February 23, 2022

Finance and Investment Analysis Case study assignment: some questions and 1 big question in the pdf. solve all the questio

Finance and Investment Analysis Case study assignment: some questions and 1 big question in the pdf. solve all the questions after reading the case study which is attached as 2 pdf files. The questions are also attached in the pdf. Please solve it correctly.

9 – 2 8 5 – 0 4 2 R E V : J U L Y 1 0 , 2 0 0 3

________________________________________________________________________________________________________________ Professor Professor André F. Perold prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 1984 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.

A N D R É F . P E R O L D

At the T. Rowe Price Trading Desk (B)

Tuesday, August 21, 1984 12:21 p.m.

Greg: (in response to Michael’s offer of $23 1/2 for Avantek and $151/4 for Tandem):

“OK on Tandem, but my lowest on Avantek is $24.”

Michael: “OK.”

This document is authorized for use only by Tetiana Maksymenko ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies.

285-042 At the T. Rowe Price Trading Desk (B)

Exhibit 1 Avantek Trade on August 21, 1984, 12:21 p.m.–Market Close

Time Price Shares (100s) 12:22 24 ¾ 125 12:23 24 1,830 12:23 24 1/8 1,000 12:23 24 ¼ 100 12:50 24 7/8 2

1.23 24 7/8 3 1:46 24 7/8 1 1:48 24 1/8 21 1:51 24 ¾ 30 2:07 24 5/8 1 2:10 24 5/8 5 2:20 24 5/8 1 2:38 24 5/8 10 2:39 24 5/8 8 2:39 24 ¾ 30 2:57 24 7/8 1 3:00 24 5/8 1 3:01 24 7/8 10 3:05 24 ¾ 5 3:08 24 ½ 5 3:15 24 ½ 4 3:15 24 ¾ 300 3:16 24 ¾ 1 3:39 24 ¾ 10 3:59 24 ½ 2

Source: T. Rowe Price Associates

At the T. Rowe Price Trading Desk (B) 285-042

Exhibit 2 Tandem Trades on August 21, 1984, 12:21 p.m.—Market Close

Time Price Shares (100s) Time Price Shares (100s) 12:21 15 2,000 2:17 15 5 12:22 15 1,350 2:17 15 10 12:22 15 1/4 3,200 2:21 15 1 12:23 15 1/8 7 2:24 15 5 12:27 15 1/2 1 2:26 15 1/8 1 12:29 15 2 2:27 14 7/8 2 12:30 15 1/8 1 2:32 15 1 12:36 15 1/8 10 2:33 15 100 12:43 15 3 2:33 15 1 12:46 15 1/8 10 2:35 14 7/8 1 12:52 15 1 2:40 14 7/8 5 12:59 15 1/8 5 2:43 15 20 1:00 15 1/8 5 2:44 15 50 1:01 15 1/8 10 2:44 15 50 1:02 15 1/8 10 2:44 15 1/8 1 1:02 15 1/8 20 2:45 15 1/8 2 1:04 15 1/8 5 2:45 15 1/8 2 1:05 15 1/4 5 2:53 14 7/8 2 1:05 15 1/8 5 2:57 14 7/8 1 1:15 15 1/4 2 2:57 14 7/8 2 1:24 15 1/4 2 2:58 15 1/8 2 1:26 15 1/8 5 3:02 14 5/8 2 1:29 15 1/8 1 3:05 15 1 1:29 15 1/8 25 3:06 14 7/8 30 1:30 15 19 3:09 14 7/8 2 1:33 15 15 3:10 14 7/8 5 1:33 15 1/8 1 3:11 14 7/8 10 1:38 15 1/8 2 3:11 14 7/8 5 1:43 15 1/8 4 3:11 14 7/8 5 1:47 15 1/8 13 3:11 14 7/8 5 1:48 15 1/8 2 3:13 14 7/8 5 1:48 15 51 3:13 15 1 1:49 15 1/8 1 3:14 14 7/8 50 1:53 15 60 3:17 15 5 1:56 15 1/8 1 3:21 15 1 2:01 15 2 3:22 15 10 2:04 15 9 3:28 14 7/8 30 2:06 15 1/4 30 3:33 14 7/8 2 2:06 15 1/8 4 3:38 15 20 2:06 15 1/8 4 3:41 15 9 2:10 15 9 3:47 15 1 2:13 15 1/8 50 3:50 14 7/8 1 2:15 15 1/8 2 3:54 15 32 2:16 15 1 3:56 14 7/8 1 2:17 15 5 3:56 15 250 2:17 15 5 3:58 15 4

