Students evaluation criteria:

1- Grade of the Valuation Exercise report submitted via Turnitin

2- Reservation prices submitted

3- Negotiation score: depends on how good the deal is, which the student makes.

Students do not lose grade, if they do not make a deal because market conditions

were not suitable to make a deal. Whether students make a deal or not, they leave

private notes about their deal-making strategy on the screen which would

contribute to their grade.

NOTE: make sure to read this document thoroughly and pay attention to the

important details. Please also read Harvard simulation guides and watch their

videos.

Step 1: Pre-Work

 Download the Foreground Reading to learn more about the U.S. wine industry and the

simulation context. Read and use the information.

 Download the Terminology Primer to review key terms before beginning the simulation.

Carefully pay attention to the details

 Complete the Valuation Exercise (if required by your instructor) report and submit

by the deadline set in the syllabus’s course schedule via Turnitin:

o Important: Do not click on “I have submitted evaluation report”, unless you have

finalized your report on Turnitin. As soon as you click on “I have submitted

evaluation report” after you finalize your report on Turnitin, your report is

considered to be submitted on Turnitin and you cannot change it.

o You have access to the excel files for only 2 companies and some foreground

reading. You are not required to analyze IB Company, if you do not have its

financial information. You can write your report based on available information

and any research that you do using online resources (industry and economic

analyses for example).

o You submit your individual report before the deadline which is set in the syllabus.

It means the first 5 pages of your report should only and only reflect your own

work: your analysis, your findings and your recommendations in your own words.

You are allowed to work with your team on the case. For example, a group of four

students should submit 4 individual reports. While individuals can use their group’s

findings in their report, the main part (maximum 5 pages) of the report must be

organized and written individually to reflect the individual’s opinion on the case.

The main part of the report will be checked for potential plagiarism by Turnitin

software and the instructor. It is student’s responsibility to ensure that all citations

are done properly in the main body of the report and there is no plagiarism in the

report. For example, team members cannot copy-paste the same analysis as part of

the main section of their report. However, the appendices can contain the results of

 

 

the group work and may share common elements with the other reports. Therefore,

it is possible that your appendices have some matching elements with your other

team members, but your main body of report (5 pages) cannot share any similarity

in the text. Again, it means that you cannot copy-paste from each other and put it

in the main body of your report.

o The sample rubric used in grading the case report is available on the last page of

the syllabus. The students are able to see the feedback on their individual report,

the rubric of their grade and instructor comments on Turnitin. You can learn how

to see the details of the feedback and your grade on Turnitin via the following link:

https://www.youtube.com/watch?v=OzXDMiciCsI.

 

Step 2: Role Preparation

Right after the deadline to submit your evaluation report (see the syllabus for the

deadline), you will see your role and your role preparation starts. Make sure to

bring all your material and files on a laptop or tablet to the class. If you do not

have a laptop, you can borrow a laptop from the circulation desk at library. If you

do not have a laptop, it is strongly recommended that you reserve the laptop at the

library for the class dates that involve the simulation and also inform the

instructor about your equipment requirement.

 Once assigned a role, read the Introduction screen to familiarize yourself with your

company.

 Review the Historical Stock Price screen to learn more about the companies’ financial

performances.

Step 3: Analyze & Decide

There are two rounds in the simulation:

 Round 1: starts on the session marked in the syllabus as “HB 7: Wine M & A session

1” o Instructor will discuss about some hints on the merger. Then, students start working on the

case in the class (students start to work on Round 1):

 Student work is to modify assumptions:

Read the confidential information provided about your assigned role.

o What is the objective of modifying assumptions? Set Reservation Prices

Determine reservation prices. Each role must input reservation values for both Bel

Vino and Starshine. Reservation prices are due by 10am on the date for “HB

7: Wine M & A session 2”. Important: make sure to understand the effect of your

 

 

role on determining reservation prices: If you are a buyer, the reservation price for

your target is the highest price you would be willing to pay. If you are a seller, the

reservation price for your own company is the lowest price you would be willing

to accept. For example, let’s assume you are BV. Your reservation price for BV:

you are the seller => Reservation price is the lowest that you accept to be acquired

for. Reservation price for SS: you are the buyer => Reservation price is the highest

that you accept to acquire SS.

