May 2008 Celebrations - Memories

CASE EXAMINATION
CELEBRATIONS AND
MEMORIES LTD. (CML)
MAY 2008

Copyright 2008
The Society of Management Accountants of Canada

All rights reserved. No part of this manual may be reproduced
in any form without the permission of the copyright holder.
TABLE OF CONTENTS

MAY 2008 Case Examination

Page
Case Question:
Backgrounder .................................................................................. 1
Additional Information .................................................................... 16
General Comments on Performance ...................................................... 24
Steps for Approaching Business Strategy ............................................... 32
Assessment and Solution Notes for Markers .......................................... 34
Assessment Guide .................................................................................. 62
Sample Response Successful Attempt #1 ........................................... 72
Markers Comments Successful Attempt #1 ........................................ 92
Sample Response Successful Attempt #2 ........................................... 97
Markers Comments Successful Attempt #2 ...................................... 118
Sample Response Unsuccessful Attempt .......................................... 122
Markers Comments Unsuccessful Attempt ....................................... 137
Supplement of Formulae * .................................................................... 142
*This supplement is provided to all candidates with each part of the examination.

May 2008 Case Examination

CMA Canada 1

The Societies of Management Accountants of Alberta, Manitoba, New Brunswick, Newfoundland, Northwest Territories & Nunavut,
Nova Scotia, Ontario, Prince Edward Island, Saskatchewan and the Yukon,
Certified Management Accountants Society of British Columbia, Ordre des comptables en management accrdits du Qubec

May 2008

Case Examination

Backgrounder

The background information relating to the Case Examination (Backgrounder) is provided to
candidates in advance of the examination date. The Backgrounder contains information about
both the company and the industry involved in the case. Candidates are expected to familiarize
themselves with this information in preparation for the analysis that will be required during the
Case Examination.
Candidates should note that they will not be allowed to bring any written material,
including the advance copy of this Backgrounder, into the examination centre. A new
copy of this Backgrounder, together with Additional Information about the company and
a supplement of formulae, will be provided at the writing centre for the Case
Examination. Only the following models of calculators are authorized for use on the Case
Examination:
1. Texas Instruments TI BA II Plus (including the professional model)
2. Hewlett Packard HP 10bII (or HP 10Bii)
3. Sharp EL-738C (or EL-738)

Candidates are reminded that no outside research on the industry related to this case is
required. Examination responses will be evaluated on the basis of the industry information
provided in the Backgrounder and the question paper (Additional Information).


2 CMA Canada
Celebrations and Memories Ltd. (CML)
Backgrounder

January 1965 to December 2007

Overview

Celebrations and Memories Ltd. (CML) is a privately owned, Canadian company that operates a
chain of retail greeting card stores that are located in secondary (smaller) enclosed shopping
malls. In addition to greeting cards, each store carries tobacco products, giftware, gift wrap,
magazines, newspapers, and a variety of confectionery items. Some of the stores also operate
a retail post office and/or a lottery ticket booth.

A Brief History

Ownership

CML was initially formed as a partnership in J anuary 1965 by two university students, Martin
Fong and Marie Durand, as a means of helping them finance their education. The first store was
established in an enclosed mall of moderate size that was located reasonably close to the
university attended by Fong and Durand. This store proved to be quite successful. Over the next
three years, the partners expanded the business to three stores, all located in the same city.
The stores were staffed primarily by university students, and Fong and Durand split the
administrative duties between them.

In 1968, the partners decided to expand to other cities and provinces, and incorporated the
business under federal jurisdiction. Each partner received 1,000 common shares, at a face
value of $10 per share, in exchange for their partnership equity. By 1972, Fong decided to give
up his interest in CML and pursue a career in space technology. Durand, who had completed an
MBA degree, decided to make a career out of CML and purchased Fongs shares for $20,000.

Over the next 35 years, Durand managed the company successfully, expanding the business to
a chain of 54 stores located in various provinces, as indicated in Table 1.

Table 1
CML Stores as at December 31, 2007

Province Number of Stores
Ontario 39
Quebec 10
British Columbia 3
Nova Scotia 2

At the end of 2007, Marie Durand remains the CEO and majority shareholder of CML. A
summary of the shareholdings is provided in Table 2.

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Table 2
Shares Outstanding as at December 31, 2007

Name of
Shareholder
Shares Issued
by Company
1
Amount
Paid In
Shares (Sold)
Acquired
2
Shares Owned on
Dec. 31, 2007
Marie Durand 29,000 $145,000 (5,000) 24,000
Mark Glenholmes 4,000 20,000 4,000
Senior management 0 5,000 5,000
Total 33,000 $165,000 33,000

Notes:
1. In 1980, Marie Durand authorized a two-for-one share split, giving her 4,000 shares, and
then 25,000 shares were issued by the company to Durand and 4,000 to her husband,
Mark Glenholmes, for $5 each.
2. Over the last five years, Durand sold a total of 5,000 shares to various members of
management for total proceeds of $60,000.

Management

A summarized organizational chart for CML is found in Exhibit 1.

Marie Durand, Chief Executive Officer (CEO), has a BA (economics) and an MBA. She has
been the CEO of CML since1972 and has no business experience aside from CML. In recent
years, Durand has expanded the management team and has transferred more responsibility to
senior managers than has been her habit in the past.

Gordon Hopps, Vice President of Administration, has community college certificates in business
administration, marketing, and management as well as 10 years of relevant experience in
retailing prior to being hired as the executive assistant to Durand in 1993. He was promoted to
the vice-president position in 2004 and has since demonstrated an ability to be an effective
administrator.

Tamar Shah, Vice President of Sales, has an MBA in Marketing. She originally worked for CML
in one of the Ontario stores while she was a university student. After graduating, Shah accepted
a management trainee position with an international greeting card manufacturer. When Durand
decided to expand CML in the 1990s, she hired Shah as an area sales manager. In 2002, Shah
was promoted to the vice-president position.

Claude Denis is Vice President of Facilities. Although Denis holds an engineering degree, he
was hired by CML primarily because of his experience as a commercial real estate agent. Denis
handles CMLs lease negotiations and is also responsible for leasehold construction and major
repairs and maintenance. The routine cleaning and sales display presentations in the retail
stores are handled by the sales staff at each store.

Laura Firelli is the Human Resources (HR) Manager. She has previous experience working as
an HR assistant manager in a large retail corporation. Firelli has a Bachelor of Arts (psychology)
degree and is currently a Certified Human Resources Professional (CHRP) candidate. Firelli
joined CML in 2004 as part of the restructuring at that time.

4 CMA Canada
Chris Mantha joined the accounting department of CML in 2002 after graduating from university
with a Bachelor of Commerce degree. In 2007, as a first step in possibly establishing a separate
finance department, Mantha was promoted to a new position, Financial Projects Officer. For the
present, however, Mantha will continue to report to the Vice President of Administration.

Board of Directors

When CML was first incorporated, Durand, Glenholmes, and Fong were appointed as the
directors of the company. In 1972, Fong left the board after selling his shares to Durand, and
one of the store managers, Gary Evans, was appointed as a director. In 2002, when Durand
began selling shares to members of management, it was decided to appoint four additional
directors to sit on the board: Ren Caron, Lisa Bean, Margaret Riddell, and Andy Shapiro.

Ren Caron is a successful commercial artist and has many connections in the giftware
industry. He has been a business associate of Durand for over 20 years. Lisa Bean is Durands
lawyer and agreed to sit on CMLs board of directors as a favour to Durand and as a means of
making further business contacts for her law practice. Margaret Riddell is a retired bank
manager. Prior to retiring, she was the senior bank officer who handled CMLs account from
1995 until 2001. Andy Shapiro is a self-employed computer consultant who has done some
work for Mark Glenholmes over the past few years.

Mission

In 2007, the board decided to review the companys strategic plan. As a first step, an
environmental scan was conducted (see Exhibit 2) and the following mission statement was
approved:

CML provides a satisfactory return to its shareholders through retail operations
located in secondary shopping malls in economically healthy areas of Canada.
These retail operations primarily focus on goods and services related to
satisfying consumers needs for celebrating special events with family and
friends, giving gifts, and enjoying life.

The Industry

The greeting card industry is dominated by two big companies, both of which have Canadian
subsidiaries that manufacture and distribute various lines of greeting cards. One company,
PictureCards Canada (PC), operates its own stores and has franchised stores. The other
company, Greeting Cards Canada Inc. (GCC), operates its own stores. Both companies supply
other vendors of greeting cards, including supermarkets and drugstore chains. GCC is CMLs
primary supplier of greeting cards.

In most cities, PC and GCC locate their corporate stores in the larger malls. These two
companies also produce a large variety of decorative gift items that are sold through their
corporate stores and other retailers.

The smaller companies in the greeting card industry, such as CML, generally locate their retail
stores in the smaller secondary malls. Most of these smaller companies have one to three
stores, usually in the same city. In Canada, there is only one other greeting card store chain that
is of similar size as CML Morgan and Green Ltd. (MGL), a private company for which little

CMA Canada 5
detailed operating data is available in the public domain. The card stores are likely to face
competition from retail chains of various types but only rarely from similar card stores in the
same mall.

There are three main categories of greeting cards: occasion cards (birthday, anniversary, etc.),
holiday cards (Christmas, Easter, etc.), and dollar cards (inexpensive greeting cards that are
sold at a retail price of one dollar). Some interesting facts pertaining to the Canadian greeting
card industry are as follows:

1. Adult women purchase more than 90% of all greeting cards.
2. Birthday cards represent approximately 60% of all occasion cards sold.
3. Christmas cards represent more than 70% of holiday cards sold; other popular holiday cards
are for Valentine's Day, Mother's Day, Easter, and Father's Day.

Many retail stores in malls sell magazines, newspapers, and confectionery items (e.g. candy,
chewing gum, potato chips, lozenges, chocolate bars, etc.). There is little price competition for
these items because prices are usually set by the suppliers and expectations of the public. CML
carries these products primarily as a convenience for their tobacco, card, and giftware
customers.

The smaller secondary malls usually have a major grocery store, drug store, or bargain style
department store as an anchor tenant. These malls generally serve residential communities,
and contain a variety of small retail stores and service businesses. Most have a postal outlet
that operates out of one of the stores.

In recent years, there has been a trend away from the large, enclosed malls and toward malls of
large box stores. This trend has not had a significant impact on the traffic in the secondary malls
because they tend to be used by people for whom the location is convenient. However, this
trend could impact the number of secondary malls constructed in the future, limiting the
opportunities for expansion for chains such as CML, particularly in the large Ontario and
Quebec markets.

Despite all the negative aspects of tobacco, sales in Canada continued to rise through 2003
and, despite some decline since then, Canadian sales in 2007 are 20% more than in 2001.
Although tobacco products such as cigarettes, cigars and pipe tobacco produce modest gross
profit margins, they require only minimal display space and a small investment in inventory. The
change in the tobacco environment has resulted in a significant decrease in the number of retail
outlets that carry tobacco products.

Although many businesses in malls offer lottery tickets for sale, the vast majority of lottery
tickets are purchased from free-standing lottery booths that have staff present during the mall
operating hours. The operators of these booths earn a sales commission as compensation for
selling lottery tickets. The commissions are calculated by the provincial governments and
payments are made to the operators on a weekly basis.

Celebrations and Memories Ltd. (CML) Operations

CML stores carry greeting cards, tobacco products (cigarettes, cigars, pipe tobacco, lighters,
pipes, etc.), magazines, newspapers, giftware, gift wrap products (wrapping paper, bows,

6 CMA Canada
ribbons, gift bags, etc.), confectionery items, and stationery. Some of the larger stores also
operate a retail post office and/or a lottery ticket booth.

CMLs stores are located in smaller secondary malls. For CML, the advantages offered by malls
in this category include the following:

1. The occupancy costs tend to be substantially less than in the major enclosed malls, and
lease terms are usually more flexible (e.g. five-year lease, with an option to renew for two to
five years in most cases).
2. The major greeting card retailers are rarely directly interested in these smaller malls.
Although grocery stores and drug stores usually carry some greeting cards, selection is
limited and potential customers seeking to purchase cards usually prefer to shop for them in
specialty card shops.
3. There is normally no significant direct competition in the giftware and tobacco areas.
4. These malls tend to develop a regular clientele, which allows CML employees to develop
relationships with their customers. This is particularly true with respect to customers who
regularly purchase newspapers, magazines, and tobacco products.
5. It is easier for CML to acquire contracts to operate retail postal outlets and lottery booths in
these malls.

CML does not have a prescribed floor plan for their stores but many are set up in a similar
manner. The main components of these stores are as follows (see also Exhibit 3):

1. The stores are between 1,500 and 2,100 sq. ft. and are slightly rectangular in shape. This
allows the display area to be approximately square while having a closed off area on what
would be the mall external wall (in most cases) for a washroom, storage, office and, in some
cases, a supporting storage area for a retail postal outlet. The office area also contains the
video security monitors.
2. The mall entry side of the store is wide open during store hours, and the customer service
counter is located on one side of the mall opening.
3. Card display units take up about two-thirds of the centre of the store. The gift displays, gift
wrap, and stationery take up the rest of the centre of the store, as well as the back wall and
the wall opposite the customer service area. The magazine racks are on the same wall as
the customer service counter.
4. The tobacco products are kept in cupboards directly behind the customer service counter.
5. Mobile racks on wheels are used for such things as newspapers, calendars, special
promotions, and some of the bulkier confections that do not fit in the shelving display on the
face of the customer service counter.

Head Office

In 1991, CML purchased a two year old building on 10 acres of land located in Southern
Ontario. The cost of this purchase was $152,000 for the land and $700,000 for the building. The
head office was immediately established in this building.

Product Lines

CMLs main sales focus is on its greeting cards and giftware. Except for tobacco products, cards
are the most significant revenue generating product line carried in the stores. Tobacco products
provide slightly more revenue for CML than its card sales. However, in todays environment,
selling tobacco is a very rigidly controlled process and gross profit margins are quite tight.

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The target percentage of total revenues and the target gross profit margin used for pricing for
each product line (except the postal outlets and lottery booths) are provided in Table 3.
Table 3
Product Line Targets

Product Line
Target Percentage of
Total Revenues*
Target Gross Profit
Margin**
Cards occasion
holiday
dollar
20%
8%
2%
45%
50%
42%
Tobacco cigarettes, cigars, etc.
accessories
27%
4%
10%
40%
Giftware 20% 50%
Confectionery 6% 35%
Magazines and newspapers 5% 20%
Gift wrap 5% 50%
Stationery 3% 40%
Total 100% 35%

* Total retail revenue for product line divided by total retail revenues for all product lines.
** Total gross profit for product line divided by total retail revenue for product line.

Supplier Return Policies

Holiday cards are carried in CML stores on a consignment basis, and any unsold cards are
returned to the supplier (i.e. GCC) immediately after the holiday. Magazines, newspapers, and
stale tobacco products can all be returned for full credit. For all other products, only goods that
are delivered to a store in damaged condition are permitted to be returned to the supplier.

Customer Return Policy

All sales are final, except for giftware. Customers may return giftware for a full refund within 30
days of purchase if they present proof that the item was purchased at a CML store and the item
is returned in the same condition as when it was purchased (i.e. undamaged). A store manager
can override the 30-day limit for returns of Christmas gifts within the two-week period ending
J anuary 8. In J anuary, returns of Christmas gifts sold during the previous year approximate 1%
of annual sales of giftware.

Employee Discounts

There are no discounts on magazines, newspapers or tobacco products. Otherwise, all mall
employees and family members of CML employees receive a 10% discount on the pre-tax
amount of any retail purchase.

8 CMA Canada
Promotion and Advertising

CML advertises its stores using various media (e.g. radio, newspapers, promotional flyers). It
also carries out a one-time local promotional campaign any time it opens a new store.

Company-wide promotional sales on cards and giftware are held on occasion. At individual
stores, the store manager may mark down certain giftware items or run special sales, but must
first receive approval to do so by the area sales manager. Most in-store sales are publicized at
the store sites using signs and promotional displays.

Post Office Retailer Contracts

Currently, twelve CML stores have contracts with Canada Post to operate a post office in the
store. These contracts are negotiated on an individual store basis. The compensation to CML is
a combination of a fixed fee plus a commission on postal sales revenues. Factors taken into
account in negotiating the contracted fee and commission rate include CMLs overhead costs
for the space required for the postal outlet and for the staff needed to run it, as well as the
provision of a reasonable return to CML. Canada Post supplies CML with a cash register
dedicated to postal sales as well as the equipment required for weighing and measuring
packages and envelopes being sent.

Lottery Booths

Currently, CML stores operate lottery booths in 20 malls. Each lottery booth is conveniently
located in a high traffic area of the mall outside of, but close to, the CML store. Expenses for
wages and rent are paid with the commissions earned.

Purchasing/Shipping

The purchasing function is under the supervision of Tamar Shah. Most of the purchasing is
relatively automatic. Store managers order cards directly from GCC using a scanner and a
communication device supplied by GCC that allows CML to directly transmit order and return
information using a regular telephone line. There is no need for store managers to place orders
for magazines, newspapers, confectionery items, gift wrap products, and tobacco products
sales representatives of the suppliers of these products regularly come to the store, check the
inventory, and replenish items that were sold.

For the giftware product line, CML is aware that it cannot compete against gift shops and the
large chain stores based on price, and that the companys success in this area depends on
offering gift items that are somewhat distinctive. To do this, Shah and her staff attend major and
regional trade shows, where they find and order interesting giftware products for sale in the
CML stores.

All goods are initially delivered directly to each of CMLs stores. There is some movement of
inventory among CMLs geographically grouped stores, but these transfers do not occur in high
volumes and are generally handled by the area sales managers, who are equipped with
corporately owned vans.


CMA Canada 9
Staffing

The staff complement at most CML stores consists of one full-time manager, one full-time sales
clerk, and two or three part-time sales clerks. Usually, the two full-time employees work
weekdays, with the manager starting and leaving an hour before the full-time sales clerk. The
part-time employees cover the evenings and weekends. There is usually an hour overlap
between the start time of the evening employee and the departure time of the daytime sales
clerk. All store employees are paid on an hourly rate basis.

For stores with a post office, a full-time postal clerk works weekdays and two or three part-time
postal clerks cover the evenings and weekends, thereby doubling the non-manager staff
contingent. Likewise, for the lottery booths, a full-time employee operates the booth during
weekdays, and part-time employees operate it on weekends and evenings. Lunch (30 minutes)
and most other breaks for the lottery booth employee are covered by one of the store
employees. When a store employee is not available to cover these breaks, the lottery booth is
temporarily closed until the employee returns.

The hiring process begins with Firelli screening the applications received and preparing a short
list of the most desirable applicants. She usually forwards this list to the appropriate area sales
manager, who then conducts interviews and decides on whom to hire. On occasion, Firelli will
complete the interviewing and hiring process herself. Once new employees are hired, Firelli is
responsible for training them. In urgent situations, the store managers may directly hire
additional part-time employees.

Store sales clerks are among the lowest paid in society and turnover is high. The store
managers are paid a little more and turnover is not quite as high as for sales clerks.

Processing Sales

Each store uses a standard cash register that can be programmed for 10 categories of inventory
items and 100 price points. Each cash register is equipped with a cash drawer, but not with a
scanner. The programmed price-point feature is not used because there are more than 100
different prices for the 6,000-10,000 items carried at most CML stores. Consequently, for each
item sold or returned, the sales clerk presses the appropriate category button and then manually
enters the price. Taxes are automatically calculated. All sales and returns are processed
through the cash register.

The stores are also equipped with point of sale (POS) terminals for processing credit card and
debit card payments by customers. Cheques are not accepted. Cash receipts are first put in the
cash drawer then, periodically through the day, the accumulated cash is moved to a safe
located in the store office.

Each weekday, before leaving for the day, the store manager generates summary reports from
the cash register and the POS terminal that contain various information (e.g. total sales by hour
and category; total discounts; total returns; total receipts by cash, debit card and credit card;
and total cash paid out for supplies, refunds, etc.). The manager counts the cash, sums the
amounts on the debit and credit card transactions slips, and balances the calculated amounts
against the amounts on the summary reports. Then the manager prepares a daily net sales and
net receipts report, and deposits the cash receipts in the bank (usually one located in the same
mall). On the weekends, the sales clerk generates the cash register and POS terminal summary
reports, and then locks up all cash, transaction slips, and reports in the safe. On Mondays, the

10 CMA Canada
store manager processes the weekend receipts and reports, deposits the weekend cash
receipts in the bank, and then couriers the prior weeks daily reports along with all supporting
copies and documentation to the head office, where the accounting staff records the
transactions in the accounting system.

Budgeting and Accounting

CML prepares its annual budget based on the prior years results. Marginal increases in total
revenues and expenses are budgeted, and the target gross profit margins for the product lines
are applied in determining the budgeted operating profit.

Capital assets are accounted for using the capital cost allowance (CCA) tax rules, as follows:

Capital Asset CCA/Amortization Rate
Head office building 4%
Furniture and fixtures 20%
Vehicles 30%

Leasehold improvements are amortized on a straight-line basis over six years (i.e. 10% in the
first and sixth years, and 20% in each of the intervening years). Amortization of all capital
assets, including leasehold improvements and store furniture and fixtures, is recorded as a head
office expense.

The companys marginal income tax rate is 20% for income below $300,000 and 36% on
income in excess of $300,000 in any given year. Income tax instalments are paid monthly based
on the previous years actual income tax expense.

CML accounting staff prepares the annual financial statements (see Exhibit 4). Because there
are no external users of the financial statements (except for the government for compliance
purposes), the CML board of directors has decided that annual audits of the financial
statements are not necessary.


CMA Canada 11
Exhibit 1

Summary Organizational Chart
As at December 31, 2007

Reporting line
Additional support

VP, Administration
Gordon Hopps

VP, Facilities
Claude Denis

VP, Sales
Tamar Shah
Display Setup &
Maintenance
(2)
Purchasing
Agent
(1)
Area Sales
Managers
(3)
Assistant
Purchasing
Agents (3)
Store
Managers
(54)
Sales Staff
(86 full-time,
209 part-time)
CEO
Marie Durand
Board of Directors
Financial
Projects Officer
Chris Mantha
Administrative
Support
(3)

HR Manager
Laura Firelli

Accounting
(2)
Information
Technology
(1)

12 CMA Canada
Exhibit 2

Environmental Scan 2007

Strengths
Competent management
Board of directors has balanced expertise
Good relationships with customers
Effective small mall niche
Most stores and head office are effectively
located
Good mix of products
Owns the head office land and building
Weaknesses
No standard store model
Lack of inventory control
Exposure to shoplifting
No budgetary control/lack of monthly
financial reports
High staff turnover
No sales incentives
Weak marketing focus
Recent net income levels have been
decreasing

Opportunities
Growing Canadian economy
Increasing retail sales in B.C. and Alberta
Declining number of competing tobacco
outlets
Wide range of giftware products available
from a wide range of suppliers
Growing popularity of lotteries
Increasing use of postal services by online
shoppers and sellers
Threats
Large competitors/retail chains
Competition from Morgan & Green (store
sites)
Secondary mall competitors for cards
(grocery stores, drug stores, dollar stores)
Only two major suppliers of cards in
industry
New secondary mall construction is
stagnating
Uncontrollable external factors (e.g.
weather, other mall attractions)
Declining number of tobacco users
Many competitors in the giftware market
Increasing availability of software for do-it-
yourself greeting cards
Shrinking supply of low cost labour in
many cities


CMA Canada 13
Exhibit 3

Overview of a Larger Store

Postal outlet storage Mall service area
(no access from
store)
Office, storage, restroom,
surveillance monitors, safe
Giftware shelving (GS)
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GS =Giftware shelving
Revolving card
display
Mall

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GS

GS
FDE
Postal service counter
GS
Mobile rack
for special
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14 CMA Canada
Exhibit 4

Celebrations and Memories Ltd.
Balance Sheets
As at December 31
(000s)

Assets 2007 2006 2005 2004

Current Assets:
Cash $ 140 $ 330 $ 341 $ 252
Accounts receivable 15 17 17 16
Inventory 2,844 2,716 2,709 2,666
2,999 3,063 3,067 2,934
Capital Assets:
Land (cost) 152 152 152 152
Building (net) 357 372 387 403
Furniture and fixtures (net) 149 157 180 179
Vehicles (net) 145 130 105 99
Leasehold improvements (net) 236 166 199 237
1,039 977 1,023 1,070
Total Assets $4,038 $4,040 $4,090 $4,004

Liabilities and Shareholders Equity

Current Liabilities:
Bank line of credit $ 150 $ $ $
Accounts payable & accrued liabilities 1,261 1,075 1,100 1,070
Income taxes payable (receivable) (9) (13) 8 2
Current portion of long-term debt 25 25 25 25
1,427 1,087 1,133 1,097
Long-Term Liabilities:
Due to shareholder 1,391 1,691 1,691 1,691
Mortgage payable (net of current portion) 225 250 275 300
1,616 1,941 1,966 1,991
Shareholders Equity:
Share capital 165 165 165 165
Retained earnings 830 847 826 751
995 1,012 991 916
Total Liabilities and Shareholders Equity $4,038 $4,040 $4,090 $4,004


CMA Canada 15
Exhibit 4 (contd)

Income and Retained Earnings Statements
For the Years Ended December 31
(000s)

54 stores 52 stores
Retail: 2007 2006 2005 2004
Revenue (net of returns) $27,626 $26,643 $26,446 $25,642
Cost of goods sold 18,671 18,150 18,070 17,318
Gross profit 8,955 8,493 8,376 8,324
Retail expenses:
Administration and security 382 374 370 364
Direct wages and benefits 3,231 3,049 2,998 2,945
Rent 1,636 1,535 1,530 1,513
Other occupancy costs 1,339 1,257 1,252 1,237
Repairs and maintenance 220 214 168 244
Selling 212 203 205 195
7,020 6,632 6,523 6,498
Retail operating profit 1,935 1,861 1,853 1,826
Postal outlets operating profit 89 96 98 101
Lottery booths operating profit 154 133 130 123
Total operating profit 2,178 2,090 2,081 2,050
Head office expenses:
Salaries and benefits 1,325 1,270 1,215 1,191
Advertising and promotion 260 240 230 265
Amortization 177 160 157 142
Interest long term 17 18 20 21
Bank charges and short-term interest 23 2 2 1
Insurance stores and head office 83 80 80 79
Office and general 114 111 113 97
Repairs and maintenance 34 28 24 32
Professional fees 36 28 25 25
Travel and courier 68 64 59 80
2,137 2,001 1,925 1,933
Income before income taxes 41 89 156 117
Income taxes 8 18 31 23
Net income $ 33 $ 71 $ 125 $ 94
Opening retained earnings $847 $826 $751 $707
Net income 33 71 125 94
Dividends (50) (50) (50) (50)
Ending retained earnings $830 $847 $826 $751


16 CMA Canada

The Societies of Management Accountants of Alberta, Manitoba, New Brunswick, Newfoundland, Northwest Territories & Nunavut,
Nova Scotia, Ontario, Prince Edward Island, Saskatchewan and the Yukon,
Certified Management Accountants Society of British Columbia, Ordre des comptables en management accrdits du Qubec

May 2008

Case Examination

Additional Information

(Time Allowed: 4 hours)
Notes:
i) Candidates must not identify themselves in answering the question.
ii) All answers must be written on official answer sheets or in official electronic files. Work
done on the question paper or on the Backgrounder will NOT be marked.
iii) Included in the examination envelope is a standard supplement consisting of formulae
that may be useful for answering the question.
iv) Examination materials MUST NOT BE REMOVED from the examination writing
centre. All used and unused answer sheets, working papers, Backgrounder, Additional
Information, and the supplement of formulae must be sealed in the examination
envelope and submitted to the presiding officer before the candidate leaves the
examination room.
v) Only the following models of calculators are authorized for use on the Case
Examination:
1. Texas Instruments TI BA II Plus (including the professional model)
2. Hewlett Packard HP 10bII (or HP 10Bii)
3. Sharp EL-738C (or EL-738)


CMA Canada 17
Additional Information

Store Locations and Performance

During the past decade, the Canadian economy has continued to experience above average
growth with strength being demonstrated in the construction and retail sectors, among others.
The strongest growth rates have been in Alberta and British Columbia. It is expected that growth
in these two provinces will remain strong, that Ontario will experience only modest growth in the
next few years, and that other areas of the country would be fortunate to avoid a decline.
Although retail sales in Alberta have been booming, retail lease costs are the highest in the
country and construction costs are escalating, due primarily to the tight market for trades
people. As well, there is little available low-cost labour.

