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DR. PRASANTH BE MBA PH.D. MOBILE / WHATSAPP: +91 9924764558 OR +91 9447965521 EMAIL: prasanththampi1975@gmail.com WEBSITE: www.casestudyandprojectreports.com

Attempt Only Four Case Study

CASE 1: The McGee Cake Company

In early 2001, Doc and Lyn McGee formed McGee Cake Company. The company produced a full line of cakes, and its specialties included chess cake, lemon pound cake, and double-iced, double-chocolate cake. The couple formed the company as an outside interest, and both continued to work at their current jobs. Doc did all the baking, and Lyn handled the marketing and distribution. With good product quality and a sound marketing plan, the company grew rapidly. In early 2006, the company was featured in a widely distributed entrepreneurial magazine. Later that year, the company was featured in Gourmet Desserts, a leading specialty food magazine. After the article appeared in Gourmet Desserts, sales exploded, and the company began receiving orders from all over the world.

Because of the increased sales, Doc left his other job, followed shortly by Lyn. The company hired additional workers to meet demand. Unfortunately, the fast growth experienced by the company led to cash flow and capacity problems. The company is currently producing as many cakes as possible with the assets it owns, but demand for its cakes is still growing. Further, the company has been approached by a national supermarket chain with a proposal to put four of its cakes in all the chain’s stores, and a national restaurant chain has contacted the company about selling McGee cakes in its restaurants. The restaurant would sell the cakes without a brand name.

Doc and Lyn have operated the company as a sole proprietorship. They have approached you to help manage and direct the company’s growth. Specifically, they have asked you to answer the following questions:

1. What are the advantages and disadvantages of changing the company organization from a sole proprietorship to an LLC?
   
2. What are the advantages and disadvantages of changing the company organization from a sole proprietorship to a corporation?
   
3. Ultimately, what action would you recommend the company undertake? Why?

CASE 2: Ration Analysis at S&S Air, Inc.

Chris Guthrie was recently hired by S&S Air, Inc., to assist the company with its financial planning and to evaluate the company’s performance. Chris graduated from college five years ago with a finance degree. He has been employed in the finance department of a Fortune 500 company since then.

S&S Air was founded 10 years ago by friends Mark Sexton and Todd Story. The company has manufactured and sold light airplanes over this period, and the company’s products have received high reviews for safety and reliability. The company has a niche market in that it sells primarily to individuals who own and fly their own planes. The company has two models; the Birdie, which sells for $53,000, and the Eagle, which sells for $78,000.

Although the company manufactures aircraft, its operations are different from commercial aircraft companies. S&S Air builds aircraft to order. By using prefabricated parts, the company can complete the manufacture of an airplane in only five weeks. The company also receives a deposit on each order, as well as another partial payment before the order is complete. In contrast, a commercial air-plane may take one and one-half to two years to manufacture once the order is placed.

Mark and Todd have provided the following financial statements. Chris has gathered the industry ratios for the light airplane manufacturing industry.

S&S Air, Inc. 2006 Income Statement

Sales                                                   $21,785,300 Cost of goods sold                                15,874,700 Other expenses                                        2,762,500 Depreciation                                               976,200 EBIT                                                     $ 2,171,900 Interest                                                        341,600 Taxable income                                    $ 1,830,300 Taxes (40%)                                                732,120 Net income                                            $ 1,098,180 Dividends                           $439,272 Add to retained earnings      658,908

S&S Air, Inc. 2006 Balance Sheet
Assets                                                   Liabilities and Equity
Current assets Cash Account receivable Inventory Total current assets Fixed assets Net plant and equipment Total assets	$     315,000        506,000        740,800 $  1,561,800 $11,561,000 $13,077,800	Current liabilities Accounts payable Notes payable Total current liabilities Long-term debt Shareholder equity Common stock Retained earnings Total equity Total liabilities and equity	$   635,000   1,450,000 $2,085,000 $3,800,000 $    250,000    6,942,800 $ 7,192,800 $13,077,800

