432 Objectives Wk 11 2002

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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
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(2) Is this the right time for Huaneng Power International (HPI) to raise capital overseas? What are the benefits to HPI of listing on a U.S. exchange? Are there other financing alternatives the HPI should have considered?

(4) Was the chosen issue price for HPI reasonable? What is a reasonable value for 25% of HPI?
(5) Will foreign investors be interested in buying stock in this company? Should HPI proceed with this issue?

(6) Given the economic, political, and social environment in the PRC, would you recommend that U.S. institutional investors buy stock in HPI?

Note: HPI will issue 1,250,000,000 new B shares to bring the total number of shares outstanding to 5 billion. Each ADR represents 40 B class shares. To get cash flows, you need to estimate the firm’s capital expenditures. This can be done using the data in Exhibit 10, noting that capital expenditures in year t equals net assets in year t+1 minus net assets in year t + depreciation in year t. Regarding the data in Exhibit 14, keep in mind that the projected EPS of $1.45 is for an ADR, not an ordinary share.

Important Vocabulary List from Class
SUSTAINABLE GROWTH
OPTIMAL GROWTH
ACTUAL GROWTH
DEBT POLICY, DIVIDEND POLICY
FINANCIAL FLEXIBILITY

Suggested Wall Street Journal (WSJ) or other Articles

October 28,

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