Chat with us, powered by LiveChat Mini-Case #2:


Mini-Case #2: Whole Foods Market & Cost of Capital

  1. Using the data provided in the case and assuming a market return of 10%, compute the cost of equity for Wholefo ods, Sprouts, Fresh Market, and one other grocery store of your choosing. Show your work.
  2. Using market comparables and other information provided in the case, what would be the most appropriate cost of debt for Whole Foods if it were to take on more debt? Explain your answer.
  3. (Assuming you were looking in 2013) do Whole Foods seem to be growing at an adequate clip based on their equity cost and ROE? Explain your answer.
  4. Using the information provided in the case, compute Safeway’s overall cost of capital (WACC). Assume Safeway has common equity and debt, a 10% market return, and a similar tax rate to Whole Foods.
  5. In 2018, Amazon purchased Whole Foods. Since then, WF has initiated several new investment projects, like home delivery. Do you think WF’s cost of capital has increased or decreased since the investment? Explain your answer.

Respond to at least two other posts.

Page i

Case Studies
in Finance

Managing for
Corporate Value

Eighth Edition

Robert F. Bruner
Kenneth M. Eades
Michael J. Schill

Page ii


Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121.
Copyright © 2018 by McGraw-Hill Education. All rights reserved. Printed in the
United States of America. Previous editions © 2014, 2002, and 1989. No part of this
publication may be reproduced or distributed in any form or by any means, or stored
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Education, including, but not limited to, in any network or other electronic storage or
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Some ancillaries, including electronic and print components, may not be available to
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This book is printed on acid-free paper.

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ISBN 978-1-259-27719-1
MHID 1-259-27719-4

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Library of Congress Cataloging-in-Publication Data


Names: Bruner, Robert F., 1949-author. | Eades, Kenneth M., author. | Schill, Michael
J., author.
Title: Case studies in finance: managing for corporate value creation / Robert F.
Bruner, Kenneth M. Eades,
 Michael J. Schill.
Description: Eighth Edition. | Dubuque, IA : McGraw-Hill Education, [2018] | Series:
The McGraw-Hill/Irwin series in finance, insurance, and real estate | Revised edition
of the authors’ Case studies in finance, [2014]
Identifiers: LCCN 2017023496| ISBN 9781259277191 (alk. paper) | ISBN
1259277194 (alk. paper)
Subjects: LCSH: Corporations—Finance—Case studies. | International business
 Finance—Case studies.
Classification: LCC HG4015.5 .B78 2017 | DDC 658.15—dc23 LC record available

The Internet addresses listed in the text were accurate at the time of publication. The
inclusion of a website does not indicate an endorsement by the authors or McGraw-
Hill Education, and McGraw-Hill Education does not guarantee the accuracy of the
information presented at these sites.

Page iii

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Page v


In dedication to
our wives

Barbara M. Bruner
Kathy N. Eades

And to the memory of
Mary Ann H. Schill

and to our children

Page vi

About the Authors

Robert F. Bruner is University Professor, Distinguished Professor of Business
Administration and Charles C. Abbott Professor of Business Administration and Dean
Emeritus of the Darden Graduate School of Business Administration at the University
of Virginia. He has taught and written in various areas, including corporate finance,
mergers and acquisitions, investing in emerging markets, innovation, and technology
transfer. In addition to Case Studies in Finance, his books include Finance
Interactive, multimedia tutorial software in Finance (Irwin/McGraw-Hill 1997), The
Portable MBA (Wiley 2003), Applied Mergers and Acquisitions, (Wiley, 2004), Deals
from Hell: M&A Lessons that Rise Above the Ashes (Wiley, 2005) and The Panic of
1907 (Wiley, 2007). He has been recognized in the United States and Europe for his
teaching and case writing. BusinessWeek magazine cited him as one of the “masters of
the MBA classroom.” He is the author or co-author of over 400 case studies and
notes. His research has been published in journals such as Financial Management,
Journal of Accounting and Economics, Journal of Applied Corporate Finance,
Journal of Financial Economics, Journal of Financial and Quantitative Analysis, and
Journal of Money, Credit, and Banking. Industrial corporations, financial institutions,
and government agencies have retained him for counsel and training. He has been on
the faculty of the Darden School since 1982, and has been a visiting professor at
Harvard, Columbia, INSEAD, and IESE. Formerly he was a loan officer and
investment analyst for First Chicago Corporation. He holds the B.A. degree from Yale
University and the M.B.A. and D.B.A. degrees from Harvard University. Copies of
his papers and essays may be obtained from his website,
He may be reached via email at [email protected]