 Round 2

o Submit Bids

Negotiate with the other users and/or submit offers before the deadline set at

3:30pm on the date for “HB 7: Wine M & A session 2”. Simulation ends when

either a deal has reached or the time is up. You have the option to withdraw your

offer only before the counterparty accepts it.

 If you are SS, your offer involves only an exchange ratio AND you also receive offers for merger from BV or cash offers from IB.

 If you are BV, your offer involves only an exchange ratio AND you also receive offers for merger from SS or cash offers from IB.

 If you are IB, your offer involves a cash offer to either BV or SS while you consider financial viability of your offer.

 The best deal happens for you when either you sell your company at the highest price possible or buy another company at the lowest price possible.

Important: make sure to first fill out both comments boxes titled as “source of

value” and “negotiation strategy”. Make sure to also keep updating the boxes. Students are expected to make a deal, only if they face favorable conditions. Based

on your analysis of each company AND your reservation prices, you should be able

to justify why you did OR did not make a deal in these boxes.

You can click on the calculator on the top corner of the page which will help you

to make a reasonable bid, based on your role.

 If you are SS or BV, the calculator helps you to decide about exchange ratio.

 If you are IB, the calculator helps you to decide about the offer and your financing strategy.

 

FAQ:

Q:

I tried starting on the individual case simulation by completing the Valuation Exercise, but I still can’t

seem to find my assigned role.

 

 

A:

You role will be revealed after you submit your evaluation report. At the start, you are expected to write

the evaluation report without knowing your role. Hence, your evaluation report is independent from

your role at the start. After you learn your role, you will be able to re-evaluate the firms based on your

updated information.

 

Q:

I received valuation spreadsheets for Starshine and Bel Vino. Does this mean I play the part of

International Beverage?

A:

No, at this stage, your role is not revealed to you. Hence, your role has no effect on the preliminary

evaluation report. However, after your role is assigned, your evaluation practice will help you to

make decisions on the case.

 

Q:

I received no financial information for International Beverage. How am I supposed to calculate the

value of the firm pre-merger and thus determine a value of the synergy and reservation price

without this information?

 

A:

You are not expected to evaluate a company for which you have not received the information yet. It

is a friendly reminder that, in M&A, you can evaluate the synergy even without knowing acquirer

financial information as we discussed in the class.

Sheet1

Problem 9-1

What is the price of a Treasury STRIPS with a face value of $100 that matures in 5 years and has a yield to maturity of 9.0 percent? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the “$” sign in your response.)

Answer

Example

Price = $100 / (1 + .035/2)2(10) =

Sheet2

Problem 9-2
A Treasury STRIPS matures in 8 years and has a yield to maturity of 5.4 percent. Assume the par value is $100,000.
a.	What is the price of the STRIPS? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the “$” sign in your response.)
Price	$
b.	What is the quoted price? (Do not round intermediate calculations. Round your answer to 3 decimal places.)
Quoted price
Example
a.
Price = $100,000 / (1 + .054/2)2(8.5) =
b.
Quoted price = $63,577.36 / $1,000 =

Sheet3

Problem 9-3
A Treasury STRIPS is quoted at 67.181 and has 7 years until maturity. What is the yield to maturity? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the “%” sign in your response.)
YTM	%
Example
YTM = 2 × [(100 / 81.265)1/(2 × 8) − 1] = .0261 or 2.61%

Sheet4

roblem 9-4
What is the yield to maturity on a Treasury STRIPS with 6 years to maturity and a quoted price of 81.247?(Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the “%” sign in your response.)
YTM	%
Example
YTM = 2 × [(100 / 65.492)1/(2 ×7) − 1] = .0614 or 6.14%

Sheet5

Problem 9-11
A Treasury bill with 136 days to maturity is quoted at 96.012. What is the bank discount yield, the bond equivalent yield, and the effective annual return? (Do not round intermediate calculations. Enter your answers as a percent rounded to 3 decimal places. Omit the “%” sign in your response.)
Discount yield	%
Bond equivalent yield	%
Effective annual return	%
Example
98.921 = 100 × [1 − (82/360) × DY); discount yield = .04737 or 4.737%
bond equivalent yield = [365(.04737)]/[360 − (82)(.04737)] = .04855 or 4.855%
EAR = [1 + .04855/(365/82)]365/82 − 1 = .04947 or 4.947%