To take advantage of the growth in Western Canada, CML had opened three stores in British
Columbia in 2004. These stores have proven to be profitable (see Appendix A). Sales revenue
has grown by 8% each year, and retail operating profit per store in 2007 is 19% above the
average of all CML stores. The Ontario and Quebec stores have seen a slow decline in sales
and operating profits over the past few years and the two Nova Scotia stores (established in
2001) have experienced a more pronounced decline. Currently, one area sales manager is
responsible for stores in British Columbia and Nova Scotia, one for stores in Central and
Western Ontario, and the third one for stores in Eastern Ontario and Quebec.

In early 2007, CML opened two stores in new secondary malls built in growing Southern Ontario
cities in which CML had other established stores. These new stores have generated reasonable
operating profit margins in their first year of operations.

Durands Retirement

In early 2007, Mark Glenholmes had become seriously ill and the family decided to admit him
into a private clinic in the United States for treatment. In March 2007, the board of directors
approved Marie Durands request that CML begin repaying her shareholder loans at a rate of
$30,000 per month. In December 2007, Durand retired as CEO and indicated that she wished to
sell the family ownership interest in CML by 2010.

With Durands retirement as CEO, Gordon Hopps was promoted to the CEO position and Chris
Mantha was appointed Vice President of Finance and Administration. As well, Robyn Berg,
CMA, was hired as Controller to help Mantha carry out his administrative and finance
responsibilities, and to supervise the accounting staff.

In J anuary 2008, the board of directors expressed concern over the stagnating sales and
increasing operating expenses. In the past, it had adopted expansion and product diversification
strategies with reasonable success, and saw no reason to change these strategies. The board
directed management to investigate various options for increasing revenues and gross profit
margins, and decreasing expenses. Given Durands desire to increase the value of the shares
before trying to sell them, the board set a target of increasing the companys after-tax earnings
per share to at least $6.25 by 2010 and, at the same time, continue to repay Durands
shareholder loans at a rate of $30,000 per month.

18 CMA Canada
Product Line Considerations

In late 2007, Mantha investigated various product diversification options and determined that the
two new product lines with the best potential were collectible plates and DVDs.

Collectible Plates

CMLs giftware line currently includes some decorated plates, but these are not the registered,
limited edition collectible plates that have an established customer market. This type of product
line is usually sold in stores in the major malls and through mail order. There would be little or
no direct competition from other stores in the secondary malls. As such, it is expected that
adding this product line would attract new customers to the stores.

This option would require CML to become a licensed dealer for the plate manufacturers,
whereby the stores would take orders from plate collectors and the manufacturer would make
weekly deliveries to the stores. Customers would be required to place a deposit of 50% of the
price of the plate upon placing the order and the balance would be payable when the plate is
picked up, usually one to two weeks after placing the order. It is expected that the current store
employees would be able to handle the added paperwork required to keep track of open orders
and deposits, and to call customers when orders come in. However, during the busy times just
prior to holidays, dealing with plate orders could cause delays in handling customer sales for
other products, which could cause customer frustration and some lost sales.

Adding this product line would require the addition of a special display case that keeps sample
plates locked behind a glass enclosure to prevent theft and damage. This would require that
approximately 20 sq. ft. of selling space for other products would be reduced.

The initial investment per store to add this line would be $700 for the sample plates plus $800
for the display case. Mantha estimated that this line could generate annual revenues of $7,000
to $8,000 per store and that the gross profit margin would be 30% of sales.

DVDs

CML stores could accommodate adding DVDs as a product line without affecting the selling
space of other products by using mobile racks to display them at the edge of the open mall side
of the stores during store hours. This product line would appeal more to youths and young
adults than to the more mature customers who currently shop at CML stores. DVDs cannot be
returned to the supplier. To discourage misuse of the DVDs by customers (e.g. purchase, view,
and then return), Tamar Shah suggests that a policy of all DVD sales are final be adopted.

Mantha determined that the average initial investment per store would be approximately $1,000
for inventory and $500 for a mobile rack, annual revenues of $6,000 to $7,000 per store from
DVD sales could be generated, and the gross profit margin would be 50% of sales. However,
there is a high risk of theft for this type of product, which could result in having to increase
security at the stores.

Possible Store Expansion

Claude Denis has indicated that opportunities for expansion are limited to opening stores in new
secondary malls being built in growing urban sectors or finding available leases in established
malls that do not already have stores offering similar products as CML. He feels that over the

CMA Canada 19
next two years at most two suitable locations to open a store could be found in B.C., three in
Alberta, and two in Ontario. Initial costs to open a store in B.C. or Ontario are as follows:

Low Average High
Leasehold improvements $ 18,000 $ 20,000 $ 22,000
Furniture & fixtures 11,000 12,000 13,000
Inventory 53,000 55,000 57,000
First and last months rent 4,000 5,000 6,000
Other (finding location, hiring & training, store
opening promotional campaign, etc.)
19,000 23,000 27,000
Total $105,000 $115,000 $125,000

Costs to open a store in Alberta would average approximately $137,000.

For stores in Western Canada, annual travel and courier costs (absorbed by head office) are
$8,000 per store greater than for those in Central Canada. Shah estimates that, in comparison
to a B.C. store, retail revenue for a store in Alberta would be 10% higher, gross profit margin
percentage of retail sales would be the same, postal outlet and lottery booth revenues would be
the same, and total operating costs for stores, postal outlets and lottery booths would be 15%
higher.

Mantha feels that, for any new store location, CML should attempt to negotiate contracts for
operating a postal outlet and a lottery booth. Denis estimates that the probability of successfully
negotiating a contract would be 25% for a postal outlet and 40% for a lottery booth.

Warehousing

Mantha noted that gross profit margins for tobacco products have decreased due to increasing
delivery charges (see Appendix B). The purchasing agent has suggested that CML could realize
substantial savings by purchasing giftware and tobacco products in bulk and handling the
distribution to stores internally. To implement this option, a warehouse could be constructed on
CMLs existing head office property and two vehicles and drivers could be acquired to make
deliveries to the stores in Ontario and Quebec. Purchases and deliveries for the B.C. and Nova
Scotia stores would continue to be handled in the current manner.

Expected costs savings for CML are as follows:

1. Purchasing giftware in bulk with delivery to a central location would reduce the purchase
cost by 15%.
2. The cost of cigarettes would decrease by $3 per carton. In 2007, CML sold an average of
1,850 cartons of cigarettes per store.
3. The cost of other tobacco products would decrease by a total of about $100,000 per year for
CML, assuming the same sales volumes as in 2007.

The warehouse could be fully operational by the end of 2008. The cost to build the warehouse
would be $1,000,000 and its value is not expected to decline over the next 40 years, assuming it
is properly maintained. CMLs bank is prepared to provide a mortgage of 75% of the cost of the
building at an annual interest rate of 6%.

20 CMA Canada
The equipment and vehicles would have an expected useful life of seven years and could be
purchased at a cost of $300,000 or leased from Business Financing Inc. (BFI). The lease terms
would be annual payments of $77,000 per year for five years (providing BFI with a 9% return on
investment), payable at the beginning of each year, with an option to purchase the equipment
and vehicles for $3,000 at the end of five years. The equipment and vehicles would have a
maximum CCA rate of 30%. They would have an estimated residual value of $100,000 after five
years and $20,000 after seven years.

Mantha determined that the annual costs of operating and maintaining the warehouse, vehicles
and equipment, and delivering the goods to the Ontario and Quebec stores would be $340,000.

Financial Situation

The repayment of Durands shareholder loans has caused CMLs financial situation to
deteriorate, particularly in terms of cash flow. In 2007, CML was forced to use some of its
$500,000 bank line of credit (at an annual interest rate of 8%) for the first time in many years. In
J anuary 2008, Mantha asked the bank to raise CMLs line of credit to $1 million, offering all
CMLs inventory as collateral. The loan officer at the bank has requested that audited financial
statements for the year ended December 31, 2007, be provided. The bank would also like to
know how CML plans to finance its operations in the longer term.

Management Report

Hopps scheduled a senior management meeting to take place on February 1, 2008, to assess
CMLs options for meeting the boards objectives. He requested that the specific opportunities
already identified be analyzed and the findings presented at the meeting. As well, with the
retirement of Durand, Hopps is open to suggestions for changing any aspects of the companys
operations to improve profitability and employee motivation for delivering high quality service to
customers. He believes that the relationships employees develop with regular customers are
critical to the success of CML stores.

Hopps and Mantha agreed that, because Berg is new to the organization, he would not have
any biases and therefore should be given the responsibility of reviewing the companys current
operations, analyzing alternatives, and making recommendations for meeting the boards
objectives and addressing any other concerns. In addition, Mantha would like Berg to do the
following in connection with the banks request for audited financial statements and a financial
plan:

1. Review the accounting policies and recommend any changes required to ensure that the
financial statements comply with generally accepted accounting principles.
2. Review the current processes and recommend any changes required to improve or facilitate
an external audit.
3. Identify how any recommended strategies would affect the future financial statements and
cash flows.

Additional information:

1. CML expects to earn a minimum after-tax return of 9% on capital investments.
2. The company uses a periodic inventory system. Because J anuary is typically a slow sales
month, the stores are closed on the second Sunday in J anuary so that inventory can be
counted. The prices on the most recent invoices from the individual suppliers are used to

CMA Canada 21
value the counted inventory and the total value of this inventory is recorded as the
December 31 year-end inventory balance.
3. The area sales managers have estimated that as much as 2% of sales is lost through theft
and breakage. However, this cannot be verified using the current information systems. Theft
is especially prevalent for items that are close to the store opening or in corners furthest
away from the customer service desk.
4. Up to 10% of the giftware inventory becomes obsolete each year and must be sold at deep
discounts, usually at a loss. Obsolete goods are kept on display at the stores until they are
sold.
5. At the beginning of the lease term for an individual store, CML is required to pay the first and
last months rent. These payments are expensed when they are paid.
6. Berg analyzed the cost of giftware sold in 2007 and determined the following:

Province Average Cost of Goods Sold per Store
Ontario $52,230
Quebec $52,760
British Columbia $59,090
Nova Scotia $53,550

7. At three stores in Eastern Ontario, the area sales manager approved the hiring of children of
the store managers as extra part-time sales clerks during busy times. In all three cases, the
managers children were paid in cash from the cash register and these cash payments were
reported to head office as repairs and maintenance expenses. In 2007, these payments
amounted to approximately $3,000 in total.
8. Periodically, the performance of all full-time staff is reviewed. Performance appraisals are
prepared and delivered by the employees immediate supervisor, and the employee is
required to sign a copy of the appraisal. Although sales targets are set for each store, CML
has no incentive plan in place.
9. One of the assistant purchasing agents appeared to be recommending a disproportionate
number of purchases from one particular giftware supplier. An investigation revealed that
one of the suppliers commercial sales representatives is married to the employees sister
and that the two couples frequently travel together on vacation, with the expenses paid by
the sales representative.

REQUIRED:

As Robyn Berg, CMA, prepare a report for Gordon Hopps and Chris Mantha advising them on
the business and functional strategies to follow in order to meet the objectives of the board of
directors. In addition, the report should address the specific requests made by Mantha as well
as any other organizational issues and concerns requiring the attention of management. Include
details of your analyses, supported recommendations, and an action plan to implement your
recommendations. In undertaking this task, you will need to take into consideration your
background knowledge of the company and industry as well as the additional information
provided above.

22 CMA Canada
Appendix A

Operating Profit Analysis
For the Year Ended December 31, 2007
(dollar amounts in 000s)

Ontario
Stores
Quebec
Stores
B.C.
Stores
N.S.
Stores Total

Number of stores 39 10 3 2 54
Number with postal outlet 8 2 1 1 12
Number of lottery booths 12 4 3 1 20

Retail:
Revenue $19,785 $5,213 $1,664 $964 $27,626
Cost of goods sold 13,293 3,587 1,132 659 18,671
Gross profit 6,492 1,626 532 305 8,955
Expenses:
Administration and security 276 71 21 14 382
Direct wages and benefits 2,344 599 182 106 3,231
Rent 1,182 297 96 61 1,636
Other occupancy costs 967 243 79 50 1,339
Repairs and maintenance 156 41 13 10 220
Selling 152 40 13 7 212
5,077 1,291 404 248 7,020
Operating profit retail 1,415 335 128 57 1,935

Postal Outlets:
Revenue 402 100 50 50 602
Direct wages and benefits (296) (74) (37) (34) (441)
Store overhead (49) (12) (5) (6) (72)
Operating profit postal outlets 57 14 8 10 89

Lottery Booths:
Revenue 436 146 109 36 727
Direct wages and benefits (330) (110) (82) (27) (549)
Rent (14) (5) (4) (1) (24)
Operating profit lottery booths 92 31 23 8 154

Total operating profit $ 1,564 $ 380 $ 159 $ 75 $ 2,178

CMA Canada 23
Appendix B

Product Line Analysis
For the Years Ended December 31

2007 2006 Selling
Space in
Sq. Ft.
Average
Store**
2007
Gross
Profit Per
Sq. Ft.
Revenue
Per
Store
(000s)
GP*
Per
Store
(000s)
GP*
Margin
Revenue
Per
Store
(000s)
GP*
Per
Store
(000s)
GP*
Margin
Greeting cards:
Occasion $103.8 $43.7 42.1% $104.2 $44.0 42.2% 400 $ 109
Holiday 41.6 20.9 50.2% 41.8 21.0 50.2% 150 139
Dollar 10.8 4.3 39.8% 10.9 4.3 39.4% 150 29
Total greeting cards 156.2 68.9 44.1% 156.9 69.3 44.2% 700 98
Tobacco products:
Cigarettes, cigars, other 136.5 9.5 7.0% 137.2 10.3 7.5% 10 950
Accessories 20.6 7.8 37.9% 20.7 8.1 39.1% 5 1,560
Total tobacco products 157.1 17.3 11.0% 157.9 18.4 11.7% 15 1,153
Giftware 99.4 46.6 46.9% 99.6 43.9 44.1% 600 78
Confectionery 31.2 9.5 30.4% 31.1 9.3 29.9% 5 1,900
Magazines & newspapers 26.3 5.1 19.4% 26.2 4.9 18.7% 120 43
Gift wrap 25.8 12.5 48.4% 25.6 12.1 47.3% 60 208
Stationery 15.6 5.9 37.8% 15.1 5.4 35.8% 20 295
Total $511.6 $165.8 32.4% $512.4 $163.3 31.9% 1,520 $ 109

* GP =Gross Profit

** Each store is 1,500 to 2,100 sq. ft., of which 1,300 to 1,700 sq. ft. is selling space and 200 to
400 sq. ft. is non-selling space (office, storage, restroom, etc.). Stores with a postal outlet use
150 sq. ft. of space for the postal service counter and the postal outlet storage room.


24 CMA Canada
General Comments on Performance
Case Background
The May 2008 Case Examination focuses on Celebrations and Memories Ltd. (CML), a
privately-owned corporation that operates a chain of 54 retail greeting card stores located in
secondary (smaller) enclosed shopping malls. Since its inception more than 40 years ago,
CML has been owned and operated by CEO and majority shareholder Marie Durand.
In early 2007, Durands husband became seriously ill and was admitted to a private U.S.
clinic for treatment. The board of directors approved Durands request for CML to repay her
shareholder loans at a rate of $30,000 per month. By the end of the year, Durand retired as
CEO and indicated that she wished to sell the family ownership interest by 2010.
From 2004 to 2007, CMLs financial situation deteriorated, and repaying Durands
shareholder loans caused the company to fall short on cash. The board of directors became
concerned over stagnating sales and increasing operating expenses, and directed
management to investigate alternatives for reversing this trend. In response to a request for
an increase in the companys line of credit, the bank requested audited financial statements
from CML as well as a financial plan for the longer term.
Strategic Alternatives and Minor Issues
In response to the boards direction, management investigated various options and identified
the following possible strategic alternatives:
diversify the product line by adding collectible plates and/or DVDs
expand by opening stores in suitable locations in B.C., Alberta, and/or Ontario
purchase giftware and tobacco products in bulk and handle the distribution to
stores internally (warehousing option)
Management also became aware of many minor issues within CML, including problems with
internal controls, obsolete inventory, and possible conflicts of interest related to purchasing.
Required Element of the Case
The Required element of the case is stated on page 6 of the Additional Information as
follows:
As Robyn Berg, CMA, prepare a report for Gordon Hopps and Chris Mantha advising them on the
business and functional strategies to follow in order to meet the objectives of the board of directors. In
addition, the report should address the specific requests made by Mantha as well as any other
organizational issues and concerns requiring the attention of management.
The specific objectives of the board of directors can be summarized as follows:
increase after-tax earnings per share to $6.25 by 2010
repay Durands shareholder loans at a rate of $30,000 per month

CMA Canada 25
pursue expansion and product diversification strategies
As well, the board of CML expects to earn a minimum after-tax return of 9% on capital
investments.
Manthas most important request is for Berg to review accounting policies in anticipation of
the banks demand for an external audit before increasing CMLs line of credit from
$500,000 to $1 million.
The examination writer is expected to play the role of Robin Berg and prepare the requested
report. In preparing the report, the examination writer is expected to demonstrate proficiency
in functional and enabling competencies.
Recommended Response Approach
A systematic approach to analyze the strategic alternatives and solve the major and minor
issues presented in the case should be used by the examination writer (see the Steps for
Approaching Business Strategy for an appropriate approach). For this case, this approach
involves the following elements:
Review the current situation given the changes in the environment outlined in the
Additional Information (e.g. update the SWOT analysis; recognize the objectives,
constraints, and preferences; analyze the historical financial information). From
this review, the examination writer should gain an understanding of the important
facts and issues that should be considered in the analysis of the strategic
alternatives.
Analyze the strategic alternatives. Qualitative analysis of the pros and cons, and
quantitative analysis of the profitability and feasibility of the strategic alternatives
should be provided. An appropriate balance of these analyses are expected. In
the analyses, the relevant financial and non-financial information gathered in the
situational analysis and provided in the Backgrounder and Additional Information
should be interpreted and used. As well, appropriate functional tools and
concepts should be applied correctly.
Make supported recommendations and provide evidence that the recommended
strategy would meet the boards specific objectives.
Address the specific request made by Mantha, analyze a variety of minor issues
requiring attention, and develop an implementation plan. The analysis of the
relevant minor and implementation issues should be appropriately incorporated
into the various sections of the report. The implementation plan should include
actions to support the major recommendations and address the current
weaknesses.
Prepare the response in the form of a formal report to the new CEO, Gordon
Hopps, and new Vice President of Finance and Administration, Chris Mantha.
The report should advise its audience of the proposed recommendations and
implementation plan.


26 CMA Canada
Candidate Performance
Overall, performance on this examination was acceptable. Most responses
reflect an effort to use a systematic planning process,
focus mainly on the strategic alternatives and most important minor and
implementation issues, and
present a report in a reasonably acceptable format.
In general, the responses reflect a good understanding and familiarity of the information
provided in the case, and an ability to draw on this information to provide relevant and useful
analysis of the issues.
Best Responses
The best responses demonstrate sound judgment and an ability to apply an appropriate
approach to solving business problems. The following are reflected in these responses:
1. Systematically collecting data relevant to both the internal and external environments
(situational analysis) and recognizing the most relevant changes between the
established SWOT in the Backgrounder and the current situation in the Additional
Information.
2. Using this data to analyze the strategic alternatives and minor issues.
3. For the strategic alternatives analyzed, providing convincing answers to the following
four questions:
Is it profitable? (Uses decision and profitability analysis toolsF3)
Does it provide an acceptable return on investment? (Uses capital budgeting
tools such as net present valueF5)
Is there money available to pay for it? (Compares financing required against
financing availableF5)
Does it address the constraints/targets set by the board? (Calculates and
compares financial measuresF5, F6)
The most convincing proposals are those that are logical, feasible, and supported with
accurate quantitative evidence (backed by reasonable assumptions).
4. Providing recommendations consistent with the analyses.
5. Providing a plan that enumerates the what/who/when needed to implement the
recommendations.
These responses clearly follow the Steps for Approaching Business Strategy.

CMA Canada 27
Average Responses
Average responses follow a reasonable but often incomplete approach to the case. In
particular, these responses reflect the following:
1. Collecting a few points relevant to the changes that have occurred within both the
internal and external environments (situational analysis).
2. Using some of this data to analyze the strategic alternatives and minor issues.
3. Analyzing fewer strategic alternatives, in less depth, and usually with weaker quantitative
analysis.
4. Frequently treating strategic alternatives and minor issues in isolation, without providing
a global, comprehensive view.
5. Providing recommendations consistent with the analyses.
6. Providing a limited implementation plan, frequently without addressing all of the
what/who/when questions related to the strategic recommendations.
Weak Responses
In weak responses, the strategic alternatives are not sufficiently analyzed, one or two
aspects of the case are overemphasized, or many aspects are addressed but only at a
rudimentary level.
Some responses reflect a simple approach that does not place enough focus on the
strategic alternatives and does not effectively address the case in a comprehensive and
integrative manner. For example, in analyzing the strategic alternatives, this case requires
the use of quantitative analysis to determine profitability, estimate the future cash flows,
calculate net present value, and forecast earnings per share.
Other common tendencies reflected in weaker responses are listed below by competency.
F1. Strategic Management (high weight)
1. Too much time is spent assembling the situational analysis. In some responses the
SWOT provided in the Backgrounder is restated. Other responses include facts that are
not relevant to the strategic alternatives or minor issues.
A good environmental analysis is only the first step in solving the business case. The
bulk of the response must be devoted to demonstrating proficiency in the functional
competencies. This is best achieved through analysis of the strategic alternatives and
minor issues.
2. Information gathered in the situational analysis and the SWOT points provided in the
Backgrounder are not used in the analysis of the strategic alternatives and minor issues

28 CMA Canada
(i.e. a reasonable level of integration is not used in the response). A situational analysis
serves no purpose unless used to analyze the alternatives and issues.
3. There is no implementation plan, or the implementation plan does not deal with
implementation issues related to the strategic alternatives such as the theft issue related
to DVDs.
F2. Risk Management and Governance (medium weight)
1. The internal and external risks are not used in the analysis (e.g. theft exposure, threats
of industry competition).
2. The compliance issues are not identified and resolved (e.g. part-time help being paid
cash, possibly avoiding payroll taxes and source deductions; compliance with GAAP).
F3. Performance Management (high weight)
1. Relevant quantitative performance management concepts and tools are not reasonably
used in the analysis of the strategic alternatives. Common problems in the responses
include the following:
not examining profitability by line of business or by province
not considering and calculating the opportunity cost related to adding collectible
plates to the product line (i.e. lost profits from removing display space of current
products to make room for the collectible plates)
not including increased courier costs for stores in Alberta and B.C., or the
increased revenue (+10%) and increased costs (+15%) for the Alberta stores
2. Qualitative performance management concepts and tools are not appropriately applied
in the analysis of minor and implementation issues. For example, the examination writer
may recognize the point-of-sale/IT issues, but does not resolve them.
F4. Performance Measurement (low weight)
1. The various aspects of performance measurement are not addressed
(e.g. organizational goals, management and staff performance evaluation, and
compensation). For example, the low pay and lack of performance incentives are not
integrated with the staff turnover problem, and their effect on customer relations (a key
success factor) is not considered.
F5. Financial Management (high weight)
1. Capital budgeting techniques involving discounted cash flows (net present value, internal
rate of return) are either not used in analyzing the alternatives or there are serious errors
in the application. Equally problematic, these techniques are often applied to the
alternatives that require relatively minor capital investments (collectible plates, DVDs)
instead of to those with significant capital investments (expand stores, build warehouse).