Kenneth M. Eades is Professor of Business Administration and Area Coordinator of

Page vii

the Finance Department of the Darden Graduate School of Business Administration at
the University of Virginia. He has taught a variety of corporate finance topics
including: capital structure, dividend policy, risk management, capital investments
and firm valuation. His research interests are in the area of corporate finance where he
has published articles in The Journal of Finance, Journal of Financial Economics,
Journal of Financial and Quantitative Analysis, and Financial Management. In
addition to Case Studies in Finance, his books include The Portable MBA (Wiley
2010) Finance Interactive, a multimedia tutorial software in Finance (Irwin/McGraw-
Hill 1997) and Case Studies in Financial Decision Making (Dryden Press, 1994). He
has authored or co-authored over 70 case studies as well as a web-based, interactive
tutorial on the pricing of financial derivatives. He has received the Wachovia Award
for Excellence in Teaching Materials and the Wachovia Award for Excellence in
Research. Mr. Eades is active in executive education programs at the Darden School
and has served as a consultant to a number of corporations and institutions; including
many commercial banks and investment banks; Fortune 500 companies and the
Internal Revenue Service. Prior to joining Darden in 1988, Professor Eades
was a member of the faculties at The University of Michigan and the Kellogg
School of Management at Northwestern University. He has a B.S. from the University
of Kentucky and Ph.D. from Purdue University. His website is
and he may be reached via email at [email protected]

Michael J. Schill is Professor of Business Administration of the Darden Graduate
School of Business Administration at the University of Virginia where he teaches
corporate finance and investments. His research spans empirical questions in
corporate finance, investments, and international finance. He is the author of
numerous articles that have been published in leading finance journals such as
Journal of Business, Journal of Finance, Journal of Financial Economics, and Review
of Financial Studies, and cited by major media outlets such as The Wall Street
Journal. He has been on the faculty of the Darden School since 2001 and was
previously with the University of California, Riverside, as well as a visiting professor

at Cambridge and Melbourne. He is the current course head for Darden’s core MBA
finance course. He is the author or co-author of over 40 cases and technical notes, as
well as a financial market simulation entitled Bond Trader. Prior to his doctoral work,
he was a consultant with Marakon Associates in Stamford and London. He received a
B.S. degree from Brigham Young University, an M.B.A. from INSEAD, and a Ph.D.
from University of Washington. More details are available from his website,
He may be reached via email at [email protected]

Page viii


Dedication  v
About the Authors  vi
Contents  viii
Foreword  xi
Preface  xii
Note to the Student: How To Study and Discuss Cases  xxiii
Ethics in Finance  xxx

1  Setting Some Themes
1  Warren E. Buffett, 2015   To think like an investor   3
2  The Battle for Value, 2016: FedEx Corp. vs. United Parcel Service, Inc.   Valu

e creation and economic profit   23
3  Larry Puglia and the T. Rowe Price Blue Chip Growth Fund   Market efficienc

y   43
4  Genzyme and Relational Investors: Science and Business Collide?   Value cre

ation, business strategy and activist investors   63

2  Financial Analysis and Forecasting
5  Business Performance Evaluation: Approaches for Thoughtful Forecasting   F

inancial forecasting principles   89
6  The Financial Detective, 2016   Financial ratio analysis   107
7  Whole Foods Market: The Deutsche Bank Report   Financial performance for

ecasting   113
8  Horniman Horticulture   Financial forecasting and bank financing   127