Light airplane Ratios
	Lower Quartile	Median	Upper Quartile
Current ratio Quick ratio Cash ratio Total asset turnover Inventory turnover Receivables turnover Total debt ratio Debt-equity ratio Equity multiplier Times interest earned Cash coverage ratio Profit margin Return on assets Return on equity	0.50 0.21 0.08 0.68 4.89 6.27 0.44 0.79 1.79 5.18 5.84 4.05% 6.05% 9.93%	1.43 0.38 0.21 0.85 6.15 9.82 0.52 1.08 2.08 8.06 8.43 6.98% 10.53% 16.54%	1.89  0.62  0.39  1.38 10.89 14.11  0.61  1.56  2.56  9.83 10.27 9.87% 13.21% 26.15%

Questions:

1. Using the financial statements provided for S&S Air, calculate each of the ratios listed in the table for the light aircraft industry.
   
2. Mark and Todd agree that a ratio analysis can provide a measure of the company’s performance. They have chosen Boeing as an aspirant company. Would you choose Boeing as an aspirant company? Why or why not? There are other aircraft manufacturers S&S Air could use as aspirant companies. Discuss whether it is appropriate to use any of the following companies: Bombardier, Embraer, Cirrus Design Corporation, and Cessna Aircraft Company.
   
3. Compare the performance of S&S Air to the industry. For each ratio, comment on why it might be viewed as positive or negative relative to the industry. Suppose you create an inventory ratio calculated as inventory divided by current liabilities. How do you think S&S Air’s ratio would compare to the industry average?

CASE 3: The MBA Decision

Ben Bates graduated from college six years ago with a finance undergraduate degree. Although he is satisfied with his with his current job, his goal is to become an investment banker. He feels that an MBA degree would allow him to achieve this goal. After examining schools, he has narrowed his choice to either Wilton University or Mount Perry College. Although internships are encouraged by both schools, to get class credit for the internship, neither school will allow its student to work while enrolled in its MBA program.

Ben currently works at the money management firm of Dewey and Louis. His annual salary at the firm is $50,000 per year, and his salary is expected to increase at 3 percent per year until retirement. He is currently 28 years old and expects to work for 35 more years. His current job includes a fully paid health insurance plan, and his current average tax rate is 26 percent. Ben has a savings account with enough money to cover the entire cost of his MBA program.

The Ritter College of Business at Wilton University is one of the top MBA programs in the country. The MBA degree requires two years of full-time enrollment at the university. The annual tuition is $60,000, payable at the beginning of each school year. Books and other supplies are estimated to cost $2,500 per year. Ben expects that after graduation from Wilton, he will receive a job offer for about $95,000 per year, with a $15,000 signing bonus. The salary at this job will increase at 4 percent per year. Because of higher salary, his average income tax rate will increase to 31 percent.

The Bradley School of Business at Mount Perry College began its MBA program 16 years ago. The Bradley School is smaller and less well known than the Ritter College. Bradley offers an accelerated one-year program, with a tuition cost of $75,000 to be paid upon matriculation. Books and other supplies for the program are expected to cost $3,500. Ben thinks that he will receive an offer of $78,000 per year upon graduation, with a $10,000 signing bonus. The salary at this job will increase at 3.5 percent per year. His average tax rate level of income will be 29 percent.

Both schools offer a health insurance plan that will cost $3,000 per year, payable at the beginning of the year. Ben also estimates that room and board expenses will cost $20,000 per year at both schools. The appropriate discount rate is 6.5 percent.

 Questions

1. How does Ben’s age affect his decision to get an MBA?
   
2. What other, perhaps nonquantifiable, factors affect Ben’s decision to get an MBA?
   
3. Assuming all salaries are paid at the end of each year, what is the best option for Ben from a strictly financial standpoint?
   
4. Ben believes that the appropriate analysis is to calculate the future value of each option. How would you evaluate this statement?
   
5. What initial salary would Ben need to receive to make him indifferent attending Wilton University and staying in his current position?
   
6. Suppose, instead of being able to pay cash for his MBA, Ben must borrow the money. The current borrowing rate is 5.4 percent. How would this affect his decision?

CASE – 4        Bullock Gold Mining

Seth Bullock, the owner of Bullock Gold Mining is evaluating a new gold mine in South Dakota. Dan Dority, the company’s geologist, has just finished his analysis of the mine site. He has estimated that the mine would be productive for eight years, after which the gold would be completely mined. Dan has taken an estimate of the gold deposits to Alma Garrett, the company’s financial officer. Alma has been asked by Seth perform an analysis of the new mine and present her recommendation on whether the company should open the new mine.