CMA Canada 29
Using a tool appropriately includes understanding when to most effectively use the tool,
particularly in a time-constrained examination.
2. There is no attempt to calculate the following in any of the analyses:
financing available ($750,000 mortgage for the warehouse, increase in line of
credit to $1 million, increase in cash from operations or from proposed changes)
financing required ($1,000,000 plus $300,000 or $77,000 for the warehouse and
related equipment, funds to support store expansion, $81,000 for collectible
plates or DVDs)
3. No other relevant financial management concepts are used in the response. The
following could be used in this case:
analysis of leasing versus buying equipment for the warehouse alternative
the effect of an alternative on cash flow, working capital management, and the
Durand loan repayment
the requirement of an audit and performance plan to increase the line of credit
with the bank
preparation of a pro forma income statement or balance sheet
F6. Financial Reporting (medium weight)
1. The financial assessment of the current situation is weak. For example, few ratios are
calculated, or ratios are calculated but not interpreted.
2. Earnings per share is not calculated and compared to the board of directors target of
$6.25 by 2010.
3. No other relevant financial reporting concepts are used in the response. The following
issues could be addressed:
recording of payment of last months rent at the beginning of the lease term for
an individual store (i.e. should be recorded as a prepaid and not immediately
expensed)
recording of inventory for year-end accounting purposes (timing of year-end
inventory count; inventory valuation methods like FIFO, LIFO, or weighted
average)
recording of current portion of shareholder loan on the balance sheet
recording of payments to children of store managers in the financial statements
(i.e. wages expense instead of repairs and maintenance expense)
accounting for leases (operating vs. capital) for the warehousing alternative

30 CMA Canada
E1. Problem Solving and Decision Making (medium weight)
4. The prioritization of strategic alternatives, minor issues and implementation issues in the
case is not reasonable. For example, minor and implementation issues are analyzed in
more depth than some of the strategic alternatives.
5. Quantitative and qualitative analyses are not appropriately balanced in the analyses. All
strategic alternatives and some of the implementation/minor issues require both.
6. The analyse of the strategic alternatives and minor/implementation issues are not of
reasonable depth (too brief or superficial).
7. Case facts are not understood or used reasonably. For example, suggesting that Marie
Durand convert her shareholder loans into increased shareholdings is not reasonable
given the case facts.
E2. Leadership (Judgment/Influence) (high weight)
1. The recommended strategy is not convincing because it does not demonstrate the
following:
the 9% after-tax hurdle rate is achieved for the recommended capital investments
the desired earnings per share of $6.25 will be achieved by 2010
the $30,000 per month cash outflow to repay Durand is feasible (i.e. funding is
available to implement all the recommended actions and repay the shareholder
loan)
the need to provide the bank with audited financial statements and a long-term
financial plan is resolved
2. The recommended strategy is not consistent with the analysis provided.
E3. Professionalism & Ethical Behaviour (low weight)
1. No ethical issues or conflicts of interest are identified (relationship between purchasing
agent and sales representative; reporting wages as repairs and maintenance; selling
tobacco products and/or selling lottery tickets, both considered to be addictions).
2. The response does not reflect the right audience (Gordon Hopps and Chris Mantha
seeking to fulfil the objectives of the board). For example, the report may inappropriately
recommend postponing repayment of the shareholder loan.
E4. Written Communication (medium weight)
1. One or more of the proper components of a professional report are not present
(e.g. executive summary (ES), introduction, appendices, conclusion).
2. The introduction inappropriately contains a synopsis of the companys entire history. It
should only state simply and clearly the purpose and scope of the report.

CMA Canada 31
3. The executive summary is longer than one page and inappropriately contains lengthy
descriptive background information or analyses. The executive summary should simply
and clearly identify the main issues and alternatives, present the major
recommendations, and mention the most important recommendations pertaining to
operational and implementation issues.
4. In the analyses, brief conclusions for each alternative are often not provided (i.e.
providing only pros and cons and financial analyses without concluding remarks).
5. Many weaknesses are evident in the use of the English or French language, and the
report is neither coherent nor concise.
6. Within the quantitative analyses, many numbers are not appropriately labeled and audit
trails of detailed calculations are not provided. This results in schedules where the logic
is not demonstrated and the content is not easy to follow (a common problem with
responses that were written electronically using Excel and Word).

32 CMA Canada
Steps for Approaching Business Strategy

1. Read through the information once quickly to develop an understanding of the subject
organization, the industry in which it operates, the major issues and specific opportunities
that will need to be addressed, the information included in the exhibits (e.g. quantitative
data, SWOT analysis, organizational charts, etc.) the role that you will be required to
assume, what you are being asked to do, and who will be receiving the results of your
analysis.

2. Read through the information a second time with focus. Highlight or underline key phrases
that are critical to remember and use a system, such as code letters and words in the
margin, to categorize the information (e.g. S, W, O, and T of SWOT, KSF for key success
factors, C for constraint, U for uncertainty, P for preference, I for issue, TX for tax rate,
CCA for capital cost allowance rate, HR for hurdle rate, FS for financing source, FN for
financing need, etc.). Use the highlighted information to develop a framework or planning
structure for your analysis.

3. Analyze the current situation of the organization:
a) Identify the stated or implied mission, vision, strategic direction, and strategic goals;
b) Determine the key stakeholders needs and/or preferences;
c) Determine whether there are any constraints, uncertainties, or risks that require
consideration;
d) Perform an internal and external scan of the organizations environments using
appropriate tools (e.g. SWOT, Porters Five Forces, PESTE, ratio analysis, trend
analysis, profitability analysis, variance analysis, etc.), including an assessment of
target customers and target markets, and an analysis of the organizations current
financial situation; and
e) Identify the competitive advantages and the key success factors (KSFs) for the
organization and/or industry (i.e. the critical opportunities and strengths of the
organization that must be maintained or enhanced in any suggested
recommendations, and the weaknesses and threats that must be eliminated or
mitigated if the organization is going to be successful).

Focus on the points that are relevant to the issues requiring attention and avoid repeating
irrelevant background information. In a time-limited situation such as the Case
Examination, if the information provided to you includes a high-level SWOT, it is not
necessary to repeat these points. However, include in the environmental scan any other
strengths, weaknesses, opportunities, and threats relevant to the issues requiring
attention.

4. Identify the business, functional, environmental, and ethical issues that need to be
addressed and prioritize them (e.g. rank them in order of importance and categorize them
as either major or minor). Identify and evaluate the alternatives (e.g. business and/or
functional level strategies) for addressing the major issues facing the organization.
Analyze the major issues and alternatives, both quantitatively and qualitatively. Apply
appropriate quantitative tools to analyze the relevant available information. Discuss the
pros and cons of each alternative using the problem or case facts. Make specific
references to the SWOT points provided or the situation analysis performed in step 3 (e.g.
discuss how the alternative maintains or enhances the strengths and opportunities,
mitigates or eliminates the weaknesses and threats). Perform any risk assessment or

CMA Canada 33
external research that may be required. Consider each alternative from the points of view
of the various stakeholders, and how it aligns with the organizations mission, vision,
goals, and/or strategic direction. As well, consider the effects of one alternative on
another, or on other issues. State and, if necessary, justify all assumptions made.

5. Measure each alternative in terms of important criteria (e.g. short- and long-term
objectives, important constraints, key success factors, senior managements preferences,
how easily the cons can be resolved, etc.). Rank the alternatives using a decision tool
(e.g. a decision matrix, applying weightings to the various criteria, etc.). Some alternatives
may have equal impact on the decision situation, and you will have to select one over the
other.

6. Clearly state your recommendation(s) for resolving the major issues and problems. Briefly
support your choice of alternative(s). Confirm that the recommendations are aligned with
the organizations mission/vision, are a good fit with the internal and external
environments, and make good economic sense while addressing the problems and issues.

7. Ensure that your recommendations collectively form a cohesive package that is feasible
and viable. Prove that the necessary aggregate resources (e.g. physical capacity,
financing) either are available or can be readily acquired, and that constraints are not
breached. Prepare an appropriate financial forecast (e.g. projected net income, projected
return on investment, projected cash flow, pro forma income statement, etc.) taking into
consideration any recommendations made and stating all assumptions. Outline the
expected future outcomes as a result of implementing the recommendations.

8. Create an implementation plan that addresses each of the recommendations made for
resolving the major issues. State how any cons previously identified in step 4 pertaining to
the recommendations can be resolved. Address the operational and other minor issues
and discuss how solving these problems can affect the implementation of the major
recommendations, or affect other minor issues and weaknesses. Make clear and
actionable recommendations pertaining to the implementation and minor issues. Include in
the implementation plan an action plan that clearly defines each action, who is
responsible, the critical due dates, and the resources (money and people) required.

9. Present your answer in a professional manner using an appropriate format according to
the Required (e.g. working document, memo, report). For a report format, present
quantitative analyses in exhibits, appendices, or tables. Prepare an introduction and a
conclusion. Present the contents of the report in a logically sequenced and well-written
manner that reflects an appropriate tone for the receivers of the report. Check to ensure
that you have demonstrated integration in the analyses, made references in the body of
the report to all exhibits, appendices and tables, and provided labels and audit trails for all
calculations. Prepare a one-page executive summary that represents the report in short
(i.e. summarizes all the major and the most important minor issues and
recommendations). For formal reports, prepare a table of contents (not required for the
Case Examination).


34 CMA Canada
Assessment and Solution Notes for Markers

May 2008 Case Examination Celebrations and Memories Ltd. (CML)
Assessment and Solution Notes for Markers

The assessment and solution notes on the following pages provide examples of relevant
analyses that may be seen in candidate responses.

To help the markers understand the competency-based assessment, these solution notes
provide an indication of which competencies are assessed within each component of the
analyses. The following abbreviations are used throughout to represent the six functional and
four enabling competencies:

Functional Competencies:
F1 Strategic Management
F2 Risk Management and Governance
F3 Performance Management
F4 Performance Measurement
F5 Financial Management
F6 Financial Reporting

Enabling Competencies:
E1 Problem Solving and Decision Making
E2 Leadership
E3 Professionalism and Ethical Behaviour
E4 Communication

OVERALL GENERAL EXPECTATIONS

The analyses provided in the solution notes are far more complete and extensive than what
would be expected during a four-hour examination. At the same time, they do not include all the
valid points that can be made. markers must use their judgement in evaluating candidate
responses.

In answering the case in an examination setting, candidates are expected to use their
judgement in assessing which issues are the most relevant and to what extent the issues should
be analyzed.

1. A reasonable amount of both quantitative and qualitative analyses of the current
situation is expected.
2. The three main alternatives (expand product line, store expansion, and warehousing)
should be addressed and analyzed to some extent, both qualitatively and quantitatively.
3. Assumptions should be clearly indicated.
4. Recommendations should be clearly stated and supported.
5. A plan for implementing the recommendations and solving the challenges presented by
the recommended strategies should be provided.
6. Some of the minor operational issues should be analyzed and feasible
recommendations should be made to resolve these issues.


CMA Canada 35
GLOBAL MARKING

A significant advantage of global marking is that the marker has the flexibility to adapt the
marking guide to the approach taken by the candidate. There is no right answer; therefore, it is
not possible (or fair) to favour one set of recommendations over another and, to some extent,
one analytical approach over another. However, some structures and processes used in
answering the case are better than others. Markers are required to assess the competencies
demonstrated in the entire package, with a focus on the overall quality of the response and
whether the steps to approaching business strategy are applied effectively and systematically.

J udgment must be used in interpreting the meaning of a point in the response. View the point in
the context in which it is presented, not in isolation. If the meaning is not obvious given the
context, try not to use your own bias as a filter in interpreting what is written in the response (i.e.
try not to fill in the blanks with what you think they should be). Poorly written points will be
penalized both in the relevant analysis component and in the communication component.

BREADTH VERSUS DEPTH OF ANALYSIS (E1)

Assessing the trade-offs between breadth and depth of analysis is a particularly challenging
aspect of marking a time-restricted examination. Although breadth and depth of analysis is
specifically included in the assessment of E1, they also influence the assessment of most of the
competencies. J udgment must be used when a response is excessively brief, when it provides
an excessively in-depth analysis of only one or two issues, or when it uses the same tool
several times.

For example, when the same functional tool is applied for more than one alternative, there is a
higher risk of making mistakes than when the tool is applied only once. Markers are advised to
give credit for correct applications of a tool and to seriously consider whether subsequent (or
prior) weaker uses of the tool merit a negative adjustment to the assessment.

Minor flaws caused by the time pressure of the examination may be forgivable. Overall, the
marker should be looking for evidence of competencies being demonstrated in the response.
One of these competencies is that the response is balanced in terms of the breadth and depth
of the quantitative and qualitative analyses, and of the pros and cons.

SITUATIONAL ANALYSIS (E1, E3, F1, other functional competencies)

The assessment of the situational analysis includes the quality, depth, and breadth of both the
qualitative and quantitative analyses, and the identification and prioritization of strategic (major)
and operational (minor) issues. The major issues for this case can be identified as the strategic
goals and the needs/preferences of the board of directors. The minor issues are usually
identified as weaknesses in the SWOT analysis.

Prioritization of the issues and alternatives can be indicated clearly in a separate section of the
response, or can be implied by the sequence of or relative emphasis on the issues and
alternatives addressed within the response.

The mission is provided in the Backgrounder of the case (p. 4), and the strategy is provided in
the Additional Information (p. 2). Candidates should recognize these in the situational analysis.


36 CMA Canada
The internal environment should be examined to reveal the major and minor issues that need to
be addressed in order for the mission, vision and goals to be achieved. Objectives and
strategies can then be developed that capitalize on CMLs internal strengths, overcome its
weaknesses, and address or resolve the major and minor issues. A financial assessment of
CMLs current situation is also considered a component of the internal scan. Various models
and types of analyses may be used in conducting an internal scan, including analyses of
strengths and weaknesses (SWOT), ratios, trends, profitability of product line and/or geographic
regions, gross margins, value chain, core competencies, etc.

Candidates should also perform an external environmental scan to reveal the key opportunities
and threats (i.e. external risks) that exist or are expected to affect the industry. Strategies can
then be formulated by CML management that take advantage of the general opportunities and
avoid or reduce the impact of the threats. Various models and types of analyses may be used in
conducting an external scan, such as SWOT analysis, Porters Five Forces, PESTE, profit pool
analysis, stakeholder analysis, etc. Possible industry key success factors (KSFs) are also
revealed in the external environmental scan. The specific opportunities that CML is considering
(e.g. expand product line, expand stores, internally distribute products) are not counted as
general external opportunities in the SWOT analysis.

For ease of reference throughout this document, the points made in the environmental scan are
referred to as SWOT points, regardless of the model/tool used.

Because a high level SWOT analysis is provided in the Backgrounder, the assessment focuses
on relevant strengths, weaknesses, opportunities, and threats revealed in the Additional
Information.

[Note, on the following pages, references of where the information can be found are
provided, using BK =Backgrounder, AI =Additional Information, and the page number.]

Mission, Strategic Goals (F1/E1):

Mission [BK-4] CML provides a satisfactory return to its shareholders through retail
operations located in secondary shopping malls in economically healthy areas of
Canada. These retail operations primarily focus on goods and services related to
satisfying consumers needs for celebrating special events with family and friends,
giving gifts, and enjoying life.

Strategic Goals: [AI-2]
Increase income/cash flows/earnings per share through:
Expansion
Product diversification

Key Stakeholders Needs/Preferences (F1/E1):

Board of Directors - Increase revenues and gross profit margins, decrease expenses, increase
earnings per share to $6.25 by 2010, repay Durands shareholder loans
at a rate of $30,000 per month. [AI-2]
Hopps - Improve profitability and employee motivation for delivering high quality
service [AI-5]
Mantha - Raise line of credit to $1 million [AI-5]

CMA Canada 37
- Negotiate contracts for operating postal outlets and lottery booths [AI-4]
Purchasing agent - Purchase giftware and tobacco products in bulk and distribute them
internally, i.e. warehouse option [AI-4]

Constraints/Targets (F1/F5/F6/E1):

Shareholders - Earnings per share of $6.25 by 2010 (i.e. net income of $6.25 x 33,000
shares =$206,250) [AI-2]
- Repay shareholder loan to Durand at $30,000 per month [AI-2]
Bank - Audited financial statements and a financial plan [AI-5]
ROI - 9% [AI-5]

SWOT (functional competencies/E1/E3):

In the SWOT analysis, the strengths and weaknesses represent the internal environmental
factors that can be controlled by CML. The opportunities and threats represent general
environmental factors that CML does not control. The specific opportunities available to CML
represent the alternatives. Some of the SWOT points can be appropriate for more than one of
the four classifications, depending on how the candidate identifies and justifies the point.
Professional judgment must be used in determining whether a point is relevant and/or correct.

Some of the additional items relevant to the case issues are presented in the following charts.
As well, the high-level SWOT points provided in the Backgrounder are repeated here in italics
for reference (i.e. they are not considered in assessing the depth and breadth of the situational
analysis).

Strengths: Weaknesses/Issues:
1. Strong growth in revenues and operating
profits in B.C. stores. (F3) [AI-2]
2. Stores all generating a positive operating
profit. (F3) [AI-7]
3. All product lines are contributing to profits
(positive gross profit margins). (F3) [AI-8]
4. Giftware purchasing focuses on distinctive
gift items - KSF. (F1) [BK-8]
5. Bank is willing to provide a mortgage of up
to 75% of the cost of a warehouse. (F5)
[AI-4]

Points Provided in Backgrounder: [BK-12]
1. Competent management. (F1)
2. Board of directors has balanced expertise.
(F1)
3. Good relationships with customers - KSF.
(F1)
4. Effective small mall niche - KSF. (F1)
5. Most stores and head office are effectively
1. Sales and operating profits in Ontario and
Quebec stores have been declining slowly.
(F3) [AI-2]
2. Sales and operating profits in N.S. stores
have had a pronounced decline. (F3) [AI-2]
3. One sales manager must manage stores at
opposite sides of Canada (i.e. B.C. and
N.S.) not efficient, high travel costs. (F3)
[AI-2, AI-4]
4. Retirement of CEO who was a founder
(Durand). (F1) [AI-2]
5. Need to repay Durands shareholder loans
is putting pressure on cash flow used up
$150,000 of the $500,000 line of credit.
(F5) [AI-5]
6. Last months rent being expensed when
paid (i.e. failing to record as prepaids). (F6)
[AI-6]
7. Information systems do not track inventory
in sufficient detail to verify the losses
through theft and breakage. (F3) [AI-6]
8. Ten percent of giftware inventory becomes
obsolete. (F2/F3) [AI-6]
9. Part-time help being reported to head office

38 CMA Canada
Strengths: Weaknesses/Issues:
located - KSF. (F1)
6. Good mix of products. (F1)
7. Owns the head office land and buildings.
(F1)

as repairs and maintenance expenses.
(F2/F6/E3) [AI-6]
10. An assistant purchasing agent may be
making ethically questionable purchases
from his brother-in-law. (E3) [AI-6]

1, No standard store model. (F3)
2. Lack of inventory control - KSF. (F3)
3. Exposure to shoplifting. (F2)
4. No budgetary control/lack of monthly
financial reports. (F3)
5. High staff turnover. (F3)
6. No sales incentives. (F4)
7. Weak marketing focus. (F3)
8. Recent net income levels have been
decreasing. (F6 financial assessment)

General Opportunities: Threats:
1. Strong economic growth in B.C. and
Alberta. (F1) [AI-2]

1. Growing Canadian economy. (F1)
2. Increasing retail sales in B.C. and Alberta.
(F1)
3. Declining number of competing tobacco
outlets. (F1)
4. Wide range of giftware products available
from a wide range of suppliers. (F1)
5. Growing popularity of lotteries. (F1)
6. Increasing use of postal services by online
shoppers and sellers. (F1)
1. Economic growth in Ontario is modest
province where CML has the majority of
stores. (F2) [AI-2]
2. Economic growth in Quebec and Atlantic,
where CML has stores, is stagnating or
declining. (F2) [AI-2]
3. Lease, construction and operating costs in
Alberta are high (labour, facilities, etc.).
(F2) [A1-2, 4]

1. Large competitors/retail chains. (F2)
2. Competition from Morgan & Green (store
sites). (F2)
3. Secondary mall competitors for cards
(grocery stores, drug stores, dollar stores).
(F2)
4. Only two major suppliers of cards in
industry. (F2)
5. New secondary mall construction is
stagnating. (F2)
6. Uncontrollable external factors (e.g.
weather, other mall attractions). (F2)
7. Declining number of tobacco users
8. Many competitors in the giftware market.
(F2)
9. Increasing availability of software for do-it-
yourself greeting cards. (F2)
10. Shrinking supply of low cost labour in many

CMA Canada 39
General Opportunities: Threats:
cities. (F2)

Financial Assessment (F3/F5/F6):

See Appendices 1 and 2 for calculations of financial ratios and a profitability analysis of stores
by province. A good financial analysis would include correct calculation and interpretation of
relevant ratios that cover the four general areas of financial analysis: liquidity, coverage, activity,
and profitability. As well, earnings per share should be calculated to see where the company
currently stands in relation to the $6.25 target. The following are some points that may be made
in the qualitative analysis (either in the SWOT analysis or in a separate financial assessment
section).

Ratio Analysis See Appendix 1 (F6 except where otherwise indicated):

Liquidity is decreasing the current and quick ratios dropped in 2007. Although the
current ratio is above the benchmark of 2.0, the quick ratio is well below 1.0. (Note,
liquidity would be even lower if $360,000 of shareholder loans were recorded as current
liabilities).
The long-term debt-to-equity ratio has been decreasing as a result of paying back the
shareholder loan. (F5/F6)
Interest expense is sufficiently covered, but has decreased significantly in 2007.
Asset turnover is respectable, and inventory turnover is very good.
Gross profit margins appear to be healthy. (F5/F3)
Head office expenses have been increasing, causing net income to decrease.
The return on equity and return on assets have significantly decreased as a result of the
decrease in net income.
The retail operating profit as a percentage of sales has been steady at about 7% over
the past four years.

Analysis of Store Profitability See Appendix 2 (F3):

This may be discussed as part of the current financial assessment or later in the analysis of the
option to expand stores.

The Nova Scotia stores are the least profitable in terms of operating profits as a
percentage of retail sales.
The B.C. stores contribute the most dollar amount of operating profit per store.
Lottery booths provide the highest operating profit percentage of revenue, followed by
the postal outlets.

Identification of Issues and Alternatives (E1/F1):

The major issue is how CML can best increase its earnings per share and generate sufficient
cash to repay the shareholder loan and finance of any new projects. Possible alternatives for
addressing this issue are as follows:

1. Expand product line:
a) Collectible plates

40 CMA Canada
b) DVDs

2. Expand by opening new stores in B.C., Alberta, or Ontario.

3. Decrease expenses by building a warehouse and internally distributing giftware and
tobacco products to the Ontario and Quebec stores.

4. Change product mix eliminate or reduce product lines with the lowest profit margin per
square foot and add or expand those with the highest profit margins per square foot.

Minor issues are usually identified in the situational analysis (e.g. weaknesses and threats) and
addressed in the implementation plan.

Prioritization (E1)

Within the report, appropriate emphasis should be placed on the important aspects of the case,
in terms of both major and strategic issues/alternatives, and minor operational and
implementation issues, with clear prioritization in evidence (e.g. the main issue is highlighted in
the introduction or body of the report; minor issues are addressed in the implementation plan;
major issues/alternatives are addressed first and in the greatest depth). It is not necessary for
the prioritization to be spelled out in the situational analysis.

The following are evidence of weak prioritization:

extensive analysis of matters that do not deal with the organizations strategic
alternatives for achieving the boards desired strategy;
failure to consider major weaknesses and important operational and implementation
issues;
not recognizing strategic issues as such, i.e. warehouse, stores, or product line
additions (collectible plates and/or DVDs);
overemphasis of minor operational issues; and
failure to consider the constraints/targets (at least $6.25 by 2010; repay Durands
shareholder loans at $30,000 per month).

ANALYSIS OF ALTERNATIVES (functional competencies, E1, E2, E3)

At least three alternatives should be analyzed in the response. The analyses should be relevant,
consistent with case facts, tied to CMLs situation, and make sense. For each alternative, the
analyses should be of appropriate depth and breadth, and reflect an appropriate balance of
quantitative and qualitative analyses, and well as an appropriate balance of pros and cons.

The analysis of an alternative should not be one-sided (which is evidence of bias), superficial, or
contain serious conceptual errors or unreasonable assumptions. Note that the conclusions and
interpretations of the results of the quantitative analyses can be considered in assessing the
depth of the qualitative analysis.

Throughout the analyses, a good understanding of various functional competencies should be
exhibited. Appropriate functional concepts and tools should be applied to the case in an
appropriate and accurate manner. As well, in cases of uncertainty, candidates should make the
most reasonable assumption given the case facts.

CMA Canada 41

Quantitative Analysis (F3, F5, F6)

The quantitative analyses should include calculation of the impact that each option would have
on the companys gross profit, net income, and/or cash flows. The quality of the calculations and
interpretation of the result is assessed in the quantitative analysis component. Note that the
overall quality of the analyses will be affected by the reasonableness of the assumptions made.

Earnings Per Share (EPS) (F6, E2, F3, F5)

Somewhere in the response (analysis of alternatives, recommendations, implementation plan),
the impact of the alternative on the companys EPS should be considered, either individually or
in conjunction with other options. For example, the candidate can calculate the incremental
earnings per share for each option or combination of options. Alternatively, the net income
required to achieve the target $6.25 earnings per share can be calculated (i.e. 33,000 x $6.25 =
$206,250), and then the incremental after-tax income for each option or a combination of
options is calculated and compared to the $206,250 target..

Using the EPS as a criteria in drawing conclusions and making recommendations is assessed in
E2. The quality of the calculation is assessed in F6.

Qualitative Analysis (functional competencies, E1, E2, E3)

The qualitative analysis should focus on the advantages (pros) and disadvantages (cons) of the
alternative. In assessing the quality of these pros and cons, consideration is given to
appropriate use and interpretation of case facts pertaining to the option and the integrative
points linked to the situational analysis.

Providing 2 or 3 significant pros and 2 or 3 significant cons for each major alternative and/or
each sub-option (e.g. each product option in alternative 1, each province in alternative 2) would
be considered balanced and would meet expectations under examination conditions. For the
lease versus buy options in alternative 3, 1-2 pros and 1-2 cons would be considered sufficient.
Note, providing 6 pros and 1 con for an alternative may have enough depth, but would not be
balanced and could be evidence of bias.