Sheet6

Problem 9-12
A Treasury bill purchased in December 2015 has 123 days until maturity and a bank discount yield of 2.38 percent. Assume a $100 face value.
a.	What is the price of the bill as a percentage of face value? (Do not round intermediate calculations. Enter your answer as a percent rounded to 3 decimal places. Omit the “%” sign in your response.)
Price	%
b.	What is the bond equivalent yield? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the “%” sign in your response.)
Bond equivalent yield	%
Example
1.0593 = [1 + (APR)(90/365)]365/90 ; APR = bond equivalent yield = 5.802%
discount yield = [360(.05802)]/[365 + (90)(.05802)] = 5.642%

Sheet7

Problem 9-13
The treasurer of a large corporation wants to invest $16 million in excess short-term cash in a particular money market investment. The prospectus quotes the instrument at a true yield of 6.64 percent; that is, the EAR for this investment is 6.64 percent. However, the treasurer wants to know the money market yield on this instrument to make it comparable to the T-bills and CDs she has already bought. If the term of the instrument is 80 days, what are the bond equivalent and discount yields on this investment? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the “%” sign in your response.)
Bond equivalent yield	%
Discount yield	%
Example
1.0593 = [1 + (APR)(90/365)]365/90 ; APR = bond equivalent yield = 5.802%
discount yield = [360(.05802)]/[365 + (90)(.05802)] = 5.642%

Sheet8

Consider the following spot interest rates for maturities of one, two, three, and four years.

r1 = 3.7%    r2 = 4.2%     r3 = 4.9%     r4 = 5.7%

What are the following forward rates, where f1, k refers to a forward rate for the period beginning in one year and extending for k years? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the “%” sign in your response.)

Example

f1,1 = (1.0492/1.043)1/1 − 1 = 5.50%

f1,2 = (1.0563/1.043)1/2 − 1 = 6.26%

f1,3 = (1.0644/1.043)1/3 − 1 = 7.11%

Sheet9

Problem 9-23
Consider the following spot interest rates for maturities of one, two, three, and four years.
r1 = 3.9%    r2 = 4.5%     r3 = 5.2%     r4 = 6.0%
Assuming a constant real interest rate of 2 percent, what are the approximate expected inflation rates for the next four years? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the “%” sign in your response.)
I1	%
I2	%
I3	%
I4	%
EXAMPLE
f2,1 = 1.0563/1.0492 − 1 = 7.01%
f3,1 = 1.0644/1.0563 − 1 = 8.84%
I1 = r1 − 2%   = 4.30% − 2%   = 2.30%
I2 = f1,1 − 2% = 5.50% − 2%   = 3.50%
I3 = f2,1 − 2% = 7.01% − 2%   = 5.01%
I4 = f3,1 – 2% = 8.84% – 2%   = 6.84%

Sheet10

Problem 9-24
A Treasury bill that settles on May 18, 2012, pays $100,000 on August 21, 2012. Assuming a discount rate of 3.48 percent, what is the price and bond equivalent yield? Use Excel to answer this question. (Do not round intermediate calculations. Round your answers to 2 decimal places. Omit the “$” & “%” signs in your response.)
Price	$
Bond equivalent yield	%

Sheet11

Aloha Inc. has 8 percent coupon bonds on the market that have 11 years left to maturity. If the YTM on these bonds is 10.22 percent, what is the current bond price? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the “$” sign in your response.)
Price	$

Sheet12

Problem 10-2
Rolling Company bonds have a coupon rate of 4.80 percent, 18 years to maturity, and a current price of $1,126. What is the YTM? The current yield? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the “%” sign in your response.)
YTM	%
Current yield	%

Sheet13

bond has a coupon rate of 9.2 percent and 6 years until maturity. If the yield to maturity is 8.5 percent, what is the price of the bond? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the “$” sign in your response.)
Price of the bond	$

Sheet14

Problem 10-5
A bond sells for $941.15 and has a coupon rate of 7.80 percent. If the bond has 21 years until maturity, what is the yield to maturity of the bond? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the “%” sign in your response.)
Yield to maturity	%

Sheet15

Problem 10-11
Ghost Rider Corporation has bonds on the market with 12 years to maturity, a YTM of 7.1 percent, and a current price of $932. What must the coupon rate be on the company’s bonds? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the “%” sign in your response.)
Coupon rate	%

Sheet16

LKD Co. has 12 percent coupon bonds with a YTM of 8.8 percent. The current yield on these bonds is 9.1 percent. How many years do these bonds have left until they mature? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Bonds mature