Alma has used the estimates provided by Dan to determine the revenues that could be expected from the mine. She has also projected the expense of opening the mine and the annual operating expenses. If the company opens the mine, it will cost $500 million today, and it will have a cash flow of $80 million nine years from today costs associated with closing the mine and reclaiming the area surrounding it. The expected cash flows each year from the mine are shown in the table. Bullock Mining has a 12 percent required return on all of its gold mines.

Year	Cash Flow
0 1 2 3 4 5 6 7 8 9	─$500,000,000        60,000,000        90,000,000      170,000,000      230,000,000      205,000,000      140,000,000      110,000,000        70,000,000     ─80,000,000

Question:

1. Construct a spreadsheet to calculate the payback period, internal rate of return, modified internal rate of return, and net present value of the proposed mine.

2. Based on your analysis, should the company open the mine?

3. Bonus question: Most spreadsheets do not have a built-in formula to calculate the payback period. Write a VBA script that calculates the payback period for a project.

CASE 5: The Beta for American Standard

Joey Moss, a recent finance graduate, has just begun his job with the investment firm of Covili and Wyatt. Paul Covili, one of the firm’s founders, has been talking to Joey about the firm’s investment portfolio.

As with any investment, Paul is concerned about the risk of the investment as well as the potential return. More specially, because the company holds a diversified portfolio, Paul is concerned about the systematic risk of current and potential investments. One position the company holds is stock in American Standard (ASD). American Standard manufactures air conditioning systems, bath and kitchen fixtures and fittings and vehicle control systems. Additionally, the company offers commercial and residential heating, ventilation, air conditioning equipment, systems, and controls.

Covili and Wyatt currently uses a commercial data vendor for information about its positions. Because of this, Paul is unsure exactly how the numbers provided are calculated. The data provider considers its methods proprietary, and it will not disclose how stock betas and other information are calculated. Paul is uncomfortable with not knowing exactly how these numbers are being computed and also believes that it could be less expensive to calculate the necessary statistics in-house. To explore this question, Paul has asked Joey to do the following assignments:

1. Go to finance.yahoo.com and download the ending monthly stock prices for American Standard (ASD) for the last 60 months. Also, be sure to download the dividend payments over this period as well. Next, download the ending value of the S&P 500 index over the same period. For the historical risk-free rate, go to the St. Louis Federal Reserve Web site (www.stlouisfed.org) and find the three-month Treasury bill secondary market rate. Download this file. What are the monthly returns, average monthly returns, and standard deviation for American Standard stock, the three-month Treasury bill, and the S&P 500 for this period?
   
2. Beta is often estimated by linear regression. A model often used is called the market model, which is:
    Rt ─ R¦t  = αi + Βi  [RMt ─ R¦t] + εt
   In this regression, Rt is the return on the stock and R¦t  is the risk-free rate for the same period. RMt is the return on a stock market index such as the S&P 500 index. αi is the regression intercept, and Βi is the slope (and the stock’s estimated beta). εt represents the residuals for the regression. What do you think is the motivation for this particular regression? The intercept αi is often called Jensen’s alpha. What does it measure? If an asset has a positive Jensen’s alpha, where would it plot with respect to the SML? What is the financial interpretation of the residuals in the regression?
   
3. Use the market model to estimate the beta for American Standard using the last 36 months of returns (the regression procedure in Excel is one easy way to do this). Plot the monthly returns on American Standard against the index and also show the fitted line.
   
4. When the beta of a stock is calculated using monthly returns, there is a debate over the number of months that should be used in the calculation. Rework the previous questions using the last 60 months of returns. How does this answer compare to what you calculated previously? What are some arguments for and against using shorter versus longer periods? Also, you’ve used monthly data, which are common choice. You could have used daily, weekly, quarter, or even annual data. What do you think are the issues here?
   
5. Compare your beta for American Standard to the beta you find on finance.yahoo.com. How similar are they? Why might they be different?

Note: Solve any 8 out of 10.

1. (a) Discuss the term ‘Continuing Guarantee’. How can it be revoked?
   • State briefly the rights and obligations of a bailee.