INTEGRATION (E1/F1/E2)

In the analyses of the strategic and operational issues and alternatives, a superior response
would refer back to the mission of the organization, the goals of the board of directors, and the
significant strengths, weaknesses, opportunities, and threats. In addition, a superior response
would consider the key success factors and the impact of the various alternatives on the
organizations ability to meet the constraints of the shareholders and the bank.

Integration should also be demonstrated by revealing links between strategic
issues/alternatives, between implementation/operational issues, and between operational and
strategic issues/alternatives. A superior analysis would consider many related factors together
and reflect them clearly in recommendations that address all issues.

The following are some guidelines for awarding a link:


42 CMA Canada
1. Mission The analysis of each alternative should indicate whether it is consistent with
the mission (maximum of one link to mission).

2. Goals/Preferences Stating if an alternative does or does not satisfy the goals of the
board of directors and the preferences of the various management members is sufficient
for a link (maximum of one link).

3. Constraints/Targets Calculating the earnings per share for an alternative and
comparing it to the $6.25 target is considered a link. As well, testing whether enough
cash is generated to repay the shareholder loan is considered a link.

4. Industry KSFs There is a maximum of one link to KSFs. The KSF must be valid and
not currently exist within the organizational strengths or weaknesses.

5. Strengths/Internal KSFs
To link to strengths, the report must strengthen or use a strength. As well, indicating as a
con that an alternative will weaken or destroy a strength is a link. Not using a strength is
not considered a link (e.g. The DVD option does not let CML use its competent
management is not a link).

6. Weaknesses/Internal Risks, Operational Issues, and Implementation Issues
To link to weaknesses or operational/implementation issues, the report must
1) recommend a solution to a weakness/issue, or
2) use a weakness/issue for justification for not doing something, or
3) worsen an existing weakness.

7. Opportunities
To link to opportunities, the report must take advantage of a general opportunity.

8. Threats
To link to threats, the report must
1) use the threat in the analysis as justification for not doing something, or
2) argue that a certain action should be taken to address a threat.

SAMPLE ANALYSES OF ALTERNATIVES (functional competencies, E1, E2, E3)

Some of the relevant points and valid links that can be made are provided in the following
analyses of the alternatives.

1. Expand Product Lines

See Appendix 5 for details of possible quantitative analyses of the two product line expansion
options (collectible plates and DVDs).

Some assumptions will need to be made regarding, for example, the amortization period for
initial investments, the cost of increasing security, loss from theft of DVDs, and the incremental
sales of other products as a result of shifting display space or the behaviour of new/existing/lost
customers.


CMA Canada 43
Because the investment required is so small and the incremental gross profit is so large for both
options, it is not necessary to calculate the net present value for these options (i.e. it is obvious
that the return on investment criteria would be met). The calculations for payback and net
present value (NPV) are provided for purposes of checking the validity of the calculations for
those responses that include these calculations (note that the payback method would be
appropriate for these options and that the time horizon used could be something other than five
years). Responses may also include other quantitative analyses (e.g. impact on financial ratios,
profitability per square feet of display space), which should be assessed for relevancy.

Collectible Plates

Pros Cons
Qualitative:
- This option is consistent with the BODs
product diversification strategy. (F1) (link to
goals)
- Would attract new customers to CML stores,
who may purchase other products. (F3)
- Little or no competition from other stores in
the malls - low risk (F2) (link to strength)
- Complements the current line of decorated
plates. (F1) (link to distinct gift strength)
- Would not require an increase in store staff.
(F3)
- Except for initial sample plates, CML would
not be required to carry inventory; therefore,
there is no need for discounting or selling
any of these plates at a loss and no risk of
obsolete inventory. (F3/F2) (link to
weakness)
- Customers are required to place a deposit of
50%; therefore, low risk of customer
defaults. (F2)

Quantitative:
- Consistent with the boards desire to
increase earnings per share (increase by
$1.83 per year) (F6) (link to constraints)
- Low investment; high return (F5) exceeds
9% minimum return.
Qualitative:
- Staff would require training to handle the
paperwork, take orders, and track open
orders. (F3)
- Customer service could decrease during
busy times, resulting in frustrated customers
and lost sales. (F3) (link to strength)
- Need to account for deposits and unearned
revenue in order to comply with GAAP
(F2/F6)

Quantitative:
- Requires 20 sq. ft. of selling space currently
used for other products, likely resulting in
lost sales of these products (i.e. opportunity
cost). (F3)

Conclusion:

This would be a good option for all stores.

DVDs

Pros Cons
Qualitative:
- This option is consistent with the boards
Qualitative:
- High risk of theft. (F2) (link to weakness)

44 CMA Canada
Pros Cons
product diversification strategy. (F1) (link to
goals)
- Would attract new customers to CML stores,
who may purchase other products. (F3)
- Does not require any selling space that is
currently devoted to other products (i.e. no
opportunity cost). (F3)
- Would not require an increase in store staff.
(F3) (link to threat)
Quantitative:
- Consistent with the boards desire to
increase earnings per share. ( F1) (link to
preferences)
- Contributes the greatest increase in earnings
per share ($4.25 per year). (F6)
- Low investment; high profit margin
percentage; high return exceeds 9%
minimum return. (F5)
- May attract wrong element and increase risk
of theft of other products as well. (F2) (link
to weakness)
- Not related to any of the current product
lines may not be a good fit and may not
appeal to current customers. (F3)
- DVDs could not be returned to the supplier
high risk of obsolescence would worsen
the current problem of high levels of
obsolete inventory. (F2) (link to weakness)

Quantitative:
- Could increase security costs. (F3)

Conclusion:

This would be a good option for all stores.

2. Expand Stores

See Appendix 4 for details of quantitative analysis. To analyze the option of opening stores in
Alberta, candidates are expected to calculate the revenues, expenses and operating profit per
store using the data for a BC store as a base and applying the appropriate percentages.

Some assumptions are required regarding, for example, the amortization period for initial
investments, the initial costs of opening stores in each province (e.g. use the high, average or
low costs, interpolate the individual components of the initial costs for an Alberta store), the
lease term, etc. As well, the probabilities of successfully negotiating a contract for postal outlets
and lottery booths should be appropriately applied.

At a minimum, candidates should calculate the expected incremental income or incremental
cash flow per store. Better answers would also calculate the net present value of opening stores
in one or more provinces. It is acceptable for candidates to use a time horizon other than five
years, but they must use 9% as a hurdle rate.

Responses may also include other quantitative analyses (e.g. sensitivity analysis, impact on
financial ratios), which should be assessed for relevancy.

Pros Cons
Qualitative:
- It is expected that there will be some
opportunities for expansion in BC, AB, and
ON. (F1) (link to strength strong economic
growth in BC & AB)
Qualitative:
- Low cost labour is becoming scarce,
especially in AB. (F2) (link to threat)
- High employee turnover increases
recruitment and training costs. (F2) (link to

CMA Canada 45
Pros Cons
- More stores will strengthen the CML brand.
(F1)
- Provides more opportunities to operate
postal outlets and lottery booths, both of
which generate respectable operating
margins. (F3)
- Is consistent with the current strategic goal
of expansion. (F1) (link to goals)
- If more stores are opened in the West, a
western area sales manager could be based
out west, resulting in reduced travel costs.
(F3) (link to weakness)
- Retail sales are increasing in B.C. and
Alberta. (F1) (link to opportunity)
- There is a declining number of tobacco
outlets less competition means higher
chance of attracting tobacco customers. (F1)
(link to opportunity)
- CML has expertise in expansion. (F1) (link to
competent mgmt.)
Quantitative:
- The Ontario and B.C. stores would have a
positive net present value over a five-year
period at 9%. (F5)
- All stores would contribute toward 2010
earnings per share ($0.74 ON, $0.58 BC,
and $0.39 AB per store). (F6) (link to
constraint)

weakness)
- Declining number of tobacco users. (F2)
(link to threat)
- The impact of the trend toward malls of
large box stores on traffic in the secondary
malls may become more significant in the
future. (F2) (link to threat)
- The increasing availability of software for
do-it-yourself greeting cards could erode the
overall demand for greeting cards. (F2) (link
to threat)
- Lease costs in AB are highest in the country
and construction costs are increasing. (F2)
(link to threat)
- ON is expecting only moderate growth in
the next few years. (F2) (link to threat)
Quantitative:
- Stores in Alberta would not provide a 9%
rate of return over 5 years. (F5)

Conclusion:

Opening new Ontario stores would provide CML with the greatest expected return in the short
term and would provide the greatest incremental earnings per share by 2010. Opening stores in
B.C. would be profitable in the longer term. Unless expenses can be reduced, opening stores in
Alberta would not provide CML with the required return within a five-year time horizon, but
would increase earnings per share.

3. Build a Warehouse

See Appendix 5 for details of quantitative analysis. Candidates are expected to apply a capital
budgeting method, preferably net present value (NPV) or internal rate of return (IRR). The CCA
tax shield should be calculated for at least the warehouse building. In deciding whether to invest
in the warehouse, candidates may make an assumption regarding whether the equipment would
be purchased or leased. The time horizon used can be something other than five years (e.g.
seven years, 40 years), but the hurdle rate of 9% is expected to be used in the analysis.

Although the quantitative analysis of the lease versus buy options are provided, this issue is
really an implementation consideration and need not be considered for the build a warehouse

46 CMA Canada
decision. However, it is reasonable to consider this and other implementation issues in the
analysis of the main alternative.

Pros Cons
Qualitative:
- Would increase control over supply. (F1)
- Makes use of excess land already owned.
(F1) (link to strength)
- Bank is willing to finance 75% of the cost of
building the warehouse. (F5)
- Consistent with the boards desire to reduce
costs. (F1) (link to preferences)

Quantitative:
- The net present value is positive $765,000.
(F5)
- If the equipment is leased, the earnings per
share would increase by $5.76 in 2010. (F6)
- If the equipment is leased, the initial capital
outlay is minimized. (F5)
Qualitative:
- Complicates CMLs current ordering
process would have to keep track of
tobacco sales and place orders instead of
letting the sales rep do the work. (F3)
- Increase the pressure to effectively control
inventory. (F3)
- CML does not have expertise in the
distribution business. (F3)
- Goods damaged when CML is transporting
them would not be returnable to the vendor
.(F2)
- Could require an increase in investment in
inventory. (F5)
Quantitative:
- Requires a significant up front capital
investment at the same time that cash is
needed to repay the shareholder loan. (F5)

Conclusion:

This option would generate the desired earnings per share and, with the bank providing a
mortgage and the equipment being leased, the initial capital investment may be covered by the
incremental annual operating cash flows in the first two years. However, CML may need to find
another source of cash to cover the repayment of the shareholder loans in the short term.

4. Change product mix

Many possible combinations of dropping certain products and adding others can be analyzed.
Although this is a perfectly valid option, it is not specifically mentioned in the case and,
therefore, will likely not be addressed by many candidates.

Sample analyses are not provided. J udgement will have to be used in assessing whether the
analyses are relevant, of sufficient depth and breadth, and of sufficient quality.

RECOMMENDATIONS (E2):

Conclusions and recommendations should be clearly stated and may appear anywhere in the
response. They should make sense considering the situation of the organization, the
constraints, and the candidates analysis. Recommendations should be logical, relevant to
CMLs situation, consistent with the analysis, convincing to the reader of the report, and useful
in addressing the main issues.

Support for the major recommendations should be provided. The support should not be a
repetition of all the pros of the alternatives that were recommended. It should be a brief

CMA Canada 47
explanation of why one option was chosen over another, and should focus on the most
important criteria (e.g. KSFs, constraints, targets, goals).

For this case, support should include calculations and discussions that prove the following
(F5/F6).:
1. The desired earnings per share of $6.25 would be achieved by 2010.
2. Sufficient funding would be available to implement all the recommended actions.
3. Sufficient cash flows would be generated to enable CML to repay Durand at a rate of
$30,000 per month.

Many candidates will provide analysis for the individual recommendations only, which is
acceptable for the examination. Superior responses would calculate and compare the required
versus available financing for all recommended alternatives, and determine the total earnings
per share by 2010 assuming all the recommended strategies are implemented.

Candidates will need to choose a combination of recommendations that is feasible for CML.
There are numerous combinations of feasible recommendations. Appendix 6 provides an
analysis of the financing required versus available assuming that the following is recommended:
build a warehouse, open two new Ontario stores, add both collectible plates and DVDs to the
product line. The total expected earnings per share by 2010 given this recommendation =$1.00
+$5.76 +$1.72 +$1.43 +$4.12 =$14.03.

IMPLEMENTATION PLAN (Functional Competencies/E1/E2)

The implementation plan should address how CML should deal with the cons of the
recommended options as well as other implementation issues. As well, the issues identified in
the situational analysis (e.g. weaknesses, threats, risks, uncertainties) should be addressed. In
addressing these issues, candidates should identify and recommend ways to resolve the issues.
These recommendations should be clearly stated and actionable. It is insufficient to indicate that
an issue needs to be resolved or further investigated. Some examples of issues that could be
addressed are as follows:

Strategic Management (F1):

- Alignment of the implementation plan to CMLs available resources and success factors
(e.g. financing, constraints, location, profit margins, quality of service, store layout, staffing,
efficient management, etc.).
- Organizational structure and lines of authority.
- Change management.
- Morale issues.

Risk Management, Internal Control, and Governance (F2):

- Internal control issue related to purchasing (that a relationship exists between purchaser
and supplier highlights that this function requires controls to be instituted).
- Dealing with the risk of inventory becoming obsolete.
- Dealing with the control of cash.
- Security issues at the stores, especially in relation to the DVD option.
- Reporting the wages paid to the store managers children to Revenue Canada need to pay CPP
and EI.


48 CMA Canada
Performance Measurement (Cost and Revenue Management, Marketing, Operations
Management and Information Technology) (F3):

- Branding and image issues related to adding product lines.
- Pricing issues (e.g. regular pricing, discounts, obsolete inventory)
- Discussing use of IT systems to assist in inventory control.
- Other systems issues (e.g. batch processing vs. real time).
- Store layout; placement of merchandise.
- Marketing, promotion, and advertising ideas.

Corporate and Individual Performance Measurement (F4):

- Analysis of corporate performance measures.
- Compensation policies (management, staff).
- Performance reviews (full-time, part-time).
- Sales incentives

Finances and Taxation (F5):

- Recommending sources of financing required to implement recommendations.
- Before going ahead with the warehouse or store expansion options, need to provide bank
with a set of audited financial statements and a financial plan.
- Addressing any taxation issues or considerations.
- Preparing pro-forma financial information.

Financial Accounting, Reporting, and Analysis (F6):

- Calculating the effect of recommendations on ratios.
- Financial accounting issues (prepaid rent, amortization, inventory, current portion of
shareholder loan, etc.).
- Formatting and presentation of pro forma financial statements.

Ethical Issues and Conflicts of Interest (E3):

- Ethical issue pertaining to purchasing agent taking vacations with supplier sales rep at the
expense of the sales rep, selling tobacco products, and selling lottery tickets.
- Reporting the wages paid to children of store managers as maintenance and repairs to head
office.

Action Plan (E2):

Candidates should provide an action plan that indicates the tasks that need to be performed,
who should perform them, when they should be done, and any costs or revenues associated
with the task. This action plan should cover the strategic recommendations and some of the
implementation and operational recommendations. A table or chart can be used to effectively
present an action plan.

Financial Forecast (F5):

A three-year financial forecast should be prepared to summarize the effects of the
recommendations on the companys future financial position. This can take the form of pro

CMA Canada 49
forma financial statements, or projected earnings per share, return on investment, or cash flow.
Determination of the earnings per share by 2010 or proving that the shareholder loan can be
repaid given all the recommendations would be appropriate examples of financial forecasting for
this case.

PROFESSIONALISM AND WRITTEN COMMUNICATION (E3/E4)

Candidate responses should be in the form of a formal report (except that a table of contents is
not required). Professional language and tone should be used, and the report should reflect the
role the candidate is instructed to assume (i.e. middle manager writing a report to senior
management).

The format of the report should contain the following: executive summary, introduction, body of
the report (analyses, recommendations, implementation plan), conclusion, and
exhibits/appendices.

Executive Summary (E4):

The executive summary should be the report in short. It should provide the reader with a one-
page summary that highlights the major issues, alternatives and recommendations. As well, it
should summarize the conclusions and recommendations pertaining to the most important
implementation issues, and attempt to answer the following questions: what, why, when, where,
and how.

Introduction (E4):

The introduction should lay out the purpose and scope of the report. If the executive summary is
really an introduction, credit can be given for the introduction but not for providing an executive
summary. The following is an example of an acceptable introduction:

The purpose of this report is to address how Celebrations and Memories Ltd. (CML) can best
increase revenues and gross profit margins, decrease expenses, and generate the desired
returns for the shareholders. To this end, the report includes the following: a situational analysis;
analyses of the strategic issues and alternatives; strategic recommendation; analysis of and
recommendations for the operational and implementation issues; and an action plan for
implementing the recommendations.

Body of the Report and Exhibits/Appendices (E4):

Overall, the body of the response should flow well and be easy to follow. For purposes of
assessing report format, it is acceptable for the SWOT analysis to be provided in the
appendices, or in the body of the report, or both. Preference is given to presenting the detailed
SWOT in the appendices and providing references or highlights of the most important factors in
the body of the report.

The qualitative analyses of the strategic alternatives should be in the body of the report. The
quantitative analyses, unless they are very brief, should be provided in exhibits, tables, or
appendices. Conclusions should be provided at the end of the analysis of each issue in the
body of the report. Recommendations should follow the analyses of the major issues, together
with some support.


50 CMA Canada
The implementation plan should follow the recommendations. In this section, the analyses and
recommendations for the implementation and operational issues should be provided. Any
significant quantitative analysis, such as financing available versus financing required, should
be provided in the appendices.

Conclusion (E4):

The conclusion should be presented at the end of the body of the report and consist of a brief
statement or two that summarizes the main points and draws the report to an end. No new
information should be provided in the conclusion.

Audit Trails (E4):

Proper audit trails should be evident in the report, such as the following:
- providing references to appendices in the body of the report
- providing references to tables, calculations, etc. where appropriate
- stating any assumptions that were made in the analyses
- showing details of all calculations can be in brackets or as supplementary notes
- labelling all calculations (indicating what is being calculated)
- labelling all figures (indicating what the figure represents)
- for calculation of net present value by calculator or by Excel, indicating the discount rate,
number of periods, annuity/payment amount, and/or future value that was used.

Professional Tone, Tact, Audience-Focused (E3):

The response is expected to reflect a business tone, as opposed to a colloquial style. It should
be written in third person, and should not contain any tactless comments such as insulting or
negative characterizations of senior management or members of the board of directors. The role
of Robyn Berg should be reflected throughout the response (e.g. there should be no direct
references to the Backgrounder in the report body, except perhaps in a footnote).

Language and Style (E4):

The content of the report must be written in a clear and concise manner. The subject of a
sentence or point should be clear, and verbs should be used to convey actions. The use of point
form is an effective technique for conveying ideas and analyses concisely. However, overuse of
point form or providing only brief phrases with no clear subject and/or verb can make the
message being conveyed difficult to understand rather than making the point easier to follow.

In assessing communication skills, consideration must be given to the constraints of
examination conditions. The general ability to maintain a reasonable level of communication
skills throughout the response is the focus of the assessment. Committing only a few errors in
grammar, spelling, sentence structure and punctuation is forgivable in evaluating
communication skills. However, committing many such errors can be so distracting that it can
significantly affect the overall assessment for the communication component.


CMA Canada 51
Appendix 1
Ratio Analysis CML (F6)

Ratios Formula 2007 2006 2005 2004
Current ratio (liquidity)
current assets /
current liabilities
$2,999/$1,427
=2.10
$3,063/$1,087
=2.82
$3,067/$1,133
=2.71
$2,934/$1,097
=2.68
Quick ratio (liquidity)
(cash +acc. rec.)
/ current liabilities
($140 +
$15)/$1,427
=0.11
($330 +
$17)/$1,087
=0.32
($341 +
$17)/$1,133
=0.32
($252 +
$16)/$1,097
=0.24
LT Debt-to-Equity
(coverage)
LT debt / equity
$1,616/$995
=1.62
$1,941/$1,012
=1.92
$1,966/$991
=1.98
$1,991/$916
=2.17
Total debt-to-equity
(coverage)
total debt / equity
($1,427 +
$1,616)/$995
=3.06
($1,087 +
$1,941)/$1,012
=2.99
($1,133 +
$1,966)/$991
=3.13
($1,097 +
$1,991)/$916
=3.37
Times interest earned
(coverage)
income before
interest & taxes /
interest
($41 +$17 +$23)
/ ($17 +$23)
=2.03
($89 +$18 +$2) /
($18 +$2) =5.45
($156 +$20 +
$2) / ($20 +$2)
=8.09
($117 +$21 +
$1) / ($21 +$1)
=6.32
Asset turnover
(activity)
total revenue /
total assets*
($27,626 +$602
+727) / $4,038
=7.17

Inventory turnover
(activity)
COGS /
inventory*
$18,671/$2,844
=6.5 times
(56 days)
$18,150/$2,716
=6.7 times
(55 days)
$18,070/$2,709
=6.7 times
(55 days)
$17,318/$2,666
=6.5 times
(56 days)
Net margin
(profitability)
net income /
sales
$33/($27,626 +
$602 +727)
=0.11%

Gross profit margin
retail (profitability)
retail gross profit
/ retail sales
$8,955 / $27,626
= 32.4%
$8,493 /$26,643
=31.9%
$8,376 / $26,446
=31.7%
$8,324 / $25,642
=32.5%
Operating profit
margin retail
(profitability)
retail op. profit /
retail sales
$1,935 / $27,626
=7.0%
$1,861 /$26,643
=7.0%
$1,853 / $26,446
=7.0%
$1,826 / $25,642
=7.1%
Operating profit
margin post office
(profitability)
post office op.
profit / P.O.
revenue
$89 / $602
=14.8%

Operating profit
margin lottery
(profitability)
lottery op. profit /
lottery revenue
$154 / $727
=21.2%

Return on equity
(ROE) (profitability)
net income/
equity
$33 / $995
=3.3%
$71/ $1,012
=7.0%
$125 / $991
=12.6%
$94 / $916416
=10.3%
Return on assets
(ROA) (profitability)
net income/ total
assets
$33 / $4,033
=0.8%
$71 /$4,040
=1.8%
$125 /$4,090
=3.06%
$94 /$4,004
=2.3%
Earnings per share
(profitability)
net income /
number of shares
$33 / 33 =$1.00 $71 / 33 =$2.17 $125/33 =$3.78 $94 / 33 =$2.84
* can also be calculated using average of beginning and ending balances


52 CMA Canada
Appendix 2
Profitability Analysis Stores by Province (F3)
(in 000s)

Ontario
Stores
Quebec
Stores
B.C.
Stores
N.S.
Stores Total

Number of stores 39 10 3 2 54
Number with post office 8 2 1 1 12
Number of lottery booths 12 4 3 1 20

Retail:
Revenue $19,785 $5,213 $1,664 $964 $27,626
Cost of goods sold 13,293 3,587 1,132 659 18,671
Gross profit $ 6,492 $1,626 $ 532 $305 $ 8,955
Revenue per store $507.3 $521.3 $554.7 $482.0 $511.6
Gross profit per store $166.5 $162.6 $177.3 $152.5 $165.8
Gross profit % of revenue 32.8% 31.2% 32.0% 31.6% 32.4%

Expenses per store $130.2 $129.1 $134.7 $124.0 $130.0
Expenses % of retail rev. 25.7% 24.8% 24.3% 25.7% 24.4%

Operating profit retail $1,415 $335 $128 $57 $1,935
Operating profit per store $36.3 $33.5 $42.7 $28.5 $35.8
Operating profit % of retail rev. 7.2% 6.4% 7.7% 5.9% 7.0%

Postal Outlets:
Revenue $402 $100 $50 $50 $602
Operating profit post offices $57 $14 $8 $10 $89
Operating profit per store w. PO $7.1 $7.0 $8 $10 $7.4
Operating profit % of PO rev. 14.2% 14.0% 16.0% 20.0% 14.8%

Lottery Booths:
Revenue $436 $145 $109 $36 $727
Operating profit lottery booths $92 $31 $23 $8 $154
Operating profit per store w. LB $7.7 $7.8 $7.7 $8 $7.7
Operating profit % of LB rev. 21.1% 21.4% 21.1% 22.2% 21.2%

Total:
Revenue $20,623 $5,459 $1,823 $1,050 $28,955
Total operating profit $1,564 $380 $159 $75 $2,178
Average total operating profit
per store $40.1 $38.0 $53.0 $37.5 $40.3
Operating profit % of total rev. 7.6% 7.0% 8.7% 7.1% 7.5%


CMA Canada 53
Appendix 3
Analysis of Product Line Options (F3/F5/F6/E3)

Assumptions (E3):
1. All costs and revenues in all stores behave the same way as in 2007.
2. The gross profit per square foot is lowest for magazines and newspapers; therefore, the
selling space for magazines and newspapers will be reduced by 20 sq. ft. to make room for
the collectible plates display case. The opportunity cost of reducing the selling space for
magazines and newspapers is assumed to be $43 x 20 =$860 per store. Other reasonable
assumptions are possible, such as decreasing the selling space for dollar cards, or
eliminating a product line altogether. [An unreasonable assumption, however, would be to
assume that the opportunity cost equals the average gross profit per square foot of $109 x
20 sq. ft. =$2,180.]
3. CML will continue operating 54 stores in total. (It would be reasonable to increase the
number of stores if the candidate is recommending expansion.)
4. Annual revenue will equal the average of the estimated revenue (e.g. $7,500 per store for
plates and $6,500 for DVDs).
5. Total net income will stay below the $300,000 threshold and the tax rate will remain at 20%.
6. Investment in plates, display cases, and mobile racks will be amortized over five years on a
straight-line basis. (Assuming amortization is the same as CCA would be reasonable since it
is consistent with the current company policy.)
7. Some sales would be lost because customers become frustrated waiting for service.
However, the new customers attracted to the stores would purchase some of CMLs other
products. It is assumed that the new sales would offset the lost sales.