Source: T. Rowe Price Associates

285-042 At the T. Rowe Price Trading Desk (B)

Exhibit 3 Performance of Various Stock Indexes on August 21, 1984

Dow Jones Industrials +1.87% S&P 500 +1.75% Wilshire 500 +1.56% Computer Technology Index +2.34% New Horizons Fund +1.23%

Source: T. Rowe Price Associates

9 – 2 8 5 – 0 4 1 R E V : J U L Y 1 0 , 2 0 0 3

A N D R É F . P E R O L D

At the T. Rowe Price Trading Desk (A)

Tuesday, August 21, 1984

It was 9:58 a.m. and the markets were about to open. Greg Donovan, one of two traders for the T. Rowe Price New Horizons Fund (and accounts holding similar securities) was going over the list of buys and sells that he was hoping to execute during the day. Greg saw his most difficult task being the sale of a large block of Avantek shares. Avantek traded in the Over The Counter Market (OTC) and had been around $25/share during the previous few weeks, after being as low as $18 in May. (Exhibit lA). The T. Rowe Price analyst covering the company thought that an earnings disappointment was imminent, and that news to that effect would cause the stock’s price to plummet back into the teens. The analyst liked the stock on a long-term basis, however, and only wanted to trim down T. Rowe Price’s current position of around 600,000 shares. Greg’s instructions were to sell 183,000 shares at a price no lower than $23.

At 10:30 the Dow was up $7.50. Greg looked at the screen of his NASDAQ machine and saw that Kidder Peabody was the highest bidder for Avantek at $24 5/8. Several brokers were at $24 ½ bid, with yet several others, including Goldman Sachs, at $24 3/8. (These bids were all for only 100 shares.) Goldman, knowing that T. Rowe Price had a large position in Avantek, had called earlier that morning to say that it was a buyer of the stock in sizeable quantities. Goldman was the largest and most preeminent OTC dealer, and would regularly offer to deal in large positions (50,000 shares or more) for its own account.

Greg decided to try Kidder first. Kidder historically had not committed much of its capital to the OTC market, but recently had decided to try to become a more prominent player. It seemed to Greg that he might get a better execution from Kidder since they would gain visibility on a trade of this magnitude and they might even be willing to lose a little money on the trade. In addition, T. Rowe Price liked Kidder’s research, and here was an opportunity to compensate them, in part, for that service.1 Greg in any event often looked for opportunities to trade with brokers other than Goldman Sachs since T. Rowe Price tended to get the best execution from Goldman, and typically did a disproportionately large share of its trading through that firm.

1 In OTC trades, dealers earned revenues purely from bid-ask spreads, i.e., by finding a buyer willing to pay an asking price and a seller willing to receive a bid price (hopefully lower than the asking price), and pocketing the difference. Trades executed on the NYSE and AMEX involved payment of brokerage commissions with 10¢/share being typical for a large institution.

285-041 At the T. Rowe Price Trading Desk (A)

At 10:40 Greg somewhat nervously picked up the phone.

Greg (talking to Steve, a Kidder trader): “Hi Steve, I see you’re interested in some Avantek. How much do you want to buy?”

Steve: “Let me see. I’ll call you right back.”

Two minutes later:

Steve: “I can do 12,000 shares at [24] 5/8.”

Greg: “I am interested in a more medium sized quantity. Can you do better?”

Steve: “I don’t really think so. But, let me look again. Don’t do anything until I get back to you.”