2. (a) What do you understand by the term Implied ‘Authority of a partner’?

(b)  Enumerate the acts which are not covered under implied authority.

3. (a) What are the rights and duties of a minor in relation to partnership business?

      (b)   Distinguish between --

         (i)  Sub-agent and Substituted Agent

        (ii)  Sale, Bailment and Pledge

4. (a) Explain the rights of a partner.

      (b)   Distinguish between the following:

         (i)  Succession and Assignment.

        (ii)  Contract of Indemnity and Contract of Guarantee.

5. Write short note on.
   1. Non-registration of a firm.
   2. Capacity of Contract

• Kinds of Bailment.

1. Anticipatory breach of a Contract.

6. a) When is a Surety Discharged from Liability by the conduct of the creditor.
7. b) Describe the rules relating to passing of property in the sale of goods.

7. a) What is an illegal agreement? State the effects of illegality.
8. b) What is ‘Supervening Impossibility’? What are its effect upon the contract?
9. c) What are the remedies available to the buyer when goods in wrong quantity     

                    delivered to him?

1. d) When shall a retired partner be discharged from his liabilities for the acts of the firm before retirement?

8. (a) State the principles on which damages are assessed for breach of contract.

(b)  Describe the law relating to the ‘right of resale’ available to an unpaid seller 

       in the Sale of Goods Act, 1930.

9. a) What are the rules regarding delivery of goods?
10. b) Distinguish between:
11. i) Novation and Alteration.
12. ii) Liquidated damages and penalty

COST AND ACCOUNTING 

Note : Solve any 8 questions out of 10.

1. “Management accounting is a mid-way between financial and cost accounting.” Elucidate.

1. What is the major revenue recognition criterion?

1. What is a trading account? What are its major constituents? What is its major outcome?

1. The cash flow statement is as useful to shareholders and lenders as to management. Explain.

1. (a) “All future costs are relevant.” Do you agree? Why?

(b) “Fixed costs are really variable. The more you produce the less they become.”                                   

                    Do you agree? Explain.

1. In connection with inventory ordering and control, certain terms are basic. Explain the meaning of each of the following:
1. Economic order quantity
2. Re-order point
3. Lead time
4. Safety stock

     

1. What is meant by under/over-absorption of factory overheads? How will you account for them in cost accounts? Does it bear any impact while submitting quotations?

1. A manufacturing company operating a system of budgetary control finds that their production capacity during the year varies between 75 per cent and 90 per cent as against the budgeted capacity of 80 per cent for the year. It has been suggested that a system budgets should be introduced to effectively control costs. Outline the steps you would take to implement this suggestion keeping in mind that the management would still require periodic comparison with their overall budget during the year.

1. “Transfer prices must always be equal to externally determined market of comparative products or services.” Comment fully.

COOKING LPG LTD

DETERMINATION OF WORKING CAPTIAL

Introduction

Cooking LPG Ltd, Gurgaon, is a private sector firm dealing in the bottling and supply of domestic LPG for household consumption since 1995. The firm has a network of distributors in the districts of Gurgaon and Faridabad. The bottling plant of the firm is located on National Highway – 8 (New Delhi – Jaipur), approx. 12 kms from Gurgaon.  The firm has been consistently performing we.”  and plans to expand its market to include the whole National Capital Region.

            The production process of the plant consists of receipt of the bulk LPG through tank trucks, storage in tanks, bottling operations and distribution to dealers.   During the bottling process, the cylinders are subjected to pressurized filling of LPG followed by quality control and safety checks such as weight, leakage and other defects.  The cylinders passing through this process are sealed and dispatched to dealers through trucks.  The supply and distribution section of the plant prepares the invoice which goes along with the truck to the distributor.

Statement of the Problem :

Mr. I. M. Smart, DGM(Finance) of the company, was analyzing the financial performance of the company during the current year.  The various profitability ratios and parameters of the company indicated a very satisfactory performance.  Still, Mr. Smart was not fully content-specially with the management of the working capital by the company.  He could recall that during the past year, in spite of stable demand pattern, they had to, time and again, resort to bank overdrafts due to non-availability of cash for making various payments.  He is aware that such aberrations in the finances have a cost and adversely affects the performance of the company.  However, he was unable to pinpoint the cause of the problem.