Collectible Plates: (F3/F5/F6)
Per Store Total (54 stores)
F5 Sample plates $ 700 $37,800
F5 Display case 800 43,200
F5 Total investment $1,500 $81,000

F3 Expected annual revenue ($7,000 +$8,000)/2 $7,500 $405,000
Gross profit % 30% 30%
Expected annual gross profit 2,250 121,500
Opportunity cost (see assumption 2) 860 46,440
Incremental gross profit 1,390 75,060
F6 Amortization plates & display case (20%) 300 16,200
Incremental income 1,090 58,860
F5 Income taxes (20%) 218 11,772
F6 After-tax incremental net income $ 872 $ 47,088
Number of shares 33,000
Incremental earnings per share $1.43
Square feet of selling space 20
Gross profit per sq. ft. ($2,250/20) $112.50
Payback =$1,500/(1,390 x .8) =$1,500/$1,112 =1.35 years

Annual after-tax cash flow from operations =$1,390 x .8 =$1,112

54 CMA Canada
Net present value (5 yrs. @ 9%) =($1,112 x 3.89) - $1,500 =$4,326 - $1,500
=$2,826 per store (not considering CCA tax shield)
CCA tax shield for display case =[($800 x .2 x .2)/(.09 +.2)] x [(2.09)/(2.18)] =$106 per store
NPV =$2,826 +$106 =$2,932 per store

Note, because the NPV is quite positive before considering the CCA tax shield and the size of
the investment is not significant, it is not necessary to calculate the CCA tax shield.

DVDs: (F3/F5/F6)

Per Store Total (54 stores)
F5 Investment in inventory $ 1,000 $54,000
Investment in mobile rack 500 27,000
1,500 81,000

F3 Expected annual revenue ($6,000 +$7,000)/2 $6,500 $351,000
Gross profit % 50% 50%
Incremental gross profit 3,250 175,500
Amortization of mobile racks (20%) 100 5,400
3,150 170,119
Additional cost of security (assume $382 admin.
and security cost x 5% increase)

19
3,150 170,138
F5 Income taxes (20%) 630 34,028
F6 After-tax incremental net income $2,520 $136,110
Number of shares 33,000
Incremental earnings per share $4.12

Payback =$1,500/$2,520 =.6 year

Annual after-tax cash flow from operations =$3,250 x .8 =$2,600
Net present value (5 yrs. @ 9%) =($2,600 x 3.89) - $1,500 =$10,113 - $1,500
=$8,613 per store (not considering CCA tax shield)
CCA tax shield for racks =[($500 x .2 x .2)/(.09 +.2)] x [(2.09)/(2.18)] =$66 per store
NPV =$8,613 +$66 =$8,679 per store

Note, because the NPV is quite positive before considering the CCA tax shield and the size of
the investment is not significant, it is not necessary to calculate the CCA tax shield.

CMA Canada 55
Appendix 4
Analysis of Store Expansion Option (F3/F5/F6/E3)

Assumptions (E3):
1. All costs and revenues in B.C. and Ontario stores behave the same way as in 2007 (see
appendix 2 for revenue and expense per store).
2. The initial costs to open a store in B.C. or Ontario equal the average of the estimated range
of costs (e.g. leasehold improvements of $20,000, furniture and fixtures of $12,000,
inventory of $57,500). It is reasonable to use higher costs for B.C. stores than for Ontario
stores, in which case the present value may be negative for B.C. stores.
3. Assume that leases are for five years; therefore, a present value factor for five years at 9%
is used.
4. The operating profit for an Alberta store would be as follows ($ in 000s):

(F3) BC Store Multiplier AB Store
Retail revenue $554.7 1.10 $610.2
Gross profit margin % 32% 1.00 32%
Gross profit $177.3 $195.3
Operating costs 134.6 1.15 154.8
Retail operating profit $ 42.7 $ 40.5
Postal outlet revenue $50.0 1.00 $50.0
Postal outlet operating costs 42.0 1.15 48.3
Postal outlet operating profit $ 8.0 $ 1.7
Lottery booth revenue $36.3 1.00 $36.3
Lottery booth operating costs 28.7 1.15 33.0
Lottery booth operating profit $ 7.6 $ 3.3

5. Initial costs to open a store, other than leasehold improvements, furniture and fixtures, and
inventory are amortized evenly over five years. The initial costs to operate a store in Alberta
is allocated to various components using the same proportions as for Ontario and B.C.

Net Present Value per Store 5 years, 9% ($ in 000s) (F3/F5)

Initial Investment Per Store (000s):
Ontario B.C. Alberta*
F5 Leasehold improvements $ 20.0 $ 20.0 $ 23.8
Furniture & fixtures 12.0 12.0 14.3
Inventory 55.0 55.0 65.5
First and last months rent 5.0 5.0 6.0
Other initial costs 23.0 23.0 27.4

Total initial investment per store $115.0 $115.0 $137.0

*Example calculation: ($20/$115) x $137 =$23.8 for leasehold improvements

56 CMA Canada
Present Value per Store (000s):
Ontario B.C. Alberta
F3 Postal outlet operating profit $7.1 $8.0 $1.7
Probability of contract 25% 25% 25%

Expected postal outlet operating profit $1.8 $2.0 $0.4

Lottery booth operating profit $7.7 $7.6 $3.3
Probability of contract 40% 40% 40%

Expected lottery booth operating profit $3.1 $3.0 $1.3

Retail operating profit $36.3* $42.7 $40.5
Expected postal outlet operating profit 1.8* 2.0 0.4
Expected lottery booth operating profit 3.1* 3.0 1.3
Expected profit per store before incremental
head office costs

41.1*

47.7

42.2
Increase in travel & courier costs 0 8.0 8.0

Total expected pre-tax cash inflow per store $41.1 $39.7 $34.2
F5 Taxes @ 20% 8.2 7.9 6.8

Expected after-tax cash inflow per store 32.9 31.8 27.4
Present value factor (9%, 5 yrs.) 3.89 3.89 3.89

Present value of expected cash inflows 128.0 123.6 106.4
Initial investment 115.0 115.0 137.0

Present value before CCA tax shield $13.0 $ 8.6 $(30.6)
* The three expected profits do not add to the total because of rounding errors.

CMA Canada 57
Incremental Earnings Per Share: (F6)

Ontario B.C. Alberta
Expected pre-tax cash inflow 2008 $41.1 $39.7 $34.2
Amortization leaseholds (10%) 2.0 2.0 2.4
Amortization furniture & fixtures (20%/2) 1.2 1.2 1.4
Expected pre-tax incremental profit per store 37.9 36.5 30.4
Income taxes (20%) 7.6 7.3 6.1
Expected after-tax incremental profit per store 30.3 29.2 24.3
Number of shares (in 000s) 33 33 33
Earnings per share 2008 $0.92 $0.89 $0.74
Number of stores 2 2 3
Total incremental earnings per share - 2008 $1.84 $1.78 $2.22

Amortization furniture & fixtures (20%) 2.2 2.2 2.6
Income taxes (20%) 7.0 6.7 5.4

Amortization furniture & fixtures (20%) 1.7 1.7 2.1
Income taxes (20%) 7.1 6.8 5.5


58 CMA Canada
Appendix 5
Analysis of Warehouse Option (F3/F5/E3)

Assumptions (E3):
1. The number of stores in Ontario and Quebec will not change over the next five years.
2. The total giftware, cigarettes and tobacco products sales will remain at the 2007 levels.
3. Each store sells the same number of cartons of cigarettes (i.e. 100,000/54 =1,852).
4. All costs and revenues behave the same way as in 2007.
5. For the analysis of whether to build the warehouse, assume that the equipment would be
purchased; after deciding to build the warehouse, analyze whether to buy or lease the
equipment.

Investment (in 000s):

Before-tax After-tax PV factor
Present
Value
Cost of warehouse building $(1,000) $(1,000) 1.00000 $(1,000)
Salvage value in 5 years 1,000 1,000 0.64993 650
Present value of CCA tax shield* - bldg. 59
Present value of CCA tax shield lost from
salvage** - bldg.
(40)
PV of investment in building (331)

Cost of equipment (300) (300) 1.00000 (300)
Salvage value in 5 years 100 100 0.64993 65
Present value of CCA tax shield* - equip. 44
Present value of CCA tax shield lost from
salvage** - equip.
(10)
PV of investment in equipment (201)
Total PV of investment $ (532)

Net Present Value (in 000s): (F3/F5)

Before-tax After-tax
PV factor
5 yrs, 9%
Present
Value
Annual operating cost of warehouse $(340) $(272) 3.8897 $(1,058)
Giftware cost savings*** 385 308 3.8897 1,197
Annual savings in cigarette costs in Ont. &
QC stores (1,850 x $3 x 49 stores)
272 218 3.8897 847
Annual savings in other tobacco products 100 80 3.8897 311
Incremental annual cash flows $417 $334 3.8897 1,297
Total PV of investment (532)
Net present value $ 765

* PV of CCA tax shield building =[($1,000K x .04 x .2)/(.09 +.04)] x [(2.09)/(2.18)]
=$59K
PV of CCA tax shield equipment =[($300K x .3 x .2)/(.09 +.3)] x [(2.09)/(2.18)]
=$44K

** CCA tax shield lost from salvage of building in 15 years:
=[$1,000K/(1+.09)
5
] x [(.04 x .2)/(.04 +.09)] =$40K

CMA Canada 59
** CCA tax shield lost from salvage of equipment in 5 years:
=[$100K/(1+.09)
5
] x [(.3 x .2)/(.3 +.09)] =$10K

*** Annual cost of giftware sold in Ontario and Quebec stores:
($52,230 x 39) +($52,760 x 10) =$2,565K
Annual giftware cost savings =15% x $2,565K =$385K

Lease Versus Buy Equipment (in 000s): (F5)

Before-tax After-tax PV factor
Present
Value
Capital cost purchase option $(300) (300) 1.00000 $(300)
PV of CCA tax shield 44
PV of CCA tax shield lost from salvage (10)
PV of purchase option $(201)
First lease payment beginning yr. 1 77 62 1 (62)
Lease payments years 2 to 5 77 62 3.2397 (200)
Purchase cost end of year 5 3 3 0.64993 (2)
PV of lease option $(199)

There is virtually no difference in the lease versus buy options. To preserve cash flow, it may be
best to lease the equipment.

Financing Required (in 000s): (F5)

Cost to build warehouse $1,000
Amount bank willing to mortgage (75%) 750
Balance required financing 250
First lease payment for equipment 77
Total cash required now $ 327


60 CMA Canada
Expected Effect on Earnings Per Share in 2010 (in 000s): (F6)

2008 2009 2010
Giftware cost savings $385 $385 $385
Annual savings in cigarette costs in Ont. & QC stores 272 272 272
Annual savings in other tobacco products 100 100 100
Incremental savings 757 757 757
Annual operating cost of warehouse 340 340 340
Amortization expense warehouse [($1M x .04 x .5 for 2008;
($1M - $20K) x .04 in 2009; ($980K x .04 in 2010)] 20 39 38
Equipment lease expense 77 77 77
Interest expense mortgage (75% of cost @ 6%)* 45 45 45
Interest expense balance (25% of cost @ 8%)* 20 20 20
Total incremental expenses 502 521 520
Incremental income before taxes 255 236 237
Income taxes (assume 20%) 51 47 47
Incremental net income $204 $189 $190

* For simplicity, assume principal payments not made in the first two years.

Therefore, in 2010, the earnings per share would increase by $190,000/33,000 =$5.76.


CMA Canada 61
Appendix 6
Financing Analysis (F5)

Assumptions:
1. All costs and revenues in all stores behave the same way as in 2007.
2. The bank grants the increase in the line of credit.
3. CML adds both collectible plates and DVS to its product line, the warehouse is built, and two
new Ontario stores are opened.

Financing available:

Current line of credit $500,000
Amount of bank indebtedness 150,000
Balance unused 350,000
Requested increase ($1M - $500K) 500,000
Total available $850,000

Annual Cash Generated from Operations:

Plates option ($1,112 x 54) $ 60,048
DVD option ($2,600 x 54) 140,400
Ontario stores ($32,900 x 2) 65,800
Warehouse option 334,000
Annual cash from operations (before interest) $600,248

Financing Required:

2008 2009 2010
Payments to Durand ($30K x 12) $ 360,000 $360,000 $360,000
Investment in Plates 81,000
Investment in DVDs 81,000
Add 2 stores in Ontario 230,000
Warehouse building (25% not mortgaged) 250,000
Equipment lease payments 77,000 77,000 77,000
Total required $1,025,000 $437,000 $437,000

Assuming that the payments to Durand are covered by cash generated from operations, the
investments of $1,079,000 - $360,000 =$719,000 could be covered by the line of credit.
Subsequently, cash generated from operations would be sufficient to cover the annual cash
outflows, and repayment of the line of credit.

62 CMA Canada

MARKER ASSESSMENT GUIDE

Markers use a scale of 0 to 10 in assessing the components, according to the following
guidelines:

General Assessment Number Scale
AEAbove Expectations 9, 10
MEMeets Expectations 6, 7, 8
BEBelow Expectations 1, 2, 3, 4, 5
NANot Addressed 0

Markers must mark each of the attributes and competencies globally. J udgment must be used in
assessing the competencies exhibited in the candidates response and assigning a mark for
each competency. Guidelines for weighting the various attributes are indicated throughout the
assessment guide.

Note: In addressing any of the issues, indicating that the issue needs to be resolved or further
investigated is not credited for analyzing and resolving the issue.
F1. STRATEGIC MANAGEMENT

In assessing F1, attribute b) should be given the greatest weight.

a) Situational Analysis:
The situational analysis is appropriate for the strategic alternatives and business issues
being addressed (good quality, depth, breadth, and make sense). It includes internal and
external scans, a financial assessment of the companys current state, and other relevant
qualitative information not provided in the high level SWOT in the Backgrounder
(e.g. strategic goals, stakeholder preferences, constraints, other SWOT points,
KSFs/competitive advantages, and ratios).

AE = Good quality makes sense, includes the main relevant qualitative points, and
provides a financial assessment;
ME = Acceptable quality includes relevant qualitative data and a financial assessment;
may contain some minor errors (e.g. some irrelevant data are included, some
relevant data are excluded, some relevant data are categorized incorrectly);
BE = The quality of the situational analysis is not appropriate;
NA = No attempt to scan the environment or analyze the current situation.

CMA Canada 63
b) Strategic Aspects of Analysis and Integration:
The analysis of the strategic alternatives is reasonable and integration is demonstrated to a
reasonable degree. Examples of integrative thinking include the following (among others):
Considering the cause and effect relationship between SWOT items and strategic
alternatives.
Considering the implications of one issue or alternative on another.
Indicating how the recommended strategy takes advantage of strengths and
opportunities while mitigating weaknesses and avoiding threats.

AE = Appropriate analysis of at least three strategic alternatives and reasonable
integration (more than 10 clear and distinct integrative points);
ME = Acceptable analysis of at least two strategic alternatives and acceptable integration
(7-10 clear and distinct integrative points);
BE = Unacceptable analysis and/or unacceptable integration;
NA = Does not attempt to analyze any of the strategic alternatives.

c) Implementation Plan:
The recommended implementation plan
Identifies tasks, provides realistic timelines for completing these tasks, matches the
tasks to the appropriate individuals, and considers the resources required (what,
who, when, resources);
Aligns the organizations resources and success factors to accomplish the
recommended strategy;
Resolves problems without causing others (e.g. addresses the minor issues,
overcomes cons of recommended strategies); and
Considers organizational implications, e.g. change management, organizational
structure, morale, the role of functions such as distribution, IT, accounting, sales,
purchasing, etc.

AE = Good implementation plan;
ME = Reasonable implementation plan;
BE = Implementation plan is not reasonable;
NA = No attempt to provide an implementation plan.

64 CMA Canada
F2. RISK MANAGEMENT AND GOVERNANCE

In assessing F2, attribute a) should be given the greatest weight.

a) Internal and External Risks:
Risks are identified and appropriately used in the analysis of strategic alternatives, or
resolved in the implementation plan (e.g. recommend procedures for sharing, transferring,
and/or reducing risk). Risks include (but are not limited to) the following:
Internal risks such as depending primarily on a single card supplier, inventory
obsolescence, and inadequate controls over cash and inventory.
Risks associated with strategic alternatives such as increasing operating costs in
Alberta, high risk of theft of DVDs.
External risks such as decreasing availability of labour, stagnating construction of
secondary malls, declining number of tobacco users.

AE = Three internal and two external risks are identified and used/resolved in the analysis
of more than two strategic alternatives;
ME = Two internal risks and one external risk are identified and used/resolved;
BE = One risk is identified, but not used or resolved;
NA = No attempt to address risks.

b) Compliance and Governance:
Compliance with regulatory guidelines and other governance issues are identified and
appropriately considered and resolved (e.g. remittance of payroll deductions for children of
store managers, compliance with GAAP).

AE = One or more compliance/governance issue is identified and used/resolved;
ME = One compliance/governance issue is identified and analyzed, but use/resolution is
not reasonable (e.g. analysis/resolution has errors);
BE = One compliance/governance issue is identified, but not analyzed, used, or resolved;
NA = No attempt to address compliance/governance issues.

F3. PERFORMANCE MANAGEMENT

In assessing F3, attribute a) should be given the greatest weight.

a) Quantitative Analysis of Strategic Alternatives and Current Value Proposition:
The quantitative analysis of the strategic alternatives and current value proposition
demonstrates a reasonable understanding of relevant performance management concepts
and tools. Appropriate concepts and tools are chosen and applied appropriately (e.g. free of
serious errors, reasonable quality). The following are some relevant performance
management concepts and tools that should be applied in the quantitative analyses of the
strategic alternatives or the financial assessment:

1. Profitability and decision analyses: Relevant revenues, costs, profit margins, cash flows,
and/or net income are appropriately calculated and interpreted.

CMA Canada 65
2. Uncertainty/sensitivity analysis: The effects of uncertainty are considered in the
profitability analyses. Examples include calculating or discussing the impact of various
potential revenue levels on product line profit margins, and applying the probabilities of
successfully negotiating postal outlet and lottery booth contracts.
3. Analyses of the value proposition and markets: Profitability of the various provincial
markets or product lines is analyzed.

AE = Profitability and/or decision analysis is applied appropriately in the analysis of at
least three strategic alternatives and at least one other relevant performance
management concept or tool is applied appropriately in the quantitative analyses;
ME = Profitability and/or decision analysis is applied appropriately in the analysis of at
least two strategic alternatives, OR at least two relevant performance management
concepts or tools are applied appropriately in the quantitative analyses.
BE = Performance management concepts and tools are applied appropriately in the
analysis of fewer than two of the strategic alternatives and/or the financial
assessment;
NA = No attempt to apply performance management concepts or tools in the quantitative
analyses.

b) Qualitative Analysis of Strategic Alternatives and Implementation/Minor Issues:
The qualitative analysis of the strategic alternatives, implementation issues, and minor
issues demonstrates a reasonable understanding of relevant performance management
concepts and tools. The analysis is reasonable and free of serious errors. Some relevant
concepts and tools are as follows:

1. Cost management labour costs, distribution costs, etc.
2. Revenue management and pricing customer relationship management, marketing,
branding, target customers/segments/markets, discount pricing, etc.
3. Operations management training, capacity, store layout, inventory management,
distribution, supply chain management, etc.).
4. Information systems and information technology tracking inventory, batch processing
of sales reports from stores to head office versus real time, manual entry on cash
registers, etc.

AE = Four or more relevant performance management concepts and tools are applied
appropriately in the qualitative analyses;
ME = Two to three relevant performance management concepts or tools are applied
appropriately in the qualitative analyses;
BE = Performance management concepts and tools are not applied appropriately in the
qualitative analyses;
NA = No attempt to apply performance management concepts and tools in the qualitative
analyses.

66 CMA Canada
F4. PERFORMANCE MEASUREMENT

a) Performance Measurement:
Appropriate issues related to performance measurement of CML and its employees are
described and assessed (e.g. motivation, incentives, performance evaluation, targets, etc.).
These issues are assessed in terms of alignment with organizational goals and/or related
behavioural implications. Application of these concepts and tools is reasonable and free of
serious errors.

AE = Two relevant performance measurement issues are identified and appropriately
used or resolved;
ME = One relevant performance measurement issue is identified and appropriately used
or resolved;
BE = A performance measurement issue is identified, but it is not relevant or there are
major problems in the analysis;
NA = No attempt to address performance measurement issues.
F5. FINANCIAL MANAGEMENT

In assessing F5, attributes a) and b) should be given the greatest weight, unless the candidate
provides a pro forma for c), which can pull up the overall assessment for F5.

a) Capital Budgeting:
Capital projects are evaluated using appropriate capital budgeting methods (e.g. net
present value, internal rate of return). Capital budgeting methods used for the warehouse
and store expansion alternatives include the following components:
1. capital costs, other one-time cash outflows, residual value;
2. annual operating cash inflows and outflows;
3. present value factor at the 9% hurdle rate;
4. after-tax cash flows; and
5. calculation of CCA tax shields.

AE = Applies appropriate capital budgeting methods in the analyses of both the
warehouse and store expansion alternatives, and the analyses include the correct
components;
ME = Applies appropriate capital budgeting method in the analysis of either the warehouse
or store expansion alternative, and the analysis includes the correct components
(there may be some relatively minor weaknesses in the application);
BE = Application of capital budgeting concepts and tools contains major weaknesses or
errors (e.g. using incorrect discount rate, omits a capital cost);
NA = No attempt to apply a capital budgeting concept or tool.

b) Financing Available and Required:
The analyses of the strategic alternatives, implementation issues, and minor issues include
consideration and/or appropriate calculation of the following:
1. Financing available from various sources (e.g. $750,000 mortgage for the warehouse,
increase in line of credit to $1 million, increase in cash from operations, etc.).
2. Financing required for the strategic alternatives and other financial needs (e.g.
requirements for the purchase/lease of capital assets, other initial costs, payments to
Durand, operating costs. etc.).

CMA Canada 67
3. Aggregate financing required to implement the recommended strategies and changes
(e.g. preparing a financial forecast or pro forma cash flow statement).

AE = A reasonable attempt is made to determine and compare the financing available
from various sources and the financing required for all of the recommendations and
operational requirements (e.g. payment of shareholder loan);
ME = A reasonable attempt is made to determine and compare the financing available
from various sources and the financing required for all of the recommendations;
BE = Only the financing available or the financing required is calculated or discussed;
NA = No attempt is made to calculate or discuss financing available or required.

c) Lease versus Buy and Other Financial Management Concepts:
The options of leasing versus buying the equipment for the warehouse alternative are
analyzed and/or financial management concepts other than capital budgeting and financing
are considered/addressed appropriately in the analysis of the strategic alternatives and
business issues (e.g. preparation of a pro forma income statement or balance sheet,
taxation, cash flow, working capital management, etc.).

AE = The lease/buy decision for the warehouse alternative is appropriately analyzed, and
one relevant other financial management concept or tool is appropriately
considered/applied;
ME = The lease/buy decision for the warehouse alternative is appropriately analyzed, or
one relevant other financial management concept or tool is appropriately
considered/applied;
BE = The lease/buy decision is not analyzed, and no relevant other financial management
concept or tool is appropriately considered/applied;
NA = No attempt to consider/apply lease/buy or other financial management concepts or
tools.
F6. FINANCIAL REPORTING

In assessing F6, none of the attributes stand out as being more important than the others.
J udgment should be used in assigning an assessment.

a) Financial Analysis:
Appropriate methods of financial analysis are applied appropriately in evaluating
performance and risk (current financial assessment, effects of recommendations on ratios,
etc.). Appropriate methods of financial analysis include ratio and trend analysis,
comparative analysis, and so on. Appropriate application includes correct calculation and
interpretation.

AE = Five relevant ratios (including earnings per share) for two years and/or other relevant
financial analysis concepts/tools are applied appropriately;
ME = Three to four ratios for two years and/or other relevant financial analysis
concepts/tools are applied appropriately;
BE = Financial analysis concepts or tools are not applied appropriately;
NA = No attempt to apply a financial analysis concept or tool.


68 CMA Canada
b) Earnings Per Share Target:
The earnings per share (or equivalent net income) is calculated assuming the
implementation of at least one strategic alternative and compared to the target of $6.25.

AE = The expected earnings per share is calculated appropriately for the recommended
strategies, and compared to the target of $6.25;
ME = An adequate attempt is made to calculate the expected earnings per share for at
least one strategic alternative and is compared to the target of $6.25;
BE = The expected earnings per share is not appropriately calculated and/or the earnings
per share target is not considered;
NA = No attempt to consider the earnings per share target.

c) Other Financial Reporting Concepts and Tools:
Accounting policies are reviewed and recommendations are made to ensure that the
financial statements comply with GAAP (e.g. accounting for prepaids, amortization,
inventory, current portion of shareholder loans, leases, etc.).

AE = Four accounting policies are considered and appropriate recommendations are
made;
ME = One to three accounting policies are considered and appropriate recommendations
are made;
BE = Accounting policies are considered but the recommendations are not appropriate;
NA = No attempt to consider/apply other financial reporting concepts or tools.
E1. PROBLEM SOLVING AND DECISION MAKING APPLICATION OF A
SYSTEMATIC APPROACH

a) Executes the Systematic Approach Appropriately:
The issues and alternatives are prioritized reasonably (e.g. the most important
issues/alternatives are addressed first and in the greatest depth), and the analyses of the
issues and alternatives are of appropriate depth and breadth, balanced (pros/cons,
quantitative/qualitative), objective/free of bias, and consider more than one
perspective/global view (e.g. mission, goals, stakeholder preferences; effects of alternatives
on stores, sales, customers, other functions). [Otherwise, the quality of analysis is assessed
in the functional competencies.]

For this case, the most important issues are as follows:

1. Strategic alternatives:
Expand product line collectible plates and/or DVDs
Expand by opening new stores in B.C., Alberta, and/or Ontario
Build a warehouse and internally distribute giftware and tobacco products in Ontario
and Quebec

2. Other important issues requiring attention:
Financing (requirements and sources, lease versus buy equipment, etc.)
Implementation (space for collectible plates display, increased security for DVDs,
etc.)

