Huaneng Power Inc

FBE 432 - Class Objectives and Problem Assignments

J. K. Dietrich

Week 11 – November 4 and 6, 2002

Goals and Objectives

(1) Calculate the value of and interpret the sustainable growth rate for a firm

2) Trace the implications on financial policy of growth rates higher and lower than the sustainable growth rate for a firm

3) Discuss the importance of financial flexibility and critically assess the trade-offs from use of various financial options in implementing a firm’s strategy

Suggested Review Reading for next Class

RWJ, Chapter 18

Questions for Next Case (November 18, 2002*, Avon Products)

* Note change in date in response to student preferences

1) Evaluate Avon’s investment and financing decisions in the late 1980’s. Why was Avon restructuring its business in 1988? Did the changes make sense?

2) Evaluate Avon’s financial condition in mid-1988. Why was Avon reducing its dividend?

3) What was the purpose of the exchange offer?

4) What payoffs does an Avon PERCS provide as a function of the future stock price? What specifically is motivating this design? I marketability an issue?

5) As in institutional investor holding Avon stock, how would you evaluate the tradeoff between accepting the new preferred and keeping the common stock? Should you just sell the common stock and ignore the offer altogether?

Notes: the Avon case is an example of creative security design involving embedded options. Further, the case provides new insights into dividend policy and its role in a corporation’s overall business strategy. The case description of PERCA is not completely clear and requires more explanation: The exchange offer invites investors to tender up to 25% of common stock. PERCs pay $2 dividends per year, paid in quarterly installments of $ .50, for 13 quarters beginning September 1, 1988, and ending September 1, 1991. The common stock pays $1 dividends per year, also in 13 quarterly payments. The redemption value of...