            He discussed the problem with Mr. U.R. Keenkumar, the new manager (Finance).  After critically examining the details, Mr. Keenkumar realized that the working capital was hitherto estimated only as approximation by some rule of thumb without any proper computation based on sound financial policies and, therefore, suggested a reworking of the working capital (WC) requirement.  Mr. Smart assigned the task of determination of WC to him.

Profile of Cooking LPG Ltd.

1)         Purchases : The company purchases LPG in bulk from various importers ex-Mumbai and Kandla, @ Rs. 11,000 per MT.  This is transported to its Bottling Plant at Gurgaon through 15 MT capacity tank trucks (called bullets), hired on annual contract basis.  The average transportation cost per bullet ex-either location is Rs. 30,000.  Normally, 2 bullets per day are received at the plant.  The company make payments for bulk supplies once in a month, resulting in average time-lag of 15 days.

2)         Storage and Bottling : The bulk storage capacity at the plant is 150 MT (2 x 75 MT storage tanks)  and the plant is capable of filling 30 MT LPG in cylinders per day.  The plant operates for 25 days per month on an average.  The desired level of inventory at various stages is as under.

• LPG in bulk (tanks and pipeline quantity in the plant) – three days average production / sales.
• Filled Cylinders – 2 days average sales.
• Work-in Process inventory – zero.

3)         Marketing : The LPG is supplied by the company in 12 kg cylinders, invoiced @ Rs. 250 per cylinder.  The rate of applicable sales tax on the invoice is 4 per cent.  A commission of Rs. 15 per cylinder is paid to the distributor on the invoice itself.  The filled cylinders are delivered on company’s expense at the distributor’s godown, in exchange of equal number of empty cylinders.  The deliveries are made in truck-loads only, the capacity of each truck being 250 cylinders.  The distributors are required to pay for deliveries through bank draft.  On receipt of the draft, the cylinders are normally dispatched on the same day.  However, for every truck purchased on pre-paid basis, the company extends a credit of 7 days to the distributors on one truck-load.

4)         Salaries and Wages : The following payments are made :

• Direct labour – Re. 0.75 per cylinder (Bottling expenses) – paid on last day of the month.
• Security agency – Rs. 30,000 per month paid on 10^th of subsequent month.
• Administrative staff and managers – Rs. 3.75 lakh per annum, paid on monthly basis on the last working day.

5)         Overheads :

• Administrative (staff, car, communication etc) – Rs. 25,000 per month – paid on the 10^th of subsequent month.
• Power (including on DG set) – Rs. 1,00,000 per month paid on the 7^th Subsequent month.
• Renewal of various licenses (pollution, factory, labour CCE etc.) – Rs. 15,000 per annum paid at the beginning of the year.
• Insurance – Rs. 5,00,000 per annum to be paid at the beginning of the year.
• Housekeeping etc – Rs. 10,000 per month paid on the 10^th of the subsequent month.
• Regular maintenance of plant – Rs. 50,000 per month paid on the 10^th of every month to the vendors.  This includes expenditure on account of lubricants, spares and other stores.
• Regular maintenance of cylinders (statutory testing) – Rs. 5 lakh per annum – paid on monthly basis on the 15^th of the subsequent month.
• All transportation charges as per contracts – paid on the 10^th subsequent month.
• Sales tax as per applicable rates is deposited on the 7^th of the subsequent month.

6)   Sales : Average sales are 2,500 cylinders per day during the year.  However, during the winter months (December to February), there is an incremental demand of 20 per cent.

7)   Average Inventories : The average stocks maintained by the company as per its policy guidelines :

• Consumables (caps, ceiling material, valves etc) – Rs. 2 lakh.  This amounts to 15 days consumption.
• Maintenance spares – Rs. 1 lakh
• Lubricants – Rs. 20,000
• Diesel (for DG sets and fire engines) – Rs. 15,000
• Other stores (stationary, safety items) – Rs. 20,000

8)         Minimum cash balance including bank balance required is Rs. 5 lakh.

9)         Additional Information for Calculating Incremental Working Capital During Winter.

• No increase in any inventories take place except in the inventory of bulk LPG, which increases in the same proportion as the increase of the demand.  The actual requirements of LPG  for additional supplies are procured under the same terms and conditions from the suppliers.
• The labour cost for additional production is paid at double the rate during wintes.
• No changes in other administrative overheads.
• The expenditure on power consumption during winter increased by 10 per cent.  However, during other months the power consumption remains the same as the decrease owing to reduced production is offset by increased consumption on account of compressors /Acs.
• Additional amount of Rs. 3 lakh is kept as cash balance to meet exigencies during winter.
• No change in time schedules for any payables / receivables.
• The storage of finished goods inventory is restricted to a maximum 5,000 cylinders due to statutory requirements.  

Question:

1. Determine working capital?

1. 2

M/S HI-TECH ELECTRONICS

M/s. Hi – tech Electronics, a consumer electronics outlet, was opened two years ago in Dwarka, New Delhi. Hard work and personal attention shown by the proprietor, Mr. Sony, has brought success.  However, because of insufficient funds to finance credit sales, the outlet accepted only cash and bank credit cards.  Mr. Sony is now considering a new policy of offering installment sales on terms of 25 per cent down payment and 25 per cent per month for three months as well as continuing to accept cash and bank credit cards.

            Mr. Sony feels this policy will boost sales by 50 percent.  All the increases in sales will  be credit sales.  But to follow through a new policy, he will need a bank loan at the rate of 12 percent.  The sales projections for this year without the new policy are given in Exhibit 1.

Exhibit 1 Sales Projections and Fixed costs

Month	Projected sales without instalment option	Projected sales with instalment option
January	Rs. 6,00,000	Rs. 9,00,000
February	4,00,000	6,00,000
March	3,00,000	4,50,000
April	2,00,000	3,00,000
May	2,00,000	3,00,000
June	1,50,000	2,25,000
July	1,50,000	2,25,000
August	2,00,000	3,00,000
September	3,00,000	4,50,000
October	5,00,000	7,50,000
November	5,00,000	15,00,000
December	8,00,000	12,00,000
Total Sales	48,00,000	72,00,000
Fixed cost	2,40,000	2,40,000

He further expects 26.67 per cent of the sales to be cash, 40 per cent bank credit card sales on which a 2 per cent fee is paid, and 33.33 per cent on instalment sales.  Also, for short term seasonal requirements, the film takes loan from chit fund to which Mr. Sony subscribes @ 1.8 per cent per month.

            Their success has been due to their policy of selling at discount price.  The purchase per unit is 90 per cent of selling price.  The fixed costs are Rs. 20,000 per month.  The proprietor believes that the new policy will increase miscellaneous cost by Rs. 25,000.

            The business being cyclical in nature, the working capital finance is done on trade – off basis.  The proprietor feels that the new policy will lead to bad debts of 1 per cent.

(a)       As a financial consultant, advise the proprietor whether he should go for the extension of credit facilities.

(b)       Also prepare cash budget for one year of operation of the firm, ignoring interest.  The minimum desired cash balance & Rs. 30,000, which is also the amount the firm has on January 1.  Borrowings are possible which are made at the beginning of a month and repaid at the end when cash is available.

Attempt Only Four Case Study

CASE – 1

You are the CFO of a large Indian pharmaceutical company. Over the last five years your company has grown, primarily through overseas acquisitions. You started acquiring companies in Europe and North America in 2000.

Your balance sheet on March 2005 has assets equivalent of US$200 million, including those of your subsidiaries.

In the last board meeting, a presentation made by your European subsidiary painted a worrisome picture. This bulk drug manufacturing facility sources its raw materials from a small South African country, which is facing political unrest. This means that the reliability of this source of raw material, in the days to come, is poor. Your subsidiary is keen to source this material from a small Taiwanese firm. This Taiwanese firm is willing to supply the raw material but wants payment in US dollars for the January to June 2006 period; in euros for the July to December 2006 period through its Cayman Island bank account.

If this supply contract clicks, it could mean at least two things: one, getting a reliable supplier, and two, opening a link in the Far East market.

You are preparing to present a case for this supply contract to the top management. You search the web to get some data on USD/INR and Europe/INR behaviour.

Question:

What are the issues that you will take into account and what is the likely response from the board members?