CMA Canada 69
Inventory management (practices re obsolete inventory, frequency and timing of
inventory counts, risk of theft, etc.)
Ethical, compliance, and accounting concerns pertaining to the three store
managers who hire their children (payroll deductions, recording as maintenance,
etc.)
Need for an audit and financial reporting concerns (prepaids, inventory valuation,
amortization, monthly reporting, etc.)
Information technology and control concerns (manual cash registers, perpetual
inventory systems, etc.)
Ethical concerns pertaining to purchasing agents relationship with particular
giftware supplier
Employee incentives and staff turnover
Product mix (discontinue some product lines, expand some product lines, etc.)

AE = Reasonable prioritization, and the analyses are of reasonable depth and breadth,
balanced, objective/free of bias, and consider more than one perspective/global view
(management and functional);
ME = Reasonable prioritization, and the analyses are of acceptable breadth, reasonably
balanced, relatively objective, consider at least one perspective; and may have
limited depth and/or some bias;
BE = Inappropriate prioritization, unacceptable depth and breadth, inappropriate balance,
and/or not objective.
NA = No issues analyzed.
E2. LEADERSHIP (judgment/influence)

a) Quality of Recommendations:
Recommendations, conclusions, and solutions for the strategic alternatives and minor
issues are logical, feasible, realistic, consistent, supported, and presented in a convincing
manner. For the recommendations to be convincing, the response should demonstrate the
following:

1. 9% after-tax return is achieved for recommended capital investments (stores and
warehouse);
2. $6.25 earnings per share will be achieved by 2010;
3. $30,000 per month cash flow for repayment of shareholder loan is feasible (e.g. show in
a financial/cash forecast);
4. An audit is necessary to increase the line of credit at the bank.

AE = All of the above;
ME = Some minor problems with recommendations/conclusions/solutions (e.g. the
achievement of only two of the targets are demonstrated);
BE = Serious problems with recommendations/conclusions/solutions and/or they are not
convincing;
NA = No recommendations, conclusions or solutions made.


70 CMA Canada
E3. PROFESSIONALISM AND ETHICAL BEHAVIOUR

In assessing E3, none of the attributes stand out as being more important than the others.
J udgment should be used in assigning an assessment.

a) Conflict of Interest and Ethical Behaviour:
Existing and potential internal or external ethical, environmental, and security issues and
conflicts of interest are recognized and addressed (e.g. relationship between purchasing
agent and sales rep., selling tobacco products, selling lottery tickets, reporting wages as
repairs and maintenance, etc.).

AE = Two existing or potential ethical/environmental/security/conflict of interest issue are
recognized and used/resolved;
ME = One of these issues is recognized and reasonably used/resolved;
BE = One or more of these issues is recognized but not used/resolved;
NA = None of these issues is recognized or addressed.

b) Professional Tone and Tact:
The report reflects appropriate business tone and tact, and addresses the right audience
(tact is used in any criticism of managements policies, desires, and goals).

AE = Tone and tact are appropriate, and the right audience is addressed;
ME = Tone or tact is appropriate, and the right audience is addressed;
BE = Tone and tact are not appropriate, or the right audience is not addressed;
NA = A response is not attempted.

CMA Canada 71
E4. COMMUNICATION

a) Format, Organization, Flow, Language:
1. The format and organization of the report are appropriate:
i) The following components of appropriate format are present: cover page,
executive summary, introduction, body of the report, conclusion, and appendices.
ii) The executive summary (ES) is brief, concise, and summarizes the strategic
alternatives, recommendations, and significant other issues that the recipients
can act on.
iii) The introduction provides the purpose and scope of the report.
iv) The conclusion brings together the findings and draws the report to a close.
v) The appendices contain appropriate content (e.g. SWOT, quantitative analysis).
vi) The content of the report is organized appropriately for a business report
(e.g. uses headings and subheadings, is appropriately sequenced, uses lists
effectively).
2. The language used in the narrative is without a distracting number of deviations from
business norms, jargon, or unexplained abbreviations, and has few errors in spelling,
grammar, sentence structure, and punctuation.
3. The qualitative and quantitative content is expressed clearly, logically and coherently,
and flows well. Repetition is used in an effective manner and is not excessive.
4. References, labels and audit trails are provided where appropriate (the response is easy
to follow).

AE = All components are present and of appropriate quality, the content is organized
appropriately, few problems with language use and content expression, and the
response is easy to follow and flows well;
ME = One or two components are missing or are not appropriate, some minor
errors/problems with organization are evident, some problems with language use
and content expression, but they are not distracting and the response is easy to
follow;
BE = More than two components are missing or are not appropriate, some major
errors/problems with organization, language use and content expression are evident,
and the response is difficult to follow;
NA = A response is not attempted.

72 CMA Canada
Sample Response
Successful Attempt #1


To: Gordon Hopps and Chris Mantha

From: Robyn Berg, CMA

January 2008


CMA Canada 73
Executive Summary

This report will provide the information necessary to assist Celebrations and Memories Ltd.
(CML) in meeting its strategic goals of expansion and product diversification.

To support this, several alternatives were considered including expanding its product line to
include DVDs and plates, expanding stores into Alberta, Ontario and B.C., and constructing a
warehousing facility.

For CML to be successful, it should add new product lines of DVDs and collector plates. In
addition, it should expand its operations in Ontario and B.C., while maintaining its competitive
advantage due to its niche market, secondary malls. The capital outlay for these projects is
$634,000. This can be covered by the operating line of credit, assuming it is increased. The
after-tax profit, based on 2007 values, is $330,000. This would provide an earnings per share of
$10.01 which is well in excess of the value recommended by the board.

CML should also look at ways of increasing its revenue through better promotion, controlling its
costs, reducing its inventory and ensuring its product mix is appropriate.
If CML is able to implement these items, it will be successful and achieve its goals.

74 CMA Canada
Introduction

This report will provide the information necessary to assist Celebrations and Memories Ltd.
(CML) in meeting its strategic goals of expansion and product diversification. To this end, the
report contains an analysis of the current situation and an examination of a number of strategic
and major business alternatives. It makes a number of recommendations for increasing
revenues and gross profit margins and decreasing expenses. In addition, it provides a plan for
the successful implementation of the recommendations.

Analysis of Current Situation

Mission and Strategic Direction

The board reviewed its mission in 2007. In short, CMLs mission is threefold:

Satisfactory return to the shareholders
Retail operation in secondary malls in economically healthy areas of Canada
Primary focus on goods and services related to satisfying consumers needs for
celebrating special events with family and friends, giving gifts and enjoying life.

The mission specifically defines CMLs niche market of secondary malls and target market of
economically healthy areas of Canada. This would negate the eastern and prairie regions of
Canada for growth due to their less than healthy economies. The primary focus can be broadly
defined, which allows for expansion into other product lines.

CMLs strategic directions have been expansion and product diversification in the past. The
board feels these should be maintained.

Shareholders Needs and Preferences

Durand key shareholder

Increased value of shares
Retirement from the company and sale of all shares
Payment of shareholder loan by 2010

Board

Expansion
Product diversification
Increased profitability (EPS of $6.25 by 2010)

Management Team (Hopps)

Improve profitability
Increase employee motivation
Improve and maintain customer relationships
Meet targets of $6.25 per share set by board


CMA Canada 75
Constraints

CML expects to earn a minimum after-tax return of 9% on capital investments
Limited line of credit at $500,000. To increase line of credit to $1 million, audited
financial statements are required as well as a financing plan
Gross margins for most product lines are controlled by the supplier and/or the market,
not CML

Uncertainties

Financials have not been audited in the past and company may not have followed
generally accepted accounting principles
Economic outlook

Risks

Gross margin does not meet budgeted gross margin
Enhanced competition in the secondary mall niche
Lack of cash for operations

Environmental Scan

Strengths

Profitable stores in Western Canada
Unique and diverse gift offerings
Regular, loyal clientele
Bank is willing to provide a mortgage to CML

Weaknesses

Significant cash flow concerns and liquidity
Low operating line of credit
Suppliers control inventory levels in stores for many items, leading to higher than desired
inventory levels
Has not met budget gross margins for retail
Lack of audit
No segregation of duties for the store managers. This is an internal control issue.
Stagnating sales per store
Increasing operating expenses

Opportunities

Above average growth in the retail sector of the economy
Continued traffic to secondary malls, even with the building of big box stores
Limited edition collectible plates have an established customer market
DVDs target a different demographic than cards, specifically youth and young adults
Similar style stores to CML have 1-3 stores in similar cities/regions which decreases
travel costs and increases brand recognition

76 CMA Canada

Threats

Declining growth in the economy in central and eastern Canada
High retail lease costs, high labour costs and limited low-cost labour in Alberta

Financial Analysis

Ratios (Exhibit 1)

Liquidity is a significant concern. While the current ratio is above 2, the quick ratio is
0.11 and has dropped significantly since 2006. This is mainly due to the repayment of
Durand. There is a significant cash concern with CML.
CML is relatively solvent, with a LTD to equity ratio of 1.62. It is also dropping with the
repayment of the loans. However, the times interest earned is 2.08 if you consider all
interest (including line of credit). This is quite low. In addition, no interest is paid on the
shareholder loan. If interest was required on that loan, CML would not be viable in its
current state.
CML has significant portion of its assets tied up in inventory (70%). Its inventory
turnover rate has been relatively consistent at 6.6, but this indicates that it takes 57 days
to sell items and may be a problem if suppliers need to be paid in 30 days.
Return on equity is 3.3% and has fallen from 2006. This opposes the current desire of
the board.
EPS is $1.00 in 2007.
Dividend payout ratio is very high at 152%. Retailers typically have a dividend payout
ratio less than 70%.

Metrics (Exhibit 2)

Margins are produced by store and region in exhibit 2.

Margins

Average operating profit per store $40,330
Gross profit margin is 32.4% which is greater than 2006, but significantly less than
budgeted of 35%
Tobacco sales provide the highest gross profit per square foot
Giftware produces a margin of $78 per square foot

Key Success Factors

The key success factors for CML are:

Meeting budgeted gross profit margins and maintaining controls on cost
Locations in secondary malls with limited competition
Relationships with regular customers

CMA Canada 77
Major and Strategic Alternatives

Alternative 1: Expand the Product Line to Collectible Plates

Pros
Limited edition collectible plates have an established customer market
No direct competitors in secondary malls as they are typically bought in major malls or
by mail
Minimal initial investment
Secure product as it is stored in locked cabinets no theft or damage
Customers provide a 50% deposit up front, minimizing cash requirements
No additional staff required, expected that current employees can handle the paperwork
Does not increase inventory levels as plates are ordered for the customers

Cons
May cause delays for other customers and potentially lost sales especially during the
busy times
Requires 20 square feet of selling space
Additional paperwork may be too much for limited staff to handle
Adds more price points and complexity to the product mix

Quantitative (Exhibit 3)
NPV is significantly positive at 9% return over 3 years at both high and low revenue
values
Gross margin per square foot is $105 (low) and $120 (high) which is higher than other
giftware ($78 per square foot)
Additional gross profit margin ranges from $113,400 to $129,600 for all stores

This option requires little capital expenditure and provides excellent returns.

Alternative 2: Expand the Product Line to DVDs

Pros
Does not require additional space or reduce space for other product lines
Appeals to a younger demographic potentially a new customer market for other
products as well
Does not require any additional staff or cause customer delays
Assumed that there is limited competition for this product line in secondary malls
High gross profit margin at 50%

Cons
DVDs cannot be returned to the supplier
High possibility of misuse leads to the policy of all DVD sales are final
High risk for theft (shoplifting), which requires more security
Adds more price points and complexity to the product mix
Increases inventory levels


78 CMA Canada
NPV is significantly positive at 9% return over 3 years at both high and low revenue
values
Additional gross profit margin ranges from $162,000 to $189,000 for all stores

This option requires little capital expenditure and provides excellent returns.

Alternative 3: Store Expansion

Pros
Takes advantage of the growing economies in British Columbia and Alberta
Meets the mission of opening stores in economically healthy areas of Canada
7 locations found in secondary malls which are CML niche location and competitive
advantage
Meets the growth directive of the board
Provides positive net profits and supports CMLs desire to increase share value
Addition of stores in B.C. and Alberta helps meet the target of having 1-3 stores in a
city/region. This increases brand recognition and decreases per capita marketing costs.
All stores have the possibility of opening a post office and lottery booth both post
offices and lottery booths are experiencing increasing demand (increased shipping
online purchases and increased demand for lottery tickets)

Cons
Alberta stores will have higher operating costs due to higher wage rates. They are also
at risk for higher staff turnover.
Lease costs in Alberta are higher due to the booming economy
B.C. and Alberta have higher travel and courier costs due to their location that is
separate from head office

Net present value for the B.C. and Ontario alternatives are positive, assuming a small
positive tax shield. This is true for even the highest initial costs. Meets the
shareholders required rate of return.
Initial costs are somewhat controllable

This option is attractive to produce the growth desired by CML.

Alternative 4: Construct a Warehouse for Handling Distribution

Pros
Utilizes unused land
Reduces costs by buying in bulk and distributing internally
Improves gross margins for products with limited margins and little control over the
margins
Utilizes the purchasing staff more effectively
Allows CML to control own inventory levels, as opposed to the suppliers
Giftware is less expensive in Ontario then in other regions. Purchasing giftware centrally
would allow CML to take advantage of the less expensive giftware in Ontario.

CMA Canada 79
Potential for some costs savings in the vehicles for area managers. They would no
longer be required.
Bank is willing to provide a mortgage for 75% of the cost of the building at an annual
interest rate of 6%

Cons
Increases inventory substantially inventory has significant carrying costs
Added staffing and vehicle costs for delivery
CML has a lack of inventory control and no centralized inventory system
With current operations, this option would require significant changes to the ordering
practices as the suppliers would no longer be ordering on CMLs behalf
Shifts the focus of CML from being solely a retailer to also handling distribution
May not have the expertise or available personnel to manage this operation

It is recommended that the equipment and vehicles be purchased as opposed to leased
as the net advantage of leasing is negative at the after-tax estimated borrowing rate
The net present value of this alternative is positive on a five year investment at the
required rate of return
The capital required for this investment is $1,300,000 this could be reduced if the
equipment was leased

This option will significantly increase profit margins but entails significant risks.

80 CMA Canada
Recommendations

The alternatives were compared on their ease of implementation, profitability, fit with
shareholder preferences and risk levels. A decision matrix is presented in table 1.
Table 1; Decision matrix

Collectible Plates DVDs Expand
Stores
Warehouse
Profitability low medium medium high
Ease of
Implementation
high high medium low
Fit with Shareholder
Preferences
high high high medium
Low Risk high high medium low
Rank 2 1 3 4

CML should immediately begin to sell limited collectible plates and DVDs in all of their stores.
This provides for product diversification as desired by the board and provides additional
profitability with minimal cost. These alternatives have minimal other disadvantages. The
increased probability of threat of theft for the DVDs can be mitigated by storing them beside the
service counter. While DVDs require additional inventory, it is minimal per store. The limited
collectible plates produce a higher return per square footage than giftware and thus should
replace some of that product. They require little investment in inventory as they are on order
and produce some cash flow up front via the deposit. There is no threat of theft or damage with
this product. Both items can utilize existing human resources and require little other overhead.
This option would require an initial investment of $162,000 which could be financed out to the
line of credit. It would produce additional pre-tax profits of $297,000.

If CML is able to increase its line of credit to $1 million, CML should expand its operations in
B.C. and Ontario with the addition of two stores. The growth in the retail sector due to the
strength of the economy is excellent and the board has always desired expansion. Ontario is an
excellent selection due to its modest economy growth and proximity to head office. Its expected
operating profit is $41,000 which is higher than CMLs average. CML has had success in
Ontario and can utilize economies of scale in its advertising. CML should also open two stores
in B.C.. The economy in B.C. is one of the strongest. With 3 others stores, B.C. also provides
economies of scale in promotion and utilizes the fact that many similar card stores are grouped
in locations. B.C. stores also provide good margins, due to their lower startup costs and
personnel costs. CML should do its best to negotiate contracts for postal outlets and lottery
booths in all instances. These produce additional profit due to the increasing demand for postal
services due to online shopping and the increased demand for lottery tickets.

It is not recommended that CML enter Alberta at this time. It should be considered again in the
future. While Alberta is one of the strongest growing economies in Canada and the mission
statement indicates that CML likes to locate itself in growing areas of Canada, the higher costs
related to employees, leases and travel/courier makes this investment less attractive. In
addition, no CML stores are located in Alberta, thus the economies of scale are not available.

The incremental pre-tax profit from these stores would be$161,900, assuming a 25% success
rate for post offices and a 40% success rate for lottery booths. The additional capital

CMA Canada 81
requirement is $460,000. If the line of credit cannot be obtained to finance this requirement,
stores should be implemented one at a time as resources are available.

CML should not construct a storage warehouse at this time. While it does provide increased
profitability to CML as a whole, meets the required rate of return and utilizes unused land, it
requires a significant capital outlay ($250,000 assuming leasing and mortgage to $550,000
assuming no lease) and is a significantly risky endeavour. Because CML is located across
Canada, distribution is still an issue for B.C..

The capital outlay for these projects is $634,000. This can be covered by the operating line of
credit, assuming it is increased. Exhibit 7 shows the after-tax profit, based on 2007 values, as
$330,000. This would provide an earnings per share of $10.01 which is well in excess of the
value recommended by the board.

CML should maintain its tobacco sales as they provide the highest margin per square foot and
the number of competitors is decreasing.

Other Operational Issues

Financial Situation

CML has a $500,000 line of credit at 8% - $150,000 has been used currently
CML must repay Durand $30,000 per month - $360,000 per year
CML has asked for a line of credit of $1 million, with its inventory as collateral
CML must provide audited bank statements
CML could offer do a private share offering to finance new capital as well
Once CML exceeds $300,000 (Small business deduction) in net income before taxes,
the tax rate will increase to 36%
To finance its operations in the longer term, CML must improve its revenues and control
its costs. CML must also improve the product mix to increase the gross profit margin.
This, in addition to reducing its inventory, will place CML in a situation where it is able to
effectively finance its operations.

Accounting Policies and Financial Statements

The last months lease payment should be recorded as pre-paid rent and not expensed
on start-up
Expenses should be recognized in the correct category (personnel expensed as repairs
and maintenance)
The existence of a no-interest loan from a shareholder needs to be disclosed
The loan repayment to Durand should be recorded in current liabilities in the current
portion of long-term debt ($360,000)
The net income statement should show the gross revenues and expenses associated
with the postal outlets and lottery booths
Deposits should be recorded as unearned sales until the item is picked up
Regular financial statements should be produced and analyzed (monthly or quarterly),
variances should also be provided
An integrated information system (inventory, point of sale and accounting) would provide
more accurate information as it would not have to be entered at each stage by clerks. It

82 CMA Canada
would also provide information in real time. It would also increase the accuracy of the
information.

Inventory and Information System

Inventory levels need to be reduced to improve working capital and cash flow situation
Suppliers should not be solely in charge of purchasing and setting inventory levels (as
they will maintain them higher than CML desires)
An inventory control and integrated point of sale system should be purchased to better
monitor the inventory, provide better control and produce better data for analysis. The
integrated point of sale system should be linked to the accounting system to minimize
the re-entry of transactions and the inventory system to facilitate ordering. This would
provide perpetual inventory. Periodic inventory counts are still recommended to ensure
its accuracy and quantify losses due to theft and breakage. With a system like this,
inventory levels could be reduced and controlled.
CML uses a FIFO system which is acceptable by GAAP
Inventory should be reduced prior to it becoming obsolete and requiring deep discounts
Less giftware should be held in stores

Security, Theft and Loss

Managers report as much as 2% lost through theft and breakage
Higher cost items should be left in direct line of site of the customer service counter or
the postal counter (if it exists)
The security monitors should be utilized to control theft and more security cameras could
be added
DVDs should be stored beside the customer service counter, as they are a high theft
item
The store manager and other employees should be circulating the store on a regular
basis to discourage shoplifting
A breakage policy should be developed and signs should be posted to inform customers
what the policy is.

Internal Controls

All payments to employees should be made through the payroll system
All expenses should be reported in the correct categories. This change should be made
for the 2007 financial statement.
All expenses should be paid through appropriate channels. Cash should not be taken
out of the till except for returns.
Store managers should not be able to hire their own children. Firelli should review this
process with the managers. This item should be dealt with in the code of conduct
Full-time store clerks should perform the daily cash outs as opposed the managers.
Managers should be responsible for depositing the money. This will allow for a
segregation of duties so that one person is performing sales, balancing the till,
depositing the money and creating the reports.


CMA Canada 83
Marketing

CML must improve their marketing and promotions to increase their sales this could be
more targeted ads as well as local mailings to the residential areas served by the malls
A customer stamp program could be implemented to reward loyal customers and
encourage repeat business
Store managers should be allowed to discount their giftware incrementally prior to it
becoming obsolete
Store managers should also have the autonomy to advertise their own sales, in concert
with other local stores

Human Resources

Store managers should start one hour after full-time employees so that they meet with
part-time employees every day. This will keep the part-time employees engaged and
may reduce turnover.

Performance Incentives

While annual performance reviews are done, no incentive are provided for improved
performance
CML should institute a policy of incentives for full-time employees. These should be
directly related to performance benchmarks that are set in the annual review and should
include senior management.
Part-time staff could be offered non-cash performance incentives (t-shirts, prizes) to
encourage good performance and reduce turnover
Firelli should manage this process

Conflict of Interest

The purchasing employee is purchasing a disproportionate amount of giftware from a
company that is not at arms length
The actions of the purchasing employee should be investigated by Shah, the employee
should be shifted to other accounts and a neutral person should deal with the company
in question. In addition, the purchasing employee should be warned
A code of ethics should be implemented for all employees

84 CMA Canada
Implementation Plan

What Who When
Prepare the books for audit Mantha and
accounting staff
immediately
Obtain financing Mantha and Hopps After the audit
Purchase and install integrated information
system
Mantha and IT
support
Within six months
Implement product line diversification - DVDs
and plates
Shah Within two months
Investigate the lease of additional Ontario
stores and negotiate post offices and lottery
booths
Hopps Within three months
Investigate the lease of additional B.C. stores
and negotiate post offices and lottery booths
Hopps Three to six months
Improve security in stores Denis immediately
Create a code of conduct, breakage policy Firelli immediately
Promote a more uniform look to stores Shah Within three months
Improve marketing and promotion to increase
sales
Shah Within six months
Implement performance incentives Firelli Within six months

Conclusion

CML has a mandate for growth and product diversification. For CML to achieve this, it should
add new product lines of DVDs and collector plates. In addition, it should expand its operations
in Ontario and B.C., while maintaining its competitive advantage due to its niche market,
secondary malls. CML should also look at ways of increasing its revenue through better
promotion, controlling its costs, reducing its inventory and ensuring its product mix is
appropriate. If CML is able to implement these items, it will be successful and achieve its goal
of an EPS of $6.25.

CMA Canada 85
Exhibit 1: Financial Analysis of CML

2007 2006 2005

Quick Ratio (cash +AR) / current liabilities 0.11 0.32 0.32

Long-term debt to equity Long-term debt / equity 1.62 1.92 1.98

Times Interest Earned EBIT / all interest* 2.08 5.94 8.80
*Includes interest due to Line of Credit

Return on Equity Net income / equity 3.3% 7.0% 12.6%

Gross Margin Retail Gross profit / Revenue 32.4% 31.9% 31.7%

Profit Margin Net income / Revenue 0.12% 0.27% 0.47%

Dividend Payout Ratio Dividend / Net income 151.5% 70.4% 40.0%

Earnings per Share Net Income / #of Shares $1.00 $2.15 $3.79

Inventory Turnover COGS / Inventory 6.57 6.68 6.67

Days in Inventory 365 / Inventory turnover 55.60 54.62 54.72


86 CMA Canada
Exhibit 2: Metrics by Location

Ontario Quebec B.C. NS Total
Retail Stores 39 10 3 2 54
Postal Outlet 8 2 1 1 12
Lottery Booth 12 4 3 1 20

Retail:
Revenue per Store 507.31 521.30 554.67 482.00 511.59
Gross Profit per store 166.46 162.60 177.33 152.50 165.83
0.33 0.31 0.32 0.32

Operating Profit per store 36.28 33.50 42.67 28.50 35.83

Postal Outlet:
Operating Profit per Store 7.13 7.00 8.00 10.00 7.42

Lottery Booth:
Operating Profit per Store 7.67 7.75 7.67 8.00 7.70

Total operating profit per store 40.10 38.00 53.00 37.50 40.33


CMA Canada 87
Exhibit 3: Expand the Product Line to Collectible Plates

50% deposit from customers

Initial Investment (per store) - plates, display case 1,500

Low High
Annual Revenues 7,000 8,000
Gross Profit Margin (30%) 2,100 2,400

Gross Profit Margin (per square ft) 105 120

Net Present Value
Initial Investment (1,500) (1,500)
Annual Cash Flows 4,252 4,860
assume 3 years, 9%, tax rate still 20%
NPV 2,752 3,360

Salvage and change in working capital is not considered

Additional Gross Profit Margin (54 stores) 113,400 129,600

Initial Investment - all stores 81,000

Additional Pre Tax Profit 121,500


88 CMA Canada
Exhibit 4: Expand the Product Line to DVDs

Initial Investment (per store) - dvds, rack 1,500

Low High
Annual Revenues 6,000 7,000
Gross Profit Margin (50%) 3,000 3,500

Gross Profit Margin (per square ft) NA NA

Net Present Value
Initial Investment (1,500) (1,500)
Annual Cash Flows 6,074 7,087
assume 3 years, 9%, tax rate still 20%
NPV 4,574 5,587
Salvage and change in working capital is not considered

Additional Gross Profit Margin (54 stores) 162,000 89,000

Initial Investment - all stores 81,000

Additional Pre-Tax Profit 175,500


CMA Canada 89
Exhibit 5: Store Expansion (in 000s)

B.C. Alberta Ontario

Number of Stores Available 2 3 2
Initial Costs 115 137 115
* average used for BC and Alberta

Retail:
Revenue per store 554.7 610.1 507.3
Gross profit margin per store 32.00% 32.00% 32.80%
Gross profit per store 177.5 195.2 166.4
Costs per store 134.7 154.9 130.2
Operating Profit per store 42.8 40.4 36.2

Additional Head Office costs 8.0 8.0

Incremental operating profit per store 34.8 32.4 36.2

Post Office - probability of success is 25%:
Operating profit per store 8 1.7 7.125
** the fixed rate and commission rate should be renegotiated

Lottery Booth - probability of success 40%:
Operating profit per store 7.67 3.37 7.67

Expected operating profit per store 39.89 34.15 41.07
(adjusted for probability of success)

Net Present Value
Initial Investment -115 -137 -115
Tax Shield (small positive number)
Operaing Profits 124.1481 106.2675 127.7954
20% tax, 9% required rate of return, 5 years
Net Present Value 9.148053 -30.7325 12.79538

* tax shield is quite small, thus not estimated for this exercise
* assume still eligible for SBD, thus 20% tax
* even at the high initial costs and assuming a small tax shield due to furniture and fixtures and
leasehold improvements, the NPV for BC and Ontario will be positive

Total Incremental pre-tax profit 79.78667 82.13071
Total 161.9174
Capital requirement 230 230
460


90 CMA Canada
Exhibit 6: Build a Warehouse (in 000s)

Equipment and vehicles
Net Advantage of leasing
Purchase Cost 300
Tax Shield Forgone -48.585
d =30%. T =20%, k =7%
Lease Payments -455.61
77,000 (1+PVIFA(6%, 6))
Net Advanatage of leasing -204.19
* even with salvage, net advantage of leasing would still be negative - thus buy if funds are available

Net Present Value
Initial Cost to build Warehouse -1000
Initial Cost of Vehicles -300
Tax Shield - Building 58.998
Tax Shield - Vehicles 44.248
Salvage Vehicles (100,000 x PVIF(9%, 5 years) 65
Slavage Warehouse (1000000 x PVIF (9%, 5) 650
Tax Shield Lost - Building -3.6306
Tax Shield Lost - Vehicles -6.8074

Annual Operating Costs -1058.1
340000 * (1 - 0.2) x PVIFA(9%, 5 years)
Annual Incremental Revenue
Cigarettes revenue per carton 73.784
gross margin per carton 5.1351
increased margin 8.1351

increased margin 15.05 per store
812.7 overall
Tobacco 100
Giftware Revenue 99.4
Costs 52.781
decrease in costs 7.9172 per store
427.5 overall

Increased gross profit margin 1340 4170.1
1,340,000 * (1 - 0.2) x PVIFA(9%, 5 years)

Net Present Value 2619.808

Required Capital
Building 1000
Equipment 300
1300


CMA Canada 91
Exhibit 7: Financing Available/Required (in 000s)

Remaining Line of Credit 350 may increase to 1000
Mortgage 750 only to be used for building

Capital Requirements
Limited Addition Plates 87
DVDs 87
Store Expansion 460
634

Additional Pre Tax Profit:
Limited Addition Plates 121.5
DVDs 175.5
Store Expansion 161.9
458.9

Initial Pre Tax Profit 33
Additional Pre Tax Profit 458.9
Less Interest - Line of Credit -50.72
total 441.18
tax 110.82
net income 330.36

EPS 10.01


92 CMA Canada
Markers Comments
Successful Attempt # 1

General Comments

This response demonstrates the extent and quality of a good response that is
achievable, given adequate preparation, in a four-hour examination-writing period. The
response is clear and concise, and there is adequate consideration of the shareholders
desired earnings per share target as well as the ability for CML to finance the
recommendations.

