapter, "Ethics in Finance" right at the beginning, where ethics belongs. Most of the cases (and teaching plans in the associated instructor's manual) call for action plans rather than mere analyses or descriptions of a problem.

Contemporaneity
All of the cases in this book are set in the year 2000 or after and 35 percent of these cases and technical notes are new, or significantly updated. The mix of cases reflects the global business environment: 37 percent of the cases in this book are set outside the United States, or have strong cross-border elements. Finally the blend of cases continues to reflect the growing role of women in managerial ranks: 33 percent of the cases present women as key protagonists and decision-makers. Generally, these cases reflect the increasingly diverse world of business participants.

Plan of the Book

The cases may be taught in many different combinations. The sequence indicated by the TABLE OF CONTENTS corresponds to course designs used at Darden. Each cluster of cases in the Table of Contents suggests a concept module, with a particular orientation.

1. Setting Some Themes. These cases introduce basic concepts of value creation, assessment of performance against a capital market benchmark, and capital market efficiency, that reappear throughout a case course. The numerical analysis required of the student is relatively light. The synthesis of case facts into an important framework or perspective is the main challenge. The case, "Warren E. Buffett, 2005," sets the nearly universal theme of this volume: the need to think like an investor. "Bill Miller and Value Trust" explores a basic question about performance measurement: what is the right benchmark against which to evaluate success? "Ben & Jerry's Homemade, Inc." invites a consideration of "value" and the ways to measure it. The case entitled, "The Battle for Value, 2004: FedEx Corp. vs. United Parcel Service, Inc." uses "economic profit" (or EVA®) to explore the origins of value creation and destruction, and its competitive implications for the future.
2. Financial Analysis and Forecasting. In this section, students are introduced to the crucial skills of financial-statement analysis, break-even analysis, ratio analysis, and financial statement forecasting. A new note, "The Thoughtful Forecaster," provides a helpful introduction to financial statement analysis and student guidance on generating thoughtful financial forecasting. The new case, "Value Line Publishing: October 2002," provides students an exposure to financial modeling with electronic spreadsheets. "Horniman Horticulture" uses a financial model to build intuition for the relevancy of corporate cash flow and the financial effects of firm growth. The case, "Krispy Kreme Doughnuts, Inc.," confronts issues regarding the quality of reported financial results. Other cases address issues in the analysis of working-capital management, and credit analysis.
3. Estimating the Cost of Capital. This module begins with a discussion of "best practices" among leading firms. The cases exercise skills in estimating the cost of capital for firms and their business segments. The cases aim to exercise and solidify students' mastery of the capital asset pricing model, the dividend-growth model, and the weighted average cost of capital formula. "Nike, Inc.: Cost of Capital" presents an introductory exercise in the estimation of the weighted average cost of capital. "Teletech Corporation, 2005" explores the implications of mean-variance analysis to business segments within a firm, and gives a useful foundation for discussing value-additivity. A new case, "The Boeing 7E7," presents a dramatic exercise in the estimation of a discount rate for a major corporate project.
4. Capital Budgeting and Resource Allocation. The focus of these cases is the evaluation of investment opportunities and entire capital budgets. The analytical challenges range from simple time value of money problems to setting the entire capital budget for a resource-constrained firm. Key issues in this module include the estimation of Free Cash Flows, the comparison of various investment criteria (NPV, IRR, payback, and equivalent annuities), the treatment of issues in mutually exclusive investments, and capital budgeting under rationing. This module features several new cases. The first is "Worldwide Paper Company," a straightforward problem in assessing cash flows, cost of capital, and net present value of a capital-investment decision. The second new case is "Target Corporation," which presents the multidimensionality of a capital-investment decision for a large corporation; i.e., the factors influencing the investment decision beyond NPV and IRR. And finally, "Aurora Textile Company" asks the student to conduct a complex replacement decision within the context of investing in a troubled industry. This challenging case emphasizes the importance of conducting a thorough sensitivity analysis when using a DCF analysis for resource allocation decisions.
5. Management of the Firm's Equity: Dividends, Repurchases, Initial Offerings. This module seeks to develop practical principles about dividend policy and share issues by drawing on concepts about dividend irrelevance, signaling, investor clienteles, bonding, and agency costs. The new case, "EMI Group, PLC," examines the April 2007 decision of British music company EMI to suspend its annual dividend as the company struggled to respond to the effect of digital audio distribution on its core business. The case is intended to serve as an engaging introduction to corporate financial policy and themes in managing the right side of the balance sheet. Another new case, "TRX, Inc.: Initial Public Offering," provides a comprehensive depiction of a firm's decision to undertake an initial public offering (IPO) and the process of going public.
6. Management of the Corporate Capital Structure. The problem of setting capital structure targets is introduced in this module. Prominent issues are the use and creation of debt tax shields, the role of industry economics and technology, the influence of corporate competitive strategy, the tradeoffs among debt policy, dividend policy, and investment goals, and the avoidance of costs of distress. The new case, "California Pizza Kitchen," addresses the classic dilemma entailed in optimizing the use of debt tax shields and providing financial flexibility—this theme is extended in another case, "Deluxe Corporation," that asks how much flexibility a firm needs. Another case in this section is "Deutsche Bank Securities: Financing the Acquisition of Consolidated Supply S.A." that takes the view of a lender in a large leveraged acquisition to explore the relation between firm value and debt capacity.
7. Analysis of Financing Tactics: Leases, Options, and Foreign Currency. While the preceding module is concerned with setting debt targets, this module addresses a range of tactics a firm might use to pursue those targets, hedge risk, and exploit market opportunities. Included are domestic and international debt offerings, leases, currency hedges, warrants, and convertibles. With these cases, students will exercise techniques in securities valuation, including the use of option-pricing theory. This module includes two new cases. "Baker Adhesives" explores the concept of exchange-rate risk and the management of that risk with a forward-contract hedge and a money-market hedge. "MoGen, Inc" presents the pricing challenges associated with a convertible bond as well as a complex hedging strategy to change the conversion price of the convertible through the purchase of options and issuance of warrants.
8. Valuing the Enterprise: Acquisitions and Buyouts. This module begins with an extensive introduction to firm valuation in the note "Methods of Valuation: Mergers and Acquisitions." The focus of the note includes valuation using DCF and multiples. The module features a newly adapted merger negotiation exercise ("Flinder Valves and Controls Inc.") which provides an engaging venue for investigating the distribution of joint value in a merger negotiation. There are two new cases in the module. The first new case, "Hershey Foods Corporation," presents the high profile story of when the Hershey Trust Company put Hershey Foods up for sale. The case raises a number of challenging valuation and governance issues. The second new addition to the module is "The Timken Company," which deals with Timken's acquisition of the Torrington company from Ingersoll-Rand. This case requires the student to conduct a challenging valuation analysis of Torrington as well as to develop a financing strategy for the deal. The case, "General Electric's Proposed Acquisition of Honeywell," provides a unique opportunity for students to take the perspective of a merger arbitrage firm in evaluating a proposed deal. Thus, the comprehensive nature of cases in this module makes them excellent vehicles for end-of-course classes, student term papers, and/or presentations by teams of students.

This edition offers a number of cases that give insights about investing or financing decisions in emerging markets. These include "Deutsche Brauerei," "Kota Fibres Ltd.," "Star River Electronics Ltd.," and "Baker Adhesives."