BU.231.790.81 ADVANCED CORPORATE FINANCE

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BU.231.790.81 ADVANCED CORPORATE FINANCE

CHESTNUT FOODS

After a period of poor stock market performance, conglomerate Chestnut Foods faces the acquisition of its stock by an activist investor who managed to quietly purchase 10% of its stock and secure two places on the board.  The new investor demands the sale of Chestnut’s high growth division, which contrasts with the CFO’s plan to expand this same division.  Additionally, there is a debate of whether the food division adds more value to stockholders than the instruments division.  To disentangle the way forward for Chestnut, you are invited to grapple with the risk-adjusted performance of each division and the estimation of division-specific hurdle rates as the appropriate metric for investment policy.

If you were hired by Chestnut to make a recommendation on what path to follow, would you side up with van Muur or with the CFO’s plan?  What are your supporting arguments and estimations?

Teaching Objectives

· Examine metrics of financial performance evaluation, including ratio analysis.

· Build appreciation for the importance of attributing capital usage to business performance

· Understand metrics of risk/return assessment and economic profit for business units.  Understand and conduct a Dupont analysis.

· Understand the value-creating power of growth in the context or risk adjusted return.

Your product:

You should submit a case write up complying with the description in the syllabus.

If you like, you can accompany the word document with an excel spreadsheet provided that it is well organized and easy to follow.

If you are presenting this case, the power point presentation should be sent to me at least in draft 24 hours prior to the day of the presentation if you want to receive feedback.

Both the report and the presentation should be uploaded to Canvas according to schedule

Questions to guide your Report or to be answered by non-presenting groups/students

1.  What do you think of the performance of the Instruments Division?  How do you disentangle the debate among the senior managers about the division performance?

2.  What is your opinion of the relative performance of the five business units in the Instrument’s Division?  i.e.  Which units are generating better operative margin? Which units generate a better ROIC.  How does ROIC compare with WACC?  Use NOPAT, RONA (how does it compare with invested capital) and/or any other metric to derive your conclusions

3.  What benchmark do you use to distinguish good performance from poor performance?  Be explicit and support your decision.

4.  How do you expect your opinion differs from that of van Muur? Or not?  With whom do you tend to side in the case?