Ten minutes later:

Steve: “Look, the best I can do is 20,000 shares.”

Greg: “That’s not enough. It seems as if I am going to have to go elsewhere. Is that OK?”

Steve: (After a pause) “If I do more, say up to 35,000 shares, will you then deal?”

Greg: “No, that’s still not enough. I’m just going to have to go elsewhere. OK?”

Steve: “I suppose you’ll have to.”

Greg was upset with himself. He had hoped to be able to do a large trade with Kidder. However, all Steve had done was to try to get him on the “hook,” and he was not going to bite. The “hook” referred to a situation where if you did one trade with a dealer and had more of the same stock to trade, then by the implicit rules of the game you would have to give that dealer a right of first refusal on what remained. The dealer typically would have taken part of the other side of the trade on his or her own account, a position that would be endangered if you then went and offloaded the rest of your position elsewhere. Greg was afraid that, if he did do an initial trade with Steve, the price of this lightly traded stock might fall by as much as one or even several dollars as Steve scurried around looking for more buyers knowing that he most likely had Greg on the hook for a lot more. Not all was lost at this point, however. By getting Steve to answer affirmatively when he had asked if he could go elsewhere, Greg had at least obtained an implicit commitment from Steve not to tell other traders of T. Rowe Price’s intention to sell a large quantity of Avantek. At least, not immediately.

At this point Greg felt that his only option was to call Michael, a trader at Goldman Sachs. He wanted to move quickly and knew that Goldman would be willing to do the whole deal for its own account if necessary, as evidenced in particular by the early morning phone call. The problem was that Greg now had to tell Michael that Steve already knew about the deal. Thus, since Goldman’s position would now be riskier, Michael was unlikely to give him as good a price as he might have had Greg gone to him first.

Greg decided that perhaps the best way to approach Michael was to offer him a swap. For several weeks New Horizons had been adding to an already substantial long-term position in Tandem (also traded OTC) and Greg had done several of these trades through Michael. In fact, Goldman had mentioned that morning that they knew of a seller of Tandem. New Horizons and related accounts were interested in acquiring up to another 320,000 shares of this stock in the near term. It was up to

At the T. Rowe Price Trading Desk (A) 285-041

Greg to choose how and when to acquire it. Greg’s decision was to offer Michael both the Tandem purchase and the Avantek sale as a package deal.

At 11:25 he placed the call. At this point Kidder still showed up on the screen at $24 5/8 bid on Avantek, with Goldman at $24 3/8. During the course of the morning, small lots of Avantek stock had traded at levels as high as $24 7/8. (Exhibit 1C). Tandem, being much more active, had traded in small lots in the range $15 1/4–$14 7/8, with a 10,000 share block having just traded at $14 7/8. (Exhibit 2C). Currently, the lowest asking price for Tandem was $15 1/8 (Kidder, Salomon, Merrill), with Goldman asking $15 3/8. The Dow was up $11.81 for the day so far on moderate volume.

Greg: “I’d like to do a swap of 183,000 Avantek for 320,000 Tandem.”

Michael: “Now those are the kinds of deals I just love! Is it a package deal? A one shot deal? What? I like one shot deals.”

Greg: “One shot.” Then, apologetically: “Listen, I’ve already talked to Kidder but didn’t give him any numbers. I did it because they’re good on research. But, he only wanted to bid for medium size.”

Michael: “I’ll get back to you.”

15 minutes later, Michael called back to say that the Tandem side of the deal was easy to do, but that the Avantek part was harder; no prices as yet. He called back once again at 12:22.

Michael: “I can do Avantek at $23 ½ and Tandem at $15 1/4.”

Background

T. Rowe Price Associates, Inc. was an independent investment counseling firm, founded in 1937 and located in Baltimore, Maryland. In 1984, the firm had $15.5 billion under management. This was divided about equally between fixed income and equities, and also about equally among 12 mutual funds on one hand and separately managed accounts on the other, the latter consisting mostly of large corporate pension plan accounts.