The approach used in this response is unique to the individual candidate. Those
preparing to write the Case Examination should not use this response as a template,
but rather study the comments below, which indicate areas where this response meets
or exceeds expectations and areas where there is room for improvement. Prospective
candidates should keep in mind that it is their ability to apply their skills and
competencies to a specific case situation that is being examined, not their ability to
duplicate a structure or format.

Overall, this response provides sufficient evidence that the examination writer is
competent in solving problems and making decisions at the business strategy level and
has met or exceeded expectations for most of the enabling and functional competencies
tested on the examination, i.e. competencies covered in the first year of the Strategic
Leadership Program at the Competency Stage 2 (SC-2) level. There appears to be a
good foundation on which to continue building the candidates skills in the second year
of the Strategic Leadership Program.


Situational Analysis
The quality of the situational analysis is well done. Appropriate data is identified and
collected. The mission and strategic direction are recognized and discussed; stakeholder
preferences, constraints, uncertainties, risks and key success factors are identified; changes
in the internal and external environments are identified in a SWOT analysis; and a financial
assessment is provided, complete with calculation and interpretation of ratios and an
analysis of profit margins by geographic area.
Strategic Aspects of Analysis and Integration
Good integrative thinking is demonstrated in this response. Opportunities (e.g. the
growing economies in British Columbia and Alberta, increasing demand for postal
services and lottery tickets), strengths (e.g. utilizing land), threats (e.g. higher costs of
doing business in Alberta), and weaknesses (e.g. risk of higher staff turnover at stores
in Alberta) are identified and used appropriately in the analyses of the alternatives. The
response also considers CMLs mission and stakeholder preferences in the analyses of
the alternatives.

CMA Canada 93
Implementation Plan
Financing of the major recommendations is considered, minor issues are addressed
and an action plan for implementing all the recommendations is provided in the
response. For example, the response indicates that if the additional line of credit cannot
be obtained to finance the store expansion, the store expansion strategy should be
implemented one at a time as resources become available. It indicates that the bank
should be approached for financing after CML receives an audit so that the bank can be
provided with audited statements. As well, implementation issues at the operational
level are addressed, such as instituting incentives for both full-time and part-time
employees. Overall, the implementation plan is well done.

Internal and External Risks
External risks are appropriately considered in the analyses of the alternatives. For
example, in the discussion of the mission and strategic direction, the response indicates
that because the eastern and prairie regions of Canada have less than healthy
economies, pursuing growth in these regions would not be consistent with the mission
of operating in economically healthy areas of Canada. Internal risks are also addressed.
For example, a recommendation is made that, to mitigate the risk of theft, DVDs should
be stored beside the customer service counter.
Compliance
Although the issue of paying part-time help from the cash register is considered, there is no
recognition of the related issue of possibly avoiding payroll taxes and source deductions.

Quantitative Analysis of Strategic Alternatives and Current Value Proposition
Relevant revenues and costs are reasonably used in the analysis of the alternatives. For
example, the current profitability by region is calculated. The analysis of expanding stores
includes the additional travel costs to Western Canada. The analysis of building a
warehouse includes the annual operating costs of $340,000 and savings for giftware,
cigarettes and other tobacco products.
However, some errors are made in the various analyses. For example, in the analysis of the
warehouse, the calculation of the increased gross profit margin for cigarettes uses the total
increased margin per carton ($8.13135) instead of the incremental margin ($3.00). Also, the
calculation does not factor in the correct number of stores (i.e. all 54 stores are used instead
of just the 49 stores in Ontario and Quebec).
Uncertainty analysis is considered in the DVD and collectible plate options. For example,
annual revenues at the high and low range for both options are calculated. As well, although
it is difficult to follow, uncertainty is appropriately considered in the store expansion
alternative. For example, the probabilities for both the lottery booth and post office are stated
and used in the calculation of expected operating profit per store (although the audit trail is
not clear).

94 CMA Canada
Qualitative Analysis of Strategic Alternatives and Implementation/Minor Issues
The analyses of the implementation and operational issues demonstrate a good
understanding of relevant performance management concepts and tools, such as
operations management and revenue management concepts related to the limited floor
space and the 20 square feet required for collectible plates (i.e. a recommendation is made
to replace some of the giftware with the collectible plates because the collectible plates
produce a higher return per square foot.). Information systems and technology concepts are
considered in relation to monitoring inventory better by purchasing an inventory control and
integrated point of sale system. As well, recommendations are made for improving
marketing and promotion in order to increase sales (e.g. targeted ads, stamp program,
store manager autonomy to advertise their own sales).


Corporate performance measurement concepts are not used in the response. However,
incentive and compensation systems and performance evaluation issues are identified and
appropriately discussed. The recommendations to institute incentives for full-time employees
as well as part-time employees are reasonable.


Capital Budgeting
The main alternatives are appropriately analyzed using the net present value method.
Income taxes at 20% are considered, CCA tax shields are calculated and salvage values
are included. In most cases, the present value factors used appropriately reflect the 9%
hurdle rate; however, the analysis of leasing the equipment and vehicles inappropriately
uses 7% and 6% as discount rates in calculating tax shield forgone and present value of
lease payments. As well, tax should be deducted from the lease payments in the leasing
calculation.
Financing Available and Required
The financing required and financing available for implementing the recommended
alternatives are identified in the response (Exhibit 7). The response would be improved if it
clearly identified the amount of funding available (i.e. the potential increase in the line of
credit less the current line of credit used less the cash requirements to repay the
shareholder loan).
Other Financial Management Concepts
Other financial management concepts are appropriately applied in the report. For example,
there is an attempt to analyze leasing versus buying the equipment for the warehouse
alternative. However, the calculation contains errors such as neglecting to include residual
values and using the wrong hurdle rate. The response appropriately considers the cash flow
advantages within the analysis of the collectible plate option (i.e. customers provide 50%
deposit up front) and the need for an audit to be done in order to increase the line of credit
with the bank. There is also an attempt to calculate CMLs pre-tax profit for one year based
on all of the recommendations being undertaken.

CMA Canada 95

Financial Analysis
A good balance of ratios are appropriately calculated for 3 years (Exhibit 1). Liquidity,
activity, profitability, debt-to-equity, and earnings per share ratios are adequately interpreted.
Earnings Per Share Target
There is an attempt to calculate earnings per share for on year based on all the
recommendations being undertaken and it is compared to the board of directors target of
$6.25 by 2010. This calculation could be improved by deducting amortization in the
calculation of net income.
Other Financial Reporting Concepts and Tools
The response provides adequate recommendations for relevant financial reporting
concepts, such as recording prepaid rent, properly recording expenses in the correct
category (payroll inaccurately expensed as repairs and maintenance), and recording
Durands current loan repayment for the fiscal year within current liabilities.
E1 Problem Solving and Decision Making Systematic Approach

Executes the Systematic Approach Appropriately
All elements of a systematic approach are present in a reasonable form within the response.
The extent of the data gathering is appropriate for the case issues and problems being
addressed, the major alternatives and many of the minor issues are identified and analyzed
using the relevant data collected, recommendations are clearly stated, and an
implementation plan is provided.
The response appropriately prioritizes issues and alternatives. The analyses of the issues
and alternatives are objective, reasonably balanced, free of bias, and of appropriate breadth
and depth.
E2 Leadership

Quality of Recommendations
The recommendations, conclusions, and solutions are logical, feasible, realistic, supported,
and presented in a sufficiently convincing manner. The alternatives recommended are those
that are shown to meet the target earnings per share of $6.25 and the 9% hurdle rate
required for capital investments. As well, there is an attempt to prove that adequate
financing is available. The report could be improved by demonstrating that Durands
shareholder loan repayments will be met as well as elaborating on why the warehouse
alternative was not chosen since the quantitative analyses shows a far greater benefit than
the other recommendations.

96 CMA Canada

Conflict of Interest and Ethical Issues
The conflict of interest of the purchasing employee is recognized and the recommendation
to shift the employee to other accounts as well as implementing a code of ethics is
adequate.
Professional Tone and Tact
The report exhibits good tone and tact, and addresses the audience appropriately.

E4 Communication

Format, Organization, Flow and Language
The format of the report appropriately includes a cover page, executive summary,
introduction, body, conclusion, and appendices. The introduction indicates the purpose and
the scope of the report. The executive summary sufficiently summarizes the main strategic
alternatives and provides recommendations for these as well as for the minor and
implementation issues. The executive summary would be improved if some of the significant
issues were also identified.
The report is well organized and makes sufficient use of headings, subheadings, and lists.
The language used does not have a distracting number of errors in grammar or sentence
structure, and is easy to follow. The content is expressed clearly, logically, coherently, and
flows well.
Audit trails are provided for some of the quantitative analyses, but they are not always easy
to follow. For example, how the incremental revenue and profit margin are calculated in the
warehouse option is not clear, how the profits are calculated in the expand stores option are
not clear, and the interest rate used in the calculation of the interest on the line of credit
expense (Exhibit 7) is not stated.
Overall, this response represents a reasonably well written business report.


CMA Canada 97
Sample Response

Executive Summary

CML has faced declining profitability in recent years and the Board of Directors have requested
an analysis of the business to see what can be done to return the company to profitability.

The alternatives examined were product expansion, open an additional store, and the creation
of a warehouse to allow CML to purchase in bulk. It was recommended that both product lines
should be incorporated, a store should be opened in BC and the warehouse should be
purchased. All of these alternatives combined will generate additional revenues for CML as well
as raise the earnings per share well above the level specified by the Board of Directors.

In conclusion, if CML follows the above recommendations, then they should be returned to
profitability in a short time period. As well, the combination of alternatives should be sufficient to
increase the earnings per share well above the requested level.


98 CMA Canada
Introduction

CML has faced declining profitability in recent years and the Board of Directors have requested
an analysis of the business to see what can be done to return the company to profitability.

In order to properly analyze this company a thorough situational analysis was conducted,
followed by an analysis of several strategic alternatives. Recommendations and an
implementation plan are also included, as well as a discussion of several operational issues to
be resolved.

CMA Canada 99

Strategic Mission

CML has a stated mission statement, and it is as follows:

CML provides a satisfactory return to its shareholders through retail operations
located in secondary shopping malls in economically healthy areas of Canada.
These retail operations primarily focus on goods and services related to
satisfying consumers needs for celebrating special events with family and
friends, giving gifts, and enjoying life.

100 CMA Canada
Stakeholder Preferences

Marie Durand
Wishes to sell her families ownership interest in CML by 2010
Would like to see CMLs share price increase before she attempts to sell them
Wishes to have CML pay down her shareholder loans by $30,000 per month

Board of Directors
Wishes to pursue expansion and product diversification
Would like to increase revenues and gross profit margins and decrease expenses
Wish to increase the share price to at least $6.25 per share by 2010 and continue to
repay Durands shareholder loans at a rate of $30,000 per month

Gordon Hopps
Would like to hear suggestions for improving the companys operations to improve
profitability and employee motivation

Bank
Would like to see audited financial statements for CML at December 31, 2007
Would like to know CMLs long term financing plan

Key Success Factors

CMLs key success factors are:
They have an effective small mall niche
Good relationships with their customers

Constraints and Risks

Constraints:
Company expects an after tax return of 9% on capital investments

Major Risks
Direct competition from drug stores, grocery stores in secondary malls and indirect
competition from large suppliers in larger malls
Slowing economy and lack of secondary malls for expansion purposes

SWOT

In addition to the SWOT points provided, the following points are relevant:

Strengths
CML is giving periodic performance reviews and all employees are required to sign off
on the appraisal
Stores in Western Canada are profitable and sales revenue has grown by 8% per year

Weaknesses
Repayment of Durands shareholder loans has caused CMLs financial situation to
deteriorate and cash flow is an issue
Marie Durand has retired as CEO

CMA Canada 101
CML had to make use of their line of credit for the first time in many years
Up to 2% of sales are lost due to theft and breakage but this cannot be verified through
current information systems
10% of giftware inventory becomes obsolete each year and must be sold at deep
discounts, usually at a loss these items are kept on display until they are sold
The required last months rent on a new lease is expensed when paid
Children of store managers are hired in busy times and salary expenses are paid from
cash in the cash drawer and reported to head office as repairs and maintenance
approximately $3000 in 2007
CML currently has no incentive plan in place
Ethical issue purchasing agent was recommending a disproportionate number of
purchases from one supplier because one of this suppliers commercial sales reps was
married to the purchasing agents sister who frequently takes the agent on all expense
paid vacations

Opportunities
The bank is willing to provide an increase in CMLs line of credit contingent on audited
financials

Threats
Ontario is expected to experience only modest growth this is where CMLs main
operations are
The economy in all areas of the country are expected to go through a period of decline,
with exception of Alberta and BC

102 CMA Canada
Financial Analysis (See Appendix 1)

CMLs current financial situation has been deteriorating. An analysis of some selected financial
ratios revealed the following:
Quick ratio this ratio has been declining and is currently 0.11. This signals that the
company may have some difficulty paying suppliers and other short term obligations
without the use of inventory
Inventory turnover ratio the inventory turnover ratio has been declining in the past two
years, which means the number of days that goods are held in inventory are increasing.
This may signal that CML is having trouble selling their inventory, or may signal an
inventory control problem
Debt to equity this ratio is currently sitting at 1.80, which indicates that the company is
highly leveraged and heavily dependant on loans and other forms of debt in order to
sustain operations. As can be seen from the balance sheet, currently the most significant
loan is due to Marie Durand in the form of shareholder loans
Profit margin the profit margin for 2007 was 0.12%, which is a 56% decline from the
prior year. This decline is due to CMLs decreasing sales and increasing operating costs
Earnings per share CMLs current earnings per share ratio is $2.52 which is relatively
low compared to the Boards desired earnings per share of $6.25.

An analysis of average profitability by store by province for the retail sector of CML indicates
that British Columbia is currently the most profitable province for CML, whereas Nova Scotia is
currently the least profitable. A similar analysis for the postal outlets and lottery booths shows
that the locations in Nova Scotia are the most profitable for these sectors, while the stores in
Quebec for postal outlets and Ontario and BC for the lottery booths are the least profitable.

In addition, an analysis of profitability by product by square footage reveals that tobacco is the
most profitable per square foot of selling space and giftware is the least profitable.

CMA Canada 103
Strategic Alternatives

Alternative Store Expansion (See Appendix 4)

A) Expansion in Ontario

Pros
Will increase profits for CML
Meets the expectations of the Board of Directors
Increases earnings per share to $3.41
In line with Board of Directors wish to continue store expansion

Cons
Market is expected to decline in Ontario
Profits expectations are lower than those of expansion to BC or Alberta
If this alternative is pursued, cannot open stores in BC and Alberta due to lack of cash
flow

B) Expansion in BC

Pros
Financial analysis of profitability by store shows that CMLs stores in BC are currently
the most profitable
Economy in BC is booming and retail market is doing extremely well
Has highest potential for profitability regardless of whether store opening costs are low,
average or high

Cons
Opening a store in Western Canada means annual travel and courier costs are $8000
per store greater than those for Central Canada
Although highest profit potential, still does not earnings per share to $6.25 as per
Boards expectations
If this alternative is pursued, cannot open stores in Ontario and Alberta due to lack of
cash flow

C) Expansion in Alberta

Pros
Store revenue in Alberta would be approximately 10% higher than the BC store
Economy in Alberta is booming and retail market is doing extremely well
Although profit expectations are lower than those of BC they are higher than those of
Ontario


104 CMA Canada
Cons
Total operating costs for stores, postal outlets and lottery booths would be approximately
15% higher than in the BC store
Retail lease costs are highest in the country
Little available low cost labour
If this alternative is pursued, cannot open stores in Ontario and BC due to lack of cash
flow

CMA Canada 105
Alternative Warehousing Products (See Appendix 5)

Pros
CML could buy tobacco and giftware products in bulk resulting in substantial savings
o giftware purchase cost reduced by 15%
o cost of cigarettes would decrease by $3 per carton
o other tobacco products would decrease $100,000 per year assuming same sales
volume as in 2007
a warehouse could be constructed and built by the end of 2008
the bank is willing to provide financing for the project 75% of cost of building at annual
interest rate of 6%
has a positive net present value of approximately $5 million which indicates that this
alternative should be pursued
has the potential to increase earnings per share to $13.18
increases earnings per share and decreases expenses which is in line with the
expectations of the Board of Directors
can use increased line of credit to assist them with the resulting cash flow issue until the
savings are realized

Cons
requires immediate financing of $250k not covered through the mortgage with the bank
a source of additional financing will be required in order to accomplish this (see
Appendix 6)
requires higher cash outflows for inventory in order to take advantage of bulk discounts

106 CMA Canada
Alternative Product Expansion Collectible Plates (See Appendix 2)

Pros
These type of plates have an established customer market
Little or no direct competition from other stores in secondary malls
It is expected that this product line would attract new customers to the stores
No additional staff would be required as current employees could handle all additional
paperwork required
In line with Board of Directors wish to continue with product expansion

Cons
CML would have to become a licensed dealer for these plates
During busy seasonal times customer relations may suffer due to plate orders and CML
may need to hire seasonal staff
A special display case would be required that would take approximately 20 sq ft of space
from other products
Minimal increase in earnings per share

CMA Canada 107
Alternative Product Expansion DVDs (See Appendix 3)

Pros
This product could be accommodated without affecting the selling space of other
products by use of mobile racks
Would appeal more to youths and young adults and could bring in larger customer base

Cons
High risk of theft for this type of product would could result in increased security for the
stores
No significant effect on earnings per share

108 CMA Canada
Strategic Recommendations

Based on the above analysis the following is recommended:

Warehouse CML should proceed with building the warehouse. It will generate
significant cost savings for the company and will significantly increase earnings per
share. Until the cost savings are realized CML can make use of their extended line of
credit to assist them with the bulk purchases
Product expansion Collectible plates this alternative requires minimal cash outlay
and although minimal, will generate additional profits. It will also increase their customer
base which could result in additional incremental revenues.
Store expansion - CML should pursue expansion to British Columbia because of the
three possible locations it will generate the highest additional profit for CML and will help
increase the earnings per share as requested by the Board of Directors. For financing
options CML should consider approaching

The combination of the above recommendations should increase earnings per share to
approximately 14.17 in the short run.

The following are not recommended:

Product expansion DVDs this will likely result in additional security measures
required which will result in higher costs, the amount of which is not known at this time,
and should therefore not be pursued
Store expansion Ontario and Alberta these options did not propose as high a return
as the BC store location and therefore were not chosen.

Based on the above recommendations the mission statement as approved by the board of
directors is still relevant.

CMA Canada 109
Implementation Plan

Immediately
Margaret Depew should be called upon to investigate further bank financing options so
that all three of the above alternatives can be taken on by CML.
The display cases for the plates should be purchased and the sample inventory should
also be purchased purchasing department and Tamar Shah
Claude Denis should begin to investigate the appropriate location for the new BC store
and enter into talks to sign a lease agreement
Claude Denis should also begin to investigate a reputable contractor and begin
negotiations to build the warehouse
An external auditor should be contacted to begin the work on the audited financial
statements for the bank Chris Mantha

One to Three months
Laura Firelli should begin to advertise for the additional positions required for the BC
store
The contract for the new lease for the building should now be signed Claude Denis
The appropriate inventory for the new store should be purchased and set up should
begin Tamar Shah
Advertising for the new BC store grand opening should be prepared Tamar Shah

Three to Six months
The BC store should be opened by this point and all staff should have been trained and
begun their new positions Laura Firelli
Construction on the warehouse building should be well underway (Claude Denis) and
bulk purchasing negotiations should begin (Tamar Shah)

110 CMA Canada
Operational Issues

Internal Controls
2% of sales are lost due to theft and breakage but this cannot be verified through current
information systems CML should invest in a proper inventory control program in order
to keep track of inventory more accurately

Human Resources
Children of store managers are hired in busy times and salary expenses are paid from
cash in the cash drawer and reported to head office as repairs and maintenance
approximately $3000 in 2007 this is not correct. These amounts should be reported to
the payroll and accounting departments and if necessary a manual cheque should be
generated to pay these salaries

Accounting Issues
The required last months rent on a new lease is expensed when paid this is not
correct according to GAAP. These payments should be recorded as prepaid rents on the
balance sheet, and should be expensed during the last month of occupancy

Sales and Operations
10% of giftware inventory becomes obsolete each year and must be sold at deep
discounts, usually at a loss these items are kept on display until they are sold

Performance Measurement
CML currently has no incentive plan in place CML is already in the practice of setting
sales targets for each store, and as such a proper performance measurement plan
should be implemented to reward each store manager based on the level of sales target
met

Ethical issue
Purchasing agent was recommending a disproportionate number of purchases from one
supplier because one of this suppliers commercial sales reps was married to the
purchasing agents sister who frequently takes the agent on all expense paid vacations
action on this issue should be taken immediately. This employee should be reprimanded
and all further dealings with this supplier should be moved to another agent. As well, the
supplier company should be informed and a different sales representative should be
requested.


CMA Canada 111
Conclusion

In conclusion, if CML follows the above recommendations, then they should be returned to
profitability in a short time period. As well, the combination of alternatives should be sufficient to
increase the earnings per share well above the requested level.

