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2016 UWFC Paper 2 Discussion

Biography

Kellogg School of Management
Glen Vasel Professor of Finance, Director of the Heizer Center for Private Equity and Venture Capital

Mitchell Petersen is the Glen Vasel Professor of Finance. He has published widely in finance and economics. Professor Petersen's research is in the area of empirical corporate finance: the questions of how firms evaluate potential investment projects and how they fund such projects. His recent writing focuses on the funding of small firms and how such funding has been altered by technology and changes in the financial (banking) market. He was awarded the Smith-Breeden Prize for Outstanding Paper in the Journal of Finance in 1995 (for his paper "The Benefits of Lending Relationships: Evidence from Small Business Data") and the Michael Brennan Award for Best Paper in the Review of Financial Studies in 1998 (for his paper "Trade Credit: Theories and Evidence") and 2013 (for his paper "Investment and Capital Constraints: Repatriations Under the American Jobs Creation Act"). He was runner-up for the Brennan Award in 2008 (for his paper "Does the Source of Capital Affect Capital Structure") and 2010 (for his paper "Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches").

He has been a member of the editorial board of various journals, including the Journal of Finance, Financial Management, Review of Financial Studies and the Journal of Financial Intermediation. He is also a research associate with the National Bureau of Economic Research (NBER) and was a member of the Moody's Academic Advisory and Research Committee.

Professor Petersen was awarded the Sidney J. Levy Teaching Award in 1996, 1999, 2001, 2003, 2006, 2008, 2010, and 2012 and was voted the Kellogg Professor of the Year in 2000, the Executive MBA Outstanding Professor in 2008, 2010, 2011, 2013, and 2015, and Kellogg Alumni Professor of the Year in 2010. He received his Ph.D. in Economics from the Massachusetts Institute of Technology.

Areas of Expertise Banking and Financial Institutions
Corporate Bankruptcy
Corporate Capital Structure
Corporate Finance
Debt-Equity Choice
Entrepreneurship
Payout Policy (Dividends, Repurchases)
Pension Funds
Real Options (Investments)
Risk Management
Small Business Management
Taxation

Education PhD, 1990, Economics, Massachusetts Institute of Technology

AB, 1986, Economics, Princeton University, Summa Cum Laude, Phi Beta Kappa

Academic Positions Director of Heizer Center for Private Equity and Venture Capital, Kellogg School of Management, Northwestern University, 2007-present

Glen E. Vasel Professor of Finance, Kellogg School of Management, Northwestern University, 2005-present

Glen E. Vasel Associate Professor of Finance, Kellogg School of Management, Northwestern University, 1997-2005

Assistant Professor of Finance, Kellogg School of Management, Northwestern University, 1994-1997

Assistant Professor of Finance, Graduate School of Business, University of Chicago, 1990-1994

Honors and Awards BGI - Michael Brennan Award - Best Paper, Review of Financial Studies

Executive MBA Program Outstanding Teaching Awards, Kellogg School of Management, 2016, 2015, 2014, 2011, 2010, 2008

Kellogg Alumni Professor of the Year Award, Kellogg School of Managment, 2010

Sidney J. Levy Teaching Award, Kellogg School of Management, 2012, 2010, 2008, 2006, 2003, 2001, 1999, 1996

Editor's Choice Award, Review of Financial Studies, 2010

Michael Brennan Award (runner-up), Barclays Global Investors, 2010

Sidney J. Levy Teaching Award, Kellogg School of Business and Management, 2003

Sidney J. Levy Teaching Award, Kellogg School of Business and Management, 2001

L.G. Lavengood Outstanding Professor of the Year Award, Kellogg School of Management, 2000

Outstanding Professor of the Year, Kellogg School of Business and Management, 2000

Sidney J. Levy Teaching Award, Kellogg School of Business and Management, 1999

Michael Brennan Award, Barclays Global Investors, 1998

Sidney J. Levy Teaching Award, Kellogg School of Business and Management, 1996

Smith Breeden Distinguished Paper Award, American Finance Association, 1995

Editorial Positions Associate Editor, Journal of Finance, 2004-2013

Associate Editor, Financial Management, 2002-2009

Editor, Journal of Financial Management, 1998-2002

Associate Editor, Journal of Finanicial Intermediation, 1995-1997

Associate Editor, Review of Financial Studies, 1995-1997

Education Academic Positions Honors and Awards Editorial Positions

Read about executive education

Cases

Petersen, Mitchell A.. 2004. Western-Southern Enterprise. Case 5-104-019 (KEL075).

This case examines the problem faced by Western Southern Enterprise a mutual insurance company at the end of 1996. Their investment in Cincinnati Bell stock has been phenomenally successful, but has left them potentially overweighted in equities in general and a single stock in particular. The cost of diversification is declaring and paying tax on a large capital gain. The possible solutions include maintaining the position, selling the position, or protecting the position by issuing a Debt Exchangeable for Common Stock security (DECS). The case can be used in a tax strategy and/or an advanced financial strategy (financial instruments) class. The case is used to ask the students to trade off the benefits of diversification (which they have to justify) against the cost of declaring the capital gain (which they must quantify). In defending their choices, students are asked to evaluate the various tax and non-tax benefits and costs of each solution. Thus the case can be used to discuss the costs of financial distress (or poor diversification) as well as teach security design. Since the client (WSE) has several potentially contradictory objectives, the case lays out a situation where security design can improve upon the simple alternatives. The case provides structuring details of the DECS and thus you can discuss why various features were included in the design of the DECS.

Petersen, Mitchell A. and Rashmi Singhal. 2007. Vioxx: Too Risky for Merck?. Case 5-207-253 (KEL289).

This case follows Merck’s pharmaceutical product Vioxx from initial development to launch and subsequent withdrawal, and considers the decisions made at each stage by the Merck executives involved. The case concludes by examining the financial impact of the Vioxx withdrawal on the company and on the Merck stock value. LEARNING OBJECTIVE: Once a decision has turned out so poorly—such as Merck’s decision to launch and support Vioxx—it is easy to criticize. However, are these bad outcomes the result of a good decision which turned out unlucky, or are they decisions where the bad outcome could have been predicted? This case allows the students to examine the various steps of Vioxx’s development and launch. By doing so, they can consider whether the decision making process broke down and why. By connecting the Vioxx launch and withdrawal to changes in Merck’s cash flow and stock market value, the students can document the impact of such decisions on the value of the firm.

Petersen, Mitchell A.. 2014. Teuer Furniture (A): Discounted Cash Flow Valuation. Case 5-313-509(A) (KEL778).

Teuer Furniture is a privately owned, moderately sized chain of upscale home furnishing showrooms in the United States. The firm survived the economic recession and by the end of 2012, it has regained its financial footing. Now that the firm is more secure financially, some of its long-term investors have asked to cash out their investments. This will be the first time that Teuer has repurchased its equity; the company has paid dividends since 2009. Chief financial officer Jennifer Jerabek and her team have been given the task of valuing Teuer using a discounted cash flow approach. The discount rate is given in the case, and the students need to build a pro forma income statement, balance sheet, and cash flow statement and then calculate a per-share value for Teuer.

Petersen, Mitchell A. and Robert O'Keef. 2004. West Teleservices. Case 5-104-020 (KEL074).

West Teleservice, a telemarketing firm, is considering going public at the end of 1996 and the case asks the students to price the IPO. During the previous 18 months, seven other telemarketing firms have gone public. Prior to this, there were no publicly traded telemarketing firms. The industry is in flux. Historically, telemarketing was conducted by wholly owned subsidiaries of telephone companies, banks, and insurance companies. However, cost cutting has caused many of these firms to outsource the business. Thus, although total telemarketing business isn't growing very quickly, the outsourced portion is growing fifty percent per year. This case can be used as an introduction to IPO valuations. It is also designed to demonstrate the use and pitfalls of valuing firms with multiples. Given this is the eighth firm to go public, there are seven other potential comparable firms. The case contains enough information to construct a rough DCF. This is useful to demonstrate what assumptions must be implicit in the multiples to arrive at the same valuation. Finally, the case can be used to discuss the idea of mispriced equity (Myers/Majluf, 1984), since there seems to be evidence that the price of equity is not sustainable.

Furfine, Craig and Mitchell A. Petersen. 2014. The Right of Acquisition: Options in Commercial Real Estate. Case 5-114-001 (KEL819).

In April 2012 Bill Nichols, a financial analyst at the real estate investment firm Koenig Capital, was about to enter a unique lease renegotiation. One of Koenig’s tenants, Hasperat Inc., had sixteen years left on its long-term lease of the Kelley Building, a 165,000-square-foot office building in downtown Cleveland. The lease contained a clause giving Hasperat the option to buy the Kelley Building from Koenig. When Nichols tried to place a mortgage on the property to take advantage of low interest rates, he learned that the existence of this option in the lease contract prevented lenders from offering Koenig their lowest rates. As a result, Nichols had been tasked with renegotiating the lease to remove the option clause. This unexpected event offered Nichols the opportunity to use his financial skills. He needed to calculate the fair value of the purchase option to be able to justify to his superiors by how much they should compensate Hasperat. Students will step into the role of Bill Nichols and apply real options modeling techniques to value the purchase option in Hasperat’s lease.

Petersen, Mitchell A.. 2015. Schumpeter Finanzberatung GmbH: Evaluating Investment Risk. Case 5-314-503 (KEL913).

It is April 2014, and the small investment management firm Elke Schumpeter founded twelve years earlier in Frankfurt, Germany, is performing well. The fund, Schumpeter Finanzberatung GmbH (SF), has pursued a low-cost market timing (tactical asset allocation) strategy that targets a mix of 60% in the equity market index and 40% in German treasury bills (T-bills) but that also strategically changes the mix in an attempt to beat the passive benchmark. The fund has grown to just over €400 million and since 2006 has outperformed the passive benchmark by 98 basis points. At the suggestion of some investors, Schumpeter is now considering expanding her firm’s investment thesis to include investments in individual stocks. She has investigated two firms: ThyssenKrupp AG and Deoleo SA. Before making the decision to invest in individual stocks, Schumpeter needs to decide how to measure the risk of those investments. Students are asked to measure the risk of both individual investments (stocks) as well as the risk of SF’s overall portfolio. The case provides a way to explain the intuition behind the capital asset pricing model and to describe the distinction between idiosyncratic (diversifiable) risk and systematic (non-diversifiable) risk.

Petersen, Mitchell A.. 2014. Teuer Furniture (B): Multiples Valuation. Case 5-313-509(B) (KEL788).

Teuer Furniture is a privately owned, moderately sized chain of upscale home furnishing showrooms in the United States. By the end of 2012, it had regained its financial footing and a number of long-term investors, including several of Teuer's original non-management investors, now want to sell their shares. At the request of the board, Jennifer Jerabek, the chief financial officer of the company, and her team put together an extensive valuation of Teuer based on a discounted cash flow analysis. When the model was presented to investors, a number of them disagreed with the results. Some investors considered the value too high; others considered it too low. Not surprisingly, some of the differences of opinion were correlated with whether or not the investors wanted to sell their shares of Teuer. Jerabek was instructed to build a valuation of Teuer using a multiples approach instead.

Petersen, Mitchell A., Rajiv Chopra and Alex Williamson. 2013. Grupo Pão de Açúcar: Strategic Use of Trade Credit. Case 5-312-508 (KEL744).

At the end of 2011, one of the largest food retailers in Brazil, Grupo Pão de Açúcar, or GPA (a subsidiary of Companhia Brasileira De Distribuição, or CBD), was reviewing its accounts payable terms with suppliers in search of additional value. Manager of analytics Maria Cristina Santos was examining the trade credit terms GPA had with Oalem Ltda, a family-owned melon grower located in northeastern Brazil. Oalem, like most small family businesses, was financed with bank loans and equity that was held predominantly by the family. The case examines how accounts payable (trade credit) terms should be set or negotiated between a large retailer and a small supplier, especially when the bargaining power between the two may not be equal. The case demonstrates that trade credit terms can be as important as the terms of more traditional forms of financing.

Petersen, Mitchell A.. 2004. Western-Southern Enterprise. Case 5-104-019 (KEL075).

This case examines the problem faced by Western Southern Enterprise a mutual insurance company at the end of 1996. Their investment in Cincinnati Bell stock has been phenomenally successful, but has left them potentially overweighted in equities in general and a single stock in particular. The cost of diversification is declaring and paying tax on a large capital gain. The possible solutions include maintaining the position, selling the position, or protecting the position by issuing a Debt Exchangeable for Common Stock security (DECS). The case can be used in a tax strategy and/or an advanced financial strategy (financial instruments) class. The case is used to ask the students to trade off the benefits of diversification (which they have to justify) against the cost of declaring the capital gain (which they must quantify). In defending their choices, students are asked to evaluate the various tax and non-tax benefits and costs of each solution. Thus the case can be used to discuss the costs of financial distress (or poor diversification) as well as teach security design. Since the client (WSE) has several potentially contradictory objectives, the case lays out a situation where security design can improve upon the simple alternatives. The case provides structuring details of the DECS and thus you can discuss why various features were included in the design of the DECS.

Petersen, Mitchell A. and Rashmi Singhal. 2007. Vioxx: Too Risky for Merck?. Case 5-207-253 (KEL289).

This case follows Merck’s pharmaceutical product Vioxx from initial development to launch and subsequent withdrawal, and considers the decisions made at each stage by the Merck executives involved. The case concludes by examining the financial impact of the Vioxx withdrawal on the company and on the Merck stock value. LEARNING OBJECTIVE: Once a decision has turned out so poorly—such as Merck’s decision to launch and support Vioxx—it is easy to criticize. However, are these bad outcomes the result of a good decision which turned out unlucky, or are they decisions where the bad outcome could have been predicted? This case allows the students to examine the various steps of Vioxx’s development and launch. By doing so, they can consider whether the decision making process broke down and why. By connecting the Vioxx launch and withdrawal to changes in Merck’s cash flow and stock market value, the students can document the impact of such decisions on the value of the firm.

Petersen, Mitchell A.. 2014. Teuer Furniture (A): Discounted Cash Flow Valuation. Case 5-313-509(A) (KEL778).

Teuer Furniture is a privately owned, moderately sized chain of upscale home furnishing showrooms in the United States. The firm survived the economic recession and by the end of 2012, it has regained its financial footing. Now that the firm is more secure financially, some of its long-term investors have asked to cash out their investments. This will be the first time that Teuer has repurchased its equity; the company has paid dividends since 2009. Chief financial officer Jennifer Jerabek and her team have been given the task of valuing Teuer using a discounted cash flow approach. The discount rate is given in the case, and the students need to build a pro forma income statement, balance sheet, and cash flow statement and then calculate a per-share value for Teuer.

Petersen, Mitchell A. and Robert O'Keef. 2004. West Teleservices. Case 5-104-020 (KEL074).

West Teleservice, a telemarketing firm, is considering going public at the end of 1996 and the case asks the students to price the IPO. During the previous 18 months, seven other telemarketing firms have gone public. Prior to this, there were no publicly traded telemarketing firms. The industry is in flux. Historically, telemarketing was conducted by wholly owned subsidiaries of telephone companies, banks, and insurance companies. However, cost cutting has caused many of these firms to outsource the business. Thus, although total telemarketing business isn't growing very quickly, the outsourced portion is growing fifty percent per year. This case can be used as an introduction to IPO valuations. It is also designed to demonstrate the use and pitfalls of valuing firms with multiples. Given this is the eighth firm to go public, there are seven other potential comparable firms. The case contains enough information to construct a rough DCF. This is useful to demonstrate what assumptions must be implicit in the multiples to arrive at the same valuation. Finally, the case can be used to discuss the idea of mispriced equity (Myers/Majluf, 1984), since there seems to be evidence that the price of equity is not sustainable.

Furfine, Craig and Mitchell A. Petersen. 2014. The Right of Acquisition: Options in Commercial Real Estate. Case 5-114-001 (KEL819).

In April 2012 Bill Nichols, a financial analyst at the real estate investment firm Koenig Capital, was about to enter a unique lease renegotiation. One of Koenig’s tenants, Hasperat Inc., had sixteen years left on its long-term lease of the Kelley Building, a 165,000-square-foot office building in downtown Cleveland. The lease contained a clause giving Hasperat the option to buy the Kelley Building from Koenig. When Nichols tried to place a mortgage on the property to take advantage of low interest rates, he learned that the existence of this option in the lease contract prevented lenders from offering Koenig their lowest rates. As a result, Nichols had been tasked with renegotiating the lease to remove the option clause. This unexpected event offered Nichols the opportunity to use his financial skills. He needed to calculate the fair value of the purchase option to be able to justify to his superiors by how much they should compensate Hasperat. Students will step into the role of Bill Nichols and apply real options modeling techniques to value the purchase option in Hasperat’s lease.

Petersen, Mitchell A.. 2015. Schumpeter Finanzberatung GmbH: Evaluating Investment Risk. Case 5-314-503 (KEL913).

It is April 2014, and the small investment management firm Elke Schumpeter founded twelve years earlier in Frankfurt, Germany, is performing well. The fund, Schumpeter Finanzberatung GmbH (SF), has pursued a low-cost market timing (tactical asset allocation) strategy that targets a mix of 60% in the equity market index and 40% in German treasury bills (T-bills) but that also strategically changes the mix in an attempt to beat the passive benchmark. The fund has grown to just over €400 million and since 2006 has outperformed the passive benchmark by 98 basis points. At the suggestion of some investors, Schumpeter is now considering expanding her firm’s investment thesis to include investments in individual stocks. She has investigated two firms: ThyssenKrupp AG and Deoleo SA. Before making the decision to invest in individual stocks, Schumpeter needs to decide how to measure the risk of those investments. Students are asked to measure the risk of both individual investments (stocks) as well as the risk of SF’s overall portfolio. The case provides a way to explain the intuition behind the capital asset pricing model and to describe the distinction between idiosyncratic (diversifiable) risk and systematic (non-diversifiable) risk.

Petersen, Mitchell A.. 2014. Teuer Furniture (B): Multiples Valuation. Case 5-313-509(B) (KEL788).

Teuer Furniture is a privately owned, moderately sized chain of upscale home furnishing showrooms in the United States. By the end of 2012, it had regained its financial footing and a number of long-term investors, including several of Teuer's original non-management investors, now want to sell their shares. At the request of the board, Jennifer Jerabek, the chief financial officer of the company, and her team put together an extensive valuation of Teuer based on a discounted cash flow analysis. When the model was presented to investors, a number of them disagreed with the results. Some investors considered the value too high; others considered it too low. Not surprisingly, some of the differences of opinion were correlated with whether or not the investors wanted to sell their shares of Teuer. Jerabek was instructed to build a valuation of Teuer using a multiples approach instead.

Petersen, Mitchell A., Rajiv Chopra and Alex Williamson. 2013. Grupo Pão de Açúcar: Strategic Use of Trade Credit. Case 5-312-508 (KEL744).

At the end of 2011, one of the largest food retailers in Brazil, Grupo Pão de Açúcar, or GPA (a subsidiary of Companhia Brasileira De Distribuição, or CBD), was reviewing its accounts payable terms with suppliers in search of additional value. Manager of analytics Maria Cristina Santos was examining the trade credit terms GPA had with Oalem Ltda, a family-owned melon grower located in northeastern Brazil. Oalem, like most small family businesses, was financed with bank loans and equity that was held predominantly by the family. The case examines how accounts payable (trade credit) terms should be set or negotiated between a large retailer and a small supplier, especially when the bargaining power between the two may not be equal. The case demonstrates that trade credit terms can be as important as the terms of more traditional forms of financing.

Other experts

Education Ph.D. in Economics, 1988; M.A. in Economics, 1985, Cornell University M.A. in Economics, Boston University, 1982 B.A. (Honors), University of Delhi, 1980   Positions Held At Haas since 2016 2016 – present, Lecturer, Haas School of Business 2013 – present, BlackRock Inc. Managing Directo...
Bryan Ritchie was appointed Notre Dame’s first vice president and associate provost for innovation in 2017. Leading the University’s IDEA (Innovation, Discovery, and Enterprise Acceleration) Center, he works closely with deans, alumni, faculty, and students to promote a culture of innovation, ent...
Kieran is the co-author of nine alternative finance industry reports covering market activity globally, as well as more specifically within regulation in East Africa and UK sustainable energy. He is leading the Cambridge-World Bank 2017-2019 Regulator & Policymaker Surveys in addition to a re...
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