The New Horizons Fund was founded in 1960 and, in 1984, was the largest and oldest emerging growth mutual fund in the United States. The Fund’s objectives were to invest in companies in the early stages of their corporate life cycle, before they became widely recognized. On June 30, 1984, the Fund had $1.2 billion in assets, of which 88% was invested in the common shares of 161 companies with five year EPS growth rates estimated to be at least 25% per year. The remaining 12% was in short-term fixed income securities.

Investment decisions for the New Horizons Fund were made by an investment advisory committee consisting of the president of the Fund, a trader (Greg), and five analysts who spent most of their time researching emerging growth companies. The analysts each managed a portion of the Fund corresponding to their areas of expertise, and could make individual stock selection decisions without prior committee approval. They were also responsible for coordinating and overseeing the trading in their stocks. The committee actively allocated the Fund’s assets across these analysts, and based its decisions on their and the president’s collective judgments. The committee generally sought stocks with greater growth potential, better fundamentals, and lower relative valuations.

T. Rowe Price employed six equity traders in all, including the head trader who had been with the firm for 25 years. Greg was a Vice President and had thus far spent 6 years at the firm, having

285-041 At the T. Rowe Price Trading Desk (A)

previously had 10 years of trading experience at other investment management institutions. In addition to serving on the investment advisory committee of the New Horizons Fund, he had some discretion to trade in stocks already owned by the Fund. For example, he could of his own accord increase an existing holding if there was a seller desperate enough to accept a very low price.

In 1983, the equity trading desk did about 23,000 trades across all accounts, averaging $36,000 per trade, totaling $8.1 billion, and split 50-50 between purchases and sales. The market capitalizations of the companies traded averaged $5.5 billion. The New Horizons Fund accounted for 18% of this trading in companies with market capitalizations averaging $750 million. (See Exhibit 5.)

Recent Developments Relating to Avantek and Tandem

T. Rowe Price’s initial position in Avantek dated back to 1978 with the purchase of 320,000 shares at $1 3/4 (split adjusted) by the New Horizons Fund. The firm’s position in this stock increased over the years, reaching 871,000 shares on March 31, 1984 (see Exhibit 1D). The bulk of this increase occurred in portfolios other than New Horizons. Some selling and repurchasing took place during these years based on occasional near-term fundamental concerns on the part of the Aerospace/Defense analyst covering the company.

In June, 1984, this analyst traveled to California to meet with the managements of several New Horizons Fund holdings. Upon his return, he issued an update on Avantek with the stock then trading at $23 1/8. He concluded that “On balance, I was very satisfied by my visit to AVAK. . . . I continue to be a buyer of AVAK below $18 and a seller at $24.”

With the surge in the stock market in early August, Avantek rose above $24, and the New Horizons Fund and related accounts sold about 200,000 shares of Avantek between $24–$25 on August 2nd and August 3rd.2 No further selling took place prior to August 21, 1984, when, based on further research by the analyst, a sell recommendation was written with the stock at $24 5/8. Excerpts are as follows:

The pricing on low noise amplifiers (LNA) for the home satellite television (TVRO) market continues to collapse. . . . I expect that the margin squeeze will cause third quarter EPS to fall below the $0.21 reported in the June quarter, which would be a major disappointment. I have revised my third-quarter estimate downward to $0.18 from $0.23. Although the TVRO problem may be a reflection of the seasonal summer slowdown, I see no way the company can make up the earnings in the fourth quarter. With the drop in my estimate for the year, and the possibility of a protracted profit squeeze in TVRO, AVAK’s valuation goes from rich to ridiculous. I recommend immediate sale.

The problem here is that Wall Street has very high expectations for AVAK. Everyone is looking for a 50% EPS gain this year, followed by 35% or more next year. It is too early to tell what will happen in 1985, since military components margins could rise dramatically, but 1984 will not meet the consensus estimate of $0.90 without a miracle in TVRO. In any case, the good news is in the stock. This is a well-managed company with good products in good markets. It is my judgment that the stock price today is out of line with AVAK’s prospects. I recommend sale, with an eye to repurchasing in the $18–$19 range.