Page ix

9  Guna Fibres, Ltd.   Forecasting seasonal financing needs   133

3  Estimating the Cost of Capital
10  “Best Practices” in Estimating the Cost   Estimating the cost of capital  

of Capital: An Update

11  Roche Holdings AG: Funding the Genentech Acquisition   Cost of debt capit
al   173

12  H. J. Heinz: Estimating the Cost of Capital in Uncertain Times   Cost of capi
tal for the firm   189

13  Royal Mail plc: Cost of Capital   Cost of capital for the firm   197
14  Chestnut Foods   Cost of capital for multi-division firm   207

4  Capital Budgeting and Resource Allocation
15  Target Corporation   Multifaceted capital investment decisions   219
16  The Investment Detective   Investment criteria and discounted cash flow 

17  Centennial Pharmaceutical Corporation   Valuation of earnout plan   241
18  Worldwide Paper Company   Analysis of an expansion investment   249
19  Fonderia del Piemonte S.p.A.   Capital investment decision   253
20  Victoria Chemicals plc (A): The Merseyside Project   Relevant cash flows 

21  Victoria Chemicals plc (B): Merseyside and Rotterdam Projects   Mutually e

xclusive investment opportunities   265
22  The Procter & Gamble Company: Investment in Crest Whitestrips Advanced Se

al   Scenario analysis in a project decision   273
23  Jacobs Division 2010   Strategic planning   285
24  University of Virginia Health System: The Long-Term Acute Care Hospital Proj

ect   Analysis of an investment in a not-for-profit organization   293
25  Star River Electronics Ltd.   Capital project analysis and forecasting   30


5  Management of the Firm’s Equity: Dividends and R
26  Rockboro Machine Tools Corporation   Dividend payout decision   313
27  EMI Group PLC   Dividend policy   329
28  Autozone, Inc.   Dividend and stock buyback decisions   347

6  Management of the Corporate Capital Structure
29  An Introduction to Debt Policy and Value   Effects of debt tax shields   3

30  M&M Pizza   Capital structure in a frictionless market   369
31  Structuring Corporate Financial Policy: Diagnosis of Problems and Evaluation o

f Strategies   Concepts in setting financial policy   373
32  California Pizza Kitchen   Optimal leverage   391
33  Dominion Resources: Cove Point   Project funding and capital structure 

34  Nokia OYJ: Financing the WP Strategic Plan   Corporate funding alternativ

es   425
35  Kelly Solar   Debt financing negotiation   449
36  J. C. Penney Company   Liquidity management   453
37  Horizon Lines, Inc.   Financial distress/restructuring/bankruptcy   467

7  Analysis of Financing Tactics: Leases, Options, an
d Foreign Currency
38  Baker Adhesives   Hedging foreign currency cash flows   483
39  Vale SA   Debt financing across borders   489
40  J&L Railroad   Risk management and hedging commodity risk   501

Page x

41  WNG Capital, LLC   Economics of lease financing   513
42  MoGen, Inc.   Convertible bond valuation and financial engineering   52


8  Valuing the Enterprise: Acquisitions and Buyo
43  Methods of Valuation for Mergers and Acquisitions   Valuation principles 

44  Medfield Pharmaceuticals   Valuing assets in place   559
45  American Greetings   Firm valuation in stock repurchase decision   571
46  Ferrari: The 2015 Initial Public Offering   Initial public offering valuation 

47  Rosetta Stone: Pricing the 2009 IPO   Initial public offering valuation   6

48  Sun Microsystems   Valuing a takeover opportunity   623
49  Carter International   Acquisition valuation and financing   645
50  DuPont Corporation: Sale of Performance Coatings   Business Unit Divestitu

re   657
51  OutReach Networks: First Venture Round   Valuation of early stage compan

y   679
52  Sanofi-Aventis’s Tender Offer for Genzyme   Corporate acquisition   68

53  Delphi Corporation   Corporate bankruptcy   715
54  Flinder Valves and Controls Inc.   Acquisition negotiation   731

Page xi


As I think about developing the next generation of leaders in business and finance, I
naturally reflect on my own path. My career in business has taught some profound
lessons—and so did my experience at the University of Virginia’s Darden School of
Business. Both life experience and school learning are critical components in the
development of any leader. For that reason, I have supported wholeheartedly higher
education as the path toward a promising future.