112 CMA Canada
Appendix 1 - Current Financial Situation

Selected Financial Ratios
2007 2006 2005
Quick Ratio =(2999-2844)/1427 =(3063-2716)/1087
=0.11 =0.32

Inventory Turnover =18671/2844 =18150/2716
=6.57 =6.68

Debt to Equity =(1616+25+150)/995 =(1941+25)/1012
=1.80 =1.94

Profit Margin =33/27626 =71/26643 =125/26446
=0.12% =0.27% =0.47%

Profit Margin Trend =(0.12-0.27)/0.27 =(0.27-0.47)/0.47
=(56%) =(43%)

Earnings per share =(33,000+50,000)/33000
=2.52

Avg Profitability by Store by Province (dollar amounts in '000s)

Retail Ontario Quebec BC NS
Gross Profit 166.46 162.6 177.33 152.5
Expenses 130.18 129.1 134.67 124
Operating Profit 36.28 33.5 42.67 28.5

Postal Outlet
Operating Profit 7.13 7 8 10

Lottery Booth
Operating Profit 7.67 7.75 7.67 8

Profitability by Product
Greeting Cards Tobacco Products Giftware Other*
Revenue 31% 31% 19% 19%
Target Revenue 30% 31% 20% 19%
Difference 1% 0% -1% 0%

Avg Revenue per sq ft 223.14 10473.33 165.67 482.44

* Note: confectionary, magazines, newspapers, gift wrap and stationary were combined into one
category as they are not significant on their own


CMA Canada 113
Appendix 2 - Expansion to Collectible Plates

Initial investment per store
sample plates $ 700
display case 800
Total Invest/store 1,500
Total CML Invest: $81,000

Estimate sales per store
Optimistic Medium Worst Case
Revenues 8,000 7,500 7,000
Gross Profit 2,400 2,250 2,100

Total CML GP 129,600 21,500 113,400

Effect on Reduction 20sq ft from other products:
SqFt/store $/sqft Total Less 20 sqft Total $ Difference %
Greeting Cards 700 223.14 156.20 680 151.74 4.46 2.86%
Giftware 600 165.67 99.40 580 96.09 3.31 3.33%
Other 205 482.44 98.90 185 89.25 9.65 9.76%

Therefore reduce greeting card sq ft as it would have the lowest effect on profitability

Incremental Gross Profit
Optimistic 2.04
Medium 1.79
Worst Case 1.54

Effect on Financial Statements
Gross Profit 8,957.04 8,956.79 8,956.54
Retail Expenses 7020 7020 7020
Retail Operating Profit 1,937 1,937 1,937
Postal Outlets 89 89 89
Lottery Booths 154 154 154
Total Operating Profit 2,180 2,180 2,180
Head Office expenses 2137 2137 2137
Income before taxes 43 43 43
Income taxes 8.61 8.56 8.51
Net Income 34.43 34.23 34.03

Earnings per share 2.56 2.55 2.55


114 CMA Canada
Appendix 3 - Expansion to DVDs

Initial Investment per store
Inventory 1000
mobile rack 500
Total invest/store 1500
Total CML Invest: 81000

Estimate sales per store
Revenues 7,000 6,500 6,000
Gross Profit 3,500 3,250 3,000

Total CML GP 189,000 175,500 162,000

Effect on Financial Statements
Gross Profit 8,959 8,958 8,958
Retail Expenses 7020 7020 7020
Retail Operating Profit 1,939 1,938 1,938
Total Operating Profit 2,182 2,181 2,181
Head Office expenses 2137 2137 2137
Income before taxes 45 44 44
Income taxes 8.90 8.85 8.80
Net Income 35.60 35.40 35.20



CMA Canada 115
Appendix 4 - Store Expansion

Store Opening Costs
Ontario Year 0 Year 1 Year 2 Year 3
Low Average High
Store opening (105,000) (115,000) (125,000)
Incremental Revenue^ 507,308 507,308 507,308 522,527 532,977 543,637
COGS (339,896) (339,896) (339,896) (350,093) (357,095) (364,237)
Incremental Operating Costs^^ (130,179) (130,179) (130,179) (134,085) (138,107) (142,251)
Incremental Income per year (67,768) (77,768) (87,768) 38,349 37,775 37,150
^Assume revenue per store is 507.31k based on information provided, increases 2%/year based on prior
year's information
^^Assume operating costs increase 3% per year based on prior years

BC Year 0 Year 1 Year 2 Year 3
Low Average High
Store opening (105,000) (115,000) (125,000)
Incremental Costs (8,000) (8,000) (8,000) (8,000) (8,000) (8,000)
Incremental Revenue* 554,667 554,667 554,667 599,040 646,963 698,720
COGS (377,173) (377,173) (377,173) (407,347) (433,465) (468,143)
Incremental Operating Costs** (134,667) (134,667) (134,667) (138,707) (142,868) (147,154)
Incremental Income per year (70,174) (80,174) (90,174) 44,986 62,630 75,423

Alberta Year 0 Year 1 Year 2 Year 3
Store opening (137,000)
Incremental Costs (8,000) (8,000) (8,000) (8,000)
Incremental Revenue* 610,133 658,944 711,660 768,592
COGS (414,891) (448,082) (483,928) (522,643)
Incremental Operating Costs** (154,867) (159,513) (164,298) (169,227)
Incremental Income per year (104,624) 43,349 55,433 68,723
*Assume that avg. revenue per BC store is 554.67k based on information provided
**Assume that avg. operating costs per BC store are 134.67k based on information provided,
assume 3% increase per year in operating costs based on prior years information

Effect on financials Year 3
Impact on Financial Statements Ontario Alberta BC
Gross Profit 9,134 9,200.95 9,185.58
Retail Expenses 7,162 7,189.23 7,167.15
Retail Operating Profit 1,972 2,011.72 2,018.42
Total Operating Profit 2,215 2,254.72 2,261.42
Head Office expenses 2137 2,145 2145
Income before taxes 78 109.72 116.42
Income taxes 15.63 21.94 23.28
Net Income 62.52 87.78 93.14



116 CMA Canada
Appendix 5 - Building Warehouse

Incremental Cost Savings (in '000s)
Revenue Gross Profit COGS/store Total COGS Total Savings
Giftware 99.4 46.6 52.8 2851.2 428.0
Tobacco 163.5 9.5 154 8316 299.7
Tobacco products 20.6 7.8 12.8 691.2 100.0
827.7

Net Present Value Year 0 Year 1-40 Total NPV
Initial Cost outlay (250,000)
Incremental Cost savings 827,380 8,900,425
Mortgage Payment (201,701)
Interest on Mortgage (12,102)
Tax Shield on building* 82,597
Equipment & vehicles -
purchase (300,000)
Tax Shield on equip&vehicle** 61,948
Delivery to ON and QUE (340,000) (3,657,502)
81,925 5,029,120 5,111,044

* Tax Shield on Building
=1,000,000(0.04)(0.28)/(0.04+0.09) * (1+0.5(0.09))/(1+0.09)
=86153.85*0.96
=82597.04
Note - assume avg tax rate of 28% (20+30/2) as CML is a CCPC and subject to small business
deduction on first $300k of income

**Tax Shield on Equipment and Vehicles
=300,000(0.30)(0.28)/(0.30+0.09) * (1+0.5(0.09))/(1+0.09)
=64615.38*0.96
=61947.77

Impact on Financial Statements
Gross Profit 9782
Retail Expenses 7020
Retail Operating Profit 2762
Postal Outlets 89
Lottery Booths 154
Total Operating Profit 3005
Head Office expenses 2478
Income before taxes 527
Income taxes 142
Net Income 385

Earnings per share =(385000+50000)/33000
=13.18


CMA Canada 117
Appendix 6 - Financing Requirements

Year 0
Collector plates 81,000
Warehouse 550,000
Store in BC 115,000
Repay shareholder loan 360,000
1,106,000
Bank line of credit 1,000,000
Additional Financing needed 106,000

DVDs and Plates Plates, DVDs, Store in BC Warehouse Total
Gross Profit 9,190.61 827.00 10,017.61
Retail Expenses 7,167.15 7,167.15
Retail Operating Profit 2,023.46 2,850
Postal Outlets 89.00 89.00
Lottery Booths 154.00 154.00
Total Operating Profit 2,266.46 3,093
Head Office expenses 2,145.00 341 2,486.00
Income before taxes 121.46 607
Income taxes 24.29 170.09
Net Income 97.17 437.37

Earnings per share 4.46 14.77


118 CMA Canada
Markers Comments

General Comments
This response provides another example of the extent and quality of an acceptable
response that is achievable in a four-hour examination-writing period. The analyses of
the individual issues are less extensive in this response than in the previous sample
response; however, the targeted earnings per share is tested throughout the response
and used to provide support for the recommended strategy.

Although these responses are significantly different in approach and the
recommendations made, both meet the expected level of skills and competencies
required for this examination, and sufficiently demonstrate that these candidates are
ready to continue in the second year of the Strategic Leadership Program.

The quality of the situational analysis is adequate. Appropriate data is identified and
collected. The response could be improved by recognizing more changes in the external
environment (i.e. opportunities and threats).
Reasonable integrative thinking is demonstrated in this response. The opportunity of the
strong BC economy and the strength of BC stores being the most profitable are
identified and used to support the appropriate alternatives. Threats such as high costs
and limited low cost labour in Alberta are used in arguments against the appropriate
alternatives. The extent of the integration, however, is limited as a result of the brief
qualitative analysis provided for the alternatives. For example, the majority of the points
made in the qualitative analysis of the warehousing alternative are actually quantitative
points.

Implementation Plan
Financing of the major recommendations is considered and an action plan for
implementing the major recommendations is provided in the response. However, the
implementation plan does not sufficiently address how some of the weaknesses of the
recommended strategies can be overcome. For example, the cons related to the
collectible plate alternative (customer relations may suffer, requires 20 sq. ft. of space
from other products) are not discussed or resolved. The analysis of optional issues
could be improved. For example, the sentence provided for Sales and Operations is
simply a statement of case facts and no analysis or resolution of the issue is provided.


CMA Canada 119
Few risks are adequately considered in the response. For example, the risks of theft and
obsolescence are identified as issues, but no recommendations are provided to resolve
these issues.
Compliance
The response recognizes that CML is not complying with GAAP (inappropriately expensing
the last months lease payment when paid). The issue of part-time help being paid cash and
not reported on the payroll is also considered.
Relevant revenues and costs are reasonably used in the analysis of the current situation
and the alternatives. For example, the current profitability by some product lines and by
region is calculated. The analysis of the store expansion alternative includes the additional
travel costs to Western Canada and appropriate assumptions for increases to revenue and
operating costs. The analysis of the warehouse alternative includes the annual savings for
giftware, cigarettes and other tobacco products. However, some errors are made in the
various analyses. For example, in the analysis of the warehouse alternative, the savings for
cartons of cigarettes is incorrectly calculated using 54 stores instead of only the 49 stores in
Ontario and Quebec.
Uncertainty analysis is appropriately considered in the analysis of the DVD, collectible plate,
and store expansion alternatives. For example, profitability is calculated based on
optimistic, medium and worst case scenarios for DVDs and collectible plates; whereas
profitability is calculated on low, average and high scenarios for the store expansion
alternative.
The analyses of the minor issues and operational aspects of implementing the
recommended strategies are very limited in the response. Investing in a proper inventory
control program is the only performance management concept applied in the body of the
report. In appendix 2, there appears to be a recommendation related to reducing floor space
for the greeting cards in order to include collectible plates, but this is never clearly discussed
in the body of the report. Furthermore, the calculations in Appendix 2 do not clearly support
reducing greeting cards.
Corporate performance measurement concepts or tools are not used in the response.
Incentive systems issues are identified but not appropriately discussed. For example, a
generic recommendation is made to implement a reward system and this plan focuses on
rewarding store managers only.

120 CMA Canada
Capital Budgeting
The net present value of one major alternative is calculated (warehouse option) using the
appropriate 9% hurdle rate and including CCA tax shields for the building and the equipment
and vehicles. However, major errors are made in the analysis. For example, tax is not
considered in determining the incremental cost savings used in the calculation, salvage
values are not included, and the calculation includes financing interest on the mortgage (i.e.
interest is already reflected in the discount rate).
The financing required and financing available for implementing the recommended
alternatives, including the shareholder loan repayment requirement, are identified in the
response (Appendix 6). However, the schedule of financing requirements incorrectly
identifies that $1 million is available in the line of credit instead of deducting the $150,000
current line of credit already utilized by CML. As well, since the schedule shows a shortfall in
financing, the response could be improved if other alternatives for financing the
recommendations are discussed (e.g. working capital management).
The response adequately calculates the effect of alternatives on net income for one year,
including the total effect on net income for the overall recommendations. Otherwise, no other
financial management concepts are applied.
Financial Analysis
An adequate number of ratios are calculated for two years and interpreted in the
response. However, the earnings per share is incorrectly calculated (i.e. dividends are
inappropriately added to net income in the numerator).

There is an attempt to calculate earnings per share (EPS) for each of the alternatives as well
as the overall recommendations, and a comparison is made to the board of directors target
of $6.25 by 2010. However, amortization is not considered in the calculation of net income in
determining EPS.
The response provides adequate recommendations for some relevant financial reporting
concepts, such as recording prepaid rent and properly recording the wages paid to part-time
staff as payroll instead of repairs and maintenance expenses.
All elements of a systematic approach are present in a reasonable form within the response.
The extent of the data gathering is appropriate for the case issues and problems being
addressed, the major alternatives and a few of the minor issues are identified and analyzed

CMA Canada 121
using the relevant data collected, recommendations are clearly stated, and an
implementation plan is provided.
The response appropriately prioritizes issues and alternatives. However, the analyses of the
issues and alternatives are not objective, reasonably balanced, or of appropriate breadth
and depth. For example, there is limited analysis for an alternative not recommended
(DVDs). Similarly, there are few cons for one of the alternatives recommended (warehouse).
This reflects a lack of objectivity. As well, the analyses of some minor operational issues are
of limited breadth and depth.
E2 Leadership
Overall, the recommended strategy demonstrates that the desired earnings per share of
$6.25 will be achieved by 2010, considers the cash flow to repay Durands shareholder loan,
and considers the need to provide the bank with audited financial statements. However, the
response is not entirely convincing because of the limited depth of analyses for some
alternatives and minor issues, and the errors in the quantitative analyses. Furthermore, the
final recommendation in Appendix 6 appears to be inconsistent with the recommendation in
the body of the report (i.e. Appendix 6 includes DVDs as part of the overall
recommendation).
The conflict of interest issue involving the purchasing employee is recognized and the
recommendation to reprimand the employee and to use another agent for this supplier is
adequate.
The response does not always reflect the right audience (e.g. referring to CML as they
when the audience is Hopps and Mantha).
E4 Communication
The format of the report appropriately includes an executive summary, introduction, body,
conclusion, and appendices. The introduction indicates the purpose and the scope of the
report. The executive summary briefly mentions the boards requirement for raising the
earnings per share and highlights the three major recommendations, but does not
sufficiently outline the significant issues or provide recommendations for any operational
issues.
The language used does not always flow well. For example, there are some errors in
grammar and sentence structure.
Overall, this response represents an acceptably written business report written considering
the 4-hour examination-writing period.

122 CMA Canada
Sample Response
Unsuccessful Attempt

Executive Summary

Introduction
Stakeholders Preference
Constraints
Current Strategic Mission

SWOT
Internal and Core Competencies
External and Market Analysis

Financial Analysis

Issue and Situation overall


Recommendation

Conclusion

Implementation
Operational Issues and Time Schedule of events

CMA Canada 123
Executive Summary

Intro

In the past CML had adopted an expansion and product diversification strategy with reasonable
success, however, in more recent years it has seen a critical decline in bottom line net income.
Furthermore, with Durands retirement a legacy of CML came to an end.

Strategic Issues and alternative

Diversify its current product line
Expand its stores
Operate a warehouse

In reviewing all these, the main objective and goal has been to create sustainable future growth
and adhere to both the Boards mandates and the Banks current constraints.

Recommendation

It is recommended that CML diversify its product line, beginning in Ontario and moving west to
BC. In addition, it is recommended that they pursue the warehouse option and look to
capitalizing in the cost savings that this could bring. In the initial first 3-5 years it is not
recommended to expand stores, however, the possibility of entering the Alberta market should
be reviewed again. Critical to the success of CML is that Durands loan repayment be slowed
down and that investment injections be committed to. EPS must significantly grow to $3.75,
which would require a growth in N/I of 200%.


124 CMA Canada
Introduction

During the past 42 years CML has experience expansion growth throughout all of Canada,
growing to 54 stores to date. In the past CML had adopted an expansion and product
diversification strategy with reasonable success, however, in more recent years it has seen a
critical decline in bottom line net income. Furthermore, with Durands retirement a legacy of
CML came to an end.

Current Mission Statement

CML provides a satisfactory return to is shareholders through retail operations located in
secondary shopping mallsprimarily focused on goods and services related to satisfying
consumers needs for celebrating special events with family and friends, giving gifts and
enjoying life

Stakeholders Preference:

Board: Increase revenues and gross profit margins and decrease expenses
Actual targets after tax earnings per share of $6.25 by 2010
Repayment of Durand Loan by $30,000/month or $360,000/yearly

Durand: Sell shares at highest price possible
Bank: Audited Financial Statements and a detailed business plan for the long term
Hopps: Profitability and increase employee motivation
Mantha: Diversification of gift items

Constraints and other information:

Audited Financial Statement, thus GAAP standardization
CML after-tax min return on capital investments 9%
Income Tax 20% income below $300K and 36% above $300K


CMA Canada 125
SWOT Analysis

Additional points to the previously conducted situational analysis. Some of the points have
been re-iterated to show their relevance to the current analysis.
Internal Analysis

Strengths
Expansion in BC (3 stores) and are very profitable
Good bank relations
Efficient and effective Management team
Hopps open minded to change
Customer relations by employees (Core competency/KSF)
Well-rounded Board members
Unique giftware products

Weaknesses
Ontario and Quebec stores have seen a decline in sales and Nova Scotia is critically
declining in sales
Sales managers cover a wide area of the country, even across provinces
Exposure to shoplifting and damage (2% of sales)
Lack of sales incentives plans
Tobacco distribution costs have increased
Poor inventory control (periodic, based on latest invoices)
10% giftware is obsolete at end of year and sold at high discounts
No budgetary control (end of year review of inventory and accounts) lack of monthly or
quarterly reports
Internal control issues : Segregation of duties/ inventory control/ relationship to
employees/lack of audit and authorization trails

External Analysis

Opportunities
Canadian Economy Strong specifically in BC and Alberta
Wide range of giftware products available from a wide range of suppliers

Threats
Ontario Economy will experience modest growth and other provinces (except
BC/Alberta) will be fortunate to not hit an economic slow down
Alberta has a shrinking supply of low cost labour and high construction and leasing costs
New secondary mall construction is stagnating
Uncontrollable external factors
Lottery and postal outlets are regulated by governments and one vendor per mall is the
norm


126 CMA Canada
Market Analysis:

The CML market is mainly controlled by two major greeting card suppliers (PC and GCC) and
these two suppliers also distribute to major outlets (drugstores, supermarkets, big box stores),
as well as maintain their own outlets. In order to succeed in this industry, competitors must
differentiate themselves, create a loyal customer base and have relevant and unique
complimentary products.

CML Company Competencies:

Niche mall locations (KSF)
Loyal Customer base (KSF)
Diversified and unique giftware products (KSF)


CMA Canada 127
Financial Analysis

Quick Ratio has severely slowed down and had a -66% decrease in 2007 from previous
year
Inventory is turning 6.56 per year or every 56 days, which may effect the obsolete
problem of giftware, however it would have to be compared to industry averages
Return on assets has been declining every year and critically in 2007
Gross margins are steady and strong at about 32% over the last three years
Operating margin has been constant in the last three years at 7.9%
Profit margins have critically declined in the last three years
Dividend pay out doubled LYs
EPS has steadily and increasingly declined in the last three years

By Region
Retail Revenue accounts for 95% of total CML revenue and 89% of total CML Operating
Profit
71% of Revenues and COGS come from Ontario and Quebec is second highest at 19%
Retail operating margin is highest in BC and Ontario (7.69% and 7.15%), Nova Scotia is
1.1% below the company average of 7%
Postal Outlets account for 2% of total revenue and 4% of total operating profit (12 out 54
stores)
Lottery Outlets account for 3% of total revenue and 7% of total operating profit (20/54
stores)

By selection of Product
Cards continue to generate an average of 30% of Revenues, 41% of Gross profit and
take up 46% of the store space
Tobacco generates an average of 30% of Revenue, 10% of GP and takes up 1% of the
store space
Giftware generates an average of 19% of revenue and 28% of GP, while occupying 40%
of the store space
All other products (magazines. Confectionary etc) generate average revenue of 19% and
the same for GP and takes up 13% of the store space

Overall, current financial situation shows that CML must find ways to bring down their operating
costs and continue to focus on their three main products, gift cards, tobacco and giftware. In
addition more careful review of both NS and Quebec operating margins has to be done in order
to try and bring their margins to company average.

128 CMA Canada

1. Product Diversification: executing DVD/ Plates or both
2. Store Expansion
3. Build Warehouse

Strategic Alternative #1: Product Diversification

Pros:
KSF is to have complimentary and unique gift products
Taking advantage of wide array of supplier opportunities, which was previously identified
Increasing revenues (Board mandate)
The ROI is 183% if both products are introduced or 150% for Plates and 217% for DVDs
Assuming that introduction is done in Ontario initially, total investment would be $117K
and it would help generate $546K in Revenue and $214K in GP
They would attract new clientele (even more Youth and younger crowds)

Cons:
Shop lifting has already been identified as an issue and the plates are expensive and
fragile. DVDs attract more shoplifting and fraud (could be returned after viewed)
Space would have to be created for Plates/DVD and this would need to be taken from
one of the current lines
Staff retraining and needed to maintain the plate cabinet

Overall the product diversification is a positive strategic alternative for CML to attract new
clientele and increase revenues. See Exhibit 1 for detailed financials

Strategic Alternative #2: Store Expansion

Pros:
Revenue growth (Stakeholder pref)
Opportunity in a growing market (addresses opportunity
GP would increase

Cons
Operating costs in Alberta are higher (addresses threat)
Cheap labour is scarce (Threat)

Strategic Alternative #3 Warehouse

Pros:
Centralized inventory control for 70% of total retail outlets (39 ontario/54 total)
(addresses current weakness)
Cost saving, operating costs would be reduced by 15% (Board mandate)
Tobacco costs would be reduced by a total of $100K per year in addition to carton costs

Cons

CMA Canada 129
Immediate investment requirement (cashflows are tight as they are)
Increase bank constraints on assets
Will deter from paying off Durand

130 CMA Canada
Recommendation

After reviewing the current situational analysis and the past analysis, which had been conducted
in 2007, it is my belief that CML should look in to increasing their product array through
diversification and constructing the Warehouse in order to capture cost saving benefits that will
help for future viability. Both of these alternatives address the main Stakeholders need of
revenue growth and operating costs management. As part of my recommendation I would also
suggest to introduce the new product lines to Ontario initially and expand to BC, since both
these provinces are experiencing strong economic growth. As for store expansions, it is
appropriate for CML to look to this alternative after it has stabilized its operating costs, however,
I do recommend this in the next five years.


CMA Canada 131
Implementation Plan

Short Term (Immediate to 4 months)
Contract a third party accounting firm to help review and audit financial statements and
to help instate Best Practices
Hire a construction consultant and company to begin warehouse building
Engage suppliers of Plates and DVDs specifics must be made with regards to plates,
as these are fragile and may be bought for specific celebrations (ie. Christmas,
Birthdays) and delivery needs to be prompt
Arrange a training session for Regional managers, who then must train Store managers
Get rid of Mall employee discount and provide discount only for store staff
Implement a residual income * required return on investment compensation for store
managers
Review current incentives for regional managers

Mid-term (4 months to 1 year)
Access construction plans
Review Best Practice procedures advised by consultant
Provide Interim-reports to Bank
Create Business Assessment for Bank
Assess functionality and effectiveness of new product lines
Implement monthly inventory audits by store employees and managers

Long-term (1 year to 5 years)
Review EPS mandate
Provide quarterly and yearly financial reports to bank
Access store productivity and set-up a store plan
Initiate a quarterly audit of stores
Hire a regional manager for every ten stores, thus two more.

Critical Issue for success

In order to help increase the EPS, the current mandate of $360/yr for Durand loan repayment
would have to be slowed down, in order to help align all future strategic initiatives. Management
must choose to initially focus on creating value to the overall company by addressing the
earnings per share mandate. In order to attain the desire value, CML must grow N/I to $206K,
which is a 525% growth rate and would require both revenues to increase and operating costs
to decrease by a minimum of 9.5%. Both of these initiatives are extremely aggressive and
require, CML to commit to expanding product assortment and investing an initial $1,000,000 to
build the warehouse and realize future cost savings.

132 CMA Canada
Conclusion
This reports mandate was to provide guidance with regards to strategic growth for CML and it
has done so, by analysing all current opportunities and by mitigating all environmental risks. In
addition, it has highlighted in its additional situational analysis, some of the current operational
issues that surround CML and must be addressed in order to continue to grow and be profitable.


CMA Canada 133

Current Situation Financial Analysis

2007 2006 2005 2004 Formula
Quick Ratio 365 0.1086 0.3192 0.316 0.2443 (Current Ass- Inv)/ Current Liability
YOY trend -66% 1% 29%
Inventory Turn 6.565 6.6826 6.6704
Daily turn 55.597 54.619 54.72 (COGS/Ave. Inventory)
Will be using yearly Inventory
ROA 0.82% 1.76% 3.06% (N/I)/Total Assets
LTD to Equity 1.6241 1.918 1.9839
GM 32.4% 31.9% 31.7% (gross profit/Revenue)
OPM 7.9% 7.8% 7.9% Operating profit/Revenue
Profit Margin 0.1% 0.3% 0.5% N/I over Revenue
ROE 3.3% 7.0% 12.6% n/I over Equity
Div Pay out Ratio 151.5% 70.4% 40.0% Div/Income
EPS $1.00 $2.15 $3.79 To meet required EPS of $6.25
COGS 18671 18150 18070 17318
YOY trend 2.9% 0.4% 4.3%
Revenue 27626 26643 26446 25642
YOY trend 3.7% 0.7% 3.1%

In thousands Ontario Quebec BC N/S Total By Store Avg.
Contribution
Retail Revenue 19785 5213 1664 964 27626 $ 511.59
By Region 71.6% 18.9% 6.0% 3.5%
COGS 13293 3587 1132 659 18671
By Region 71.2% 19.2% 6.1% 3.5%
GM 32.81% 31.19% 31.97% 31.64% 32.42%
Operating profit 1415 335 128 57 1935 $ 35.83
OPM by region 7.15% 6.43% 7.69% 5.91% 7.00%
Total Retail Rev/Total Rev 95%
Total Retail OP/Total Rev 0.8884
Postal Outlets Only
Revenues 402 100 50 50 602 50.1667
By Region 66.8% 16.6% 8.3% 8.3%
Operating profit 57 14 8 10 89
OPM by region 14.18% 14.00% 16.00% 20.00% 14.78%
2.08% 4%
Loterry Outlets
Revenues 436 146 109 36 727 36.35
Operating Profit 92 31 23 8 154 7.7
3% 7%
Total Revenue 28955
Total Operating Profit 2178


134 CMA Canada
Revenue Rev//store GP per store space % of space
Cards Revenue 30.5% 41.6% 700 46.1%
Tobacco 30.7% 10.4% 15 1.0%
Giftware 19.4% 28.1% 600 39.5%
Other 19.0% 19.8% 205 13.5%
511.6 165.8 1520

CMA Canada 135
Exhibit 1 Alternative 1

Plates
sample
plates
display
case
Ave
Revenue
Ave GP
Ave OP
(7.8%)
ROI
Initial $ 700 $ 800 $7,500 2,250 $585 150%
All stores $37,800 $43,200 $405,000 $121,500 $31,590
Half the Stores $18,200 $20,800 $195,000 $58,500 $15,210
only Ontario $27,300 $31,200 $292,500 $87,750 $22,815
Ontario/Quebec $