2 Related accounts had sold approximately 70,000 shares between March 31 and July 31 for reasons unrelated to any research recommendations.

At the T. Rowe Price Trading Desk (A) 285-041

Regarding Tandem, the New Horizons Fund and related accounts began accumulating a position in the stock in late 1981 and early 1982, and reached a position of over a million shares at an average cost of approximately $22 per share by the end of 1982. Based on some short-term fundamental concerns, this position was reduced in the first quarter of 1983 by about 200,000 shares at an average sale price of $28–$29 per share. The analyst however remained intrigued in the longer term with Tandem’s niche market position in fault-tolerant computers and continued to like Tandem’s long-term growth prospects. The remaining position was held through the balance of 1983 and the stock performed quite well closing the year at $35 1/8. The Company, however, experienced fundamental problems in the first half of 1984 relating to revenue shortfalls and the stock plummeted from $35 1/8 to a low of $13 in August 1984. On August 1 the analyst issued the following comments on Tandem, with the stock at $13 7/8.

Tandem (TNDM) has once again disappointed with its latest quarterly EPS report and its stock has sharply retreated to mid-1980 price levels. . . . I have reduced my FY1984 EPS estimate from $1.01 to $0.80 and my FY1985 estimate from $1.60 to $1.25. I have also reduced my secular growth rate assumption from 35% to 25%. In spite of the prevailing gloom about the company, I remain encouraged by TNDM’s product capability, balance sheet strength, and much improved financial control. I believe TNDM will produce excellent investment returns from current levels over the next 12–24 months but would not expect TNDM to outperform other cyclically sensitive technology stocks near term. . . . At current price levels, I suggest another serious look, with the price being right but timing perhaps still premature.

New Horizons Fund and related accounts began adding to positions in Tandem in late July, accumulating another 600,000 shares prior to August 21st, 1984.

285-041 At the T. Rowe Price Trading Desk (A)

Exhibit 1A Avantek Price and Volumea Charts—February to August 1984

Source: Datastream

Avantek Price and Daily Volume Chart

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

Jan-84 Feb-84 Mar-84 May-84 Jun-84 Jul-84 Aug-84

Volume (le ft axis)

Price (right axis)

At the T. Rowe Price Trading Desk (A) 285-041

Exhibit 1B Daily Price Ranges and Volume for Avantek—July 26, 1984 to August 20, 1984

Date High Low Volume (100s shares)

July 26 21 5/8 21 1/4 125 27 21 3/4 21 1/4 439 30 21 5/8 21 1/2 668 31 22 3/8 21 3/8 1,053

Aug. 1 22 1/2 21 3/4 7,588 2 23 5/8 22 1/8 4,550 3 25 1/4 23 3/4 4,576 6 25 1/2 24 1/2 1,159 7 24 3/4 23 7/8 638 8 24 1/2 23 1/2 632 9 24 5/8 23 1/2 407

10 25 1/2 24 3/4 1,522 13 24 3/4 24 555 14 25 1/2 24 1/2 1,003 15 25 1/4 24 7/8 410 16 25 1/8 24 1/8 587 17 24 3/4 24 1,245 20 24 3/4 24 1/2 116

Source: Datastream

Exhibit 1C Avantek Trades on August 21, 1984—10:00 a.m. to 12:20 p.m.

Time Price Shares (100s)

10:17 24 1/2 5 10:53 24 1/2 4 10:53 24 3/4 10 11:03 24 7/8 5 11:03 24 7/8 45 11:33 24 5/8 25 11:41 24 7/8 1

Source: T. Rowe Price Associates

285-041 At the T. Rowe Price Trading Desk (A)

Exhibit 1D Large Institutional Holdings and Activity in Avantek on March 31, 1984a (Price = $19 7/8, 18.7 million shares outstanding)

3 Month Change

in Shares Shares Held Dollar Value ($ millions)