As the world keeps changing, higher education must continually adapt. Practices,
processes, and business models that were once popular have faded. At the same time,
the field of Finance has witnessed dramatic changes, including the advent of new
valuation models, the rise of new markets and institutions, the invention of new
financial instruments, the impact of new information technologies, and growing
globalization. In this environment, we must think critically about the changing world,
pay attention to new ideas, and adapt in sensible ways. Business schools play a critical
role in the change process: theory suggests new approaches, empirical research tests
them, and classroom teaching transfers knowledge. The development of new teaching
materials is vital to that process.

Case studies in Finance have evolved markedly over the past 40 years. This shift
reflects the revolutionary changes in markets and organization, as well as the many
significant advances in theory and empirical research. Because case studies are an
invaluable teaching tool, it is critical that the body of cases grows with the practice of
and scholarship in Finance.

I am pleased to introduce the reader to the eighth edition of Case Studies in
Finance, by Robert F. Bruner, Kenneth M. Eades, and Michael J. Schill. These
professors exemplify the practice-oriented scholar who understands the economic
foundations of Finance and the extensive varieties of its practice. They translate
business phenomena into material that is accessible both to experienced practitioners

and novices in Finance.
This book is a valuable contribution to the teaching materials available in the field

of Finance. First, these cases link managerial decisions to capital markets and investor
expectations. At the core of most is a valuation task that requires students to look to
financial markets to resolve the problem. Second, these cases feature a wide range of
contemporary and relevant problems, including examples in real and financial
options, agency conflicts, financial innovation, investing in emerging markets, and
corporate control. They also cover classic topics in Finance, including dividend
policy, the mix of debt and equity financing, the estimation of future financial
requirements, and the choice between mutually exclusive investments. Finally, these
cases invite students to harness technology they will use in the workplace to develop
key insights.

I am confident this collection will help students, scholars, and practitioners
sharpen their decision-making ability, and advance the development of the next
generation of leaders in Finance.

John R. Strangfeld
Chairman and Chief Executive Officer
Prudential Financial, Inc.
May 3, 2017
Newark, New Jersey

Page xii


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,




Page xiii

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 exemplar Warren Buffett 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 and Diversity
All of the cases in this book are set in the year 2006 or after and 25 percent are set in
2015 or later. A substantial proportion (57 percent) of the cases and technical notes
are new, or significantly updated. The mix of cases reflects the global business
environment: 52 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: 31 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

Page xiv

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, 2016,” sets the nearly universal theme of this
volume: the need to think like an investor. The updated case entitled, “The
Battle for Value, 2016: FedEx Corp. vs. United Parcel Service, Inc.” explores
the definition of business success and its connections to themes of financial
management. “Larry Puglia and the T. Rowe Price Blue Chip Growth Fund,”
is an updated version of cases in prior editions that explores a basic
question about performance measurement: what is the right
benchmark against which to evaluate success? And finally, “Genzyme and
Relational Investors: Science and Business Collide?”, is a case that poses the
dilemma of managing a public company when the objectives of the
shareholders are not always easily aligned with the long-term objectives of
the company and an activist investor is pressuring the company for change.

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. The section
starts with a note, “Business Performance Evaluation: Approaches for
Thoughtful Forecasting”, that provides a helpful introduction to financial
statement analysis and student guidance on generating rational financial
forecasts. The case, “The Financial Detective 2016”, asks students to match
financial ratios of companies with their underlying business and financial

strategies. “Whole Foods Market: The Deutsche Bank Report” provides
students with the opportunity to reassess the financial forecast of a research
analyst in light of industry dynamics. This case can also be used an
opportunity for students to hone firm valuation skills with the evaluation of
the analyst’s “buy, hold, or sell” recommendation. “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, “Guna Fibres” asks
the students to consider a variety of working capital decisions, including the
impact of seasonal demand upon financing needs. Other cases address issues
in the analysis of working-capital management, and credit analysis.

3. …

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