T. Rowe Price Associates 38,735 871,410 $ 17.3

Jennison Associates Capital 315,000 657,600 13.1

Allstate Insurance Co. 313,100 622,700 12.4

IDS Growth Fund, Inc. – 500,000 9.9

Morgan Stanley, Inc. 124,344 440,844 9.2

Harris Trust & Savings Bank (59,000) 416,000 8.3

Campbell Advisors, Inc. 140,300 407,400 8.1

Lincoln First Banks, Inc. – 406,500 8.1

University of Rochester – 404,000 8.0

Eberstadt Asset Management, Inc. 121,800 371,500 7.4

John Hancock Mutual Life 78,300 362,000 7.2

Bank of Boston Corp. 31,405 263,655 5.2

Aetna Life & Casualty Co. (61,500) 255,000 5.1

Capital Research & Management 233,000 233,000 4.6

State Street Research & Management (89,100) 204,900 4.1

IDS New Dimensions Fund 32,500 200,000 4.0

Investors Research Corp. 175,000 175,000 3.5

Dean Witter Reynolds Intercap 35,600 125,600 2.5

United Virginia Bankshares (92,800) 102,450 2.0

Kemper Financial Services (181,900) 94,300 1.9

Republicbank Corp. (96,100) 15,785 0.3

Torchmark Corporation (60,000) – –

Rothschild Asset Management (61,000) – –

Gardner & Preston Moss (86,270) – –

JW Seligman & Co. (655,000) – – – Total 196,414 7,129,644 142.1

Source: “The Spectrum 3,” Computer Directions Advisors, Silver Springs, Maryland.

aThis was the most recently available data on August 21, 1984.

At the T. Rowe Price Trading Desk (A) 285-041

Exhibit 2A Tandem Price and Volumea Charts–January to August 1984

Source: Datastream

Exhibit 2B Daily Price and Volume Ranges for Tandem—July 26, 1984 to August 20, 1984

Date High Low Volume (100s shares)

July 26 16 7/8 13 3/8 26,807 27 15 3/4 14 1/4 14,909 30 15 3/4 13 1/4 7,759 31 14 1/4 13 11,108

Aug. 1 15 3/8 14 1/4 11,240 2 15 5/8 15 1/8 9,057 3 16 3/4 15 1/4 13,443 6 18 16 7,646 7 17 1/2 16 1/8 4,615 8 16 3/4 16 6,506 9 16 3/4 16 4,849

10 17 5/8 16 5/8 10,791 13 17 13 1/2 7,596 14 15 3/8 14 1/2 4,708 15 15 5/8 14 1/2 2,392 16 15 1/2 15 5,806 17 15 3/8 14 3/8 4,084 20 14 7/8 13 3/4 3,209

Source: Datastream

Tandem Price and Daily Volume Chart

10,000

20,000

30,000

40,000

50,000

60,000

Jan-84 Feb-84 Mar-84 May-84 Jun-84 Jul-84 Aug-84

Volume (left axis)

Price (right axis)

This document is authorized for use only by Tetiana Maksymenko ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for addition

Collepals.com Plagiarism Free Papers

Are you looking for custom essay writing service or even dissertation writing services? Just request for our write my paper service, and we'll match you with the best essay writer in your subject! With an exceptional team of professional academic experts in a wide range of subjects, we can guarantee you an unrivaled quality of custom-written papers.

Get ZERO PLAGIARISM, HUMAN WRITTEN ESSAYS

Why Hire Collepals.com writers to do your paper?

Quality- We are experienced and have access to ample research materials.

We write plagiarism Free Content

Confidential- We never share or sell your personal information to third parties.

Support-Chat with us today! We are always waiting to answer all your questions.

Finance and Investment Analysis Case study assignment: some questions and 1 big question in the pdf. solve all the questio

Related Posts

What are stocks and bonds? Describe how you could estimate their values. If you are investing in the stock market, which would yo

For this journal task, you will consider how you, as the CEO/CFO of a publicly traded manufacturing firm, would mitigate the pote

What enabled Moderna to move so fast with their COVID-19 vaccine? Describe Moderna’s business model. How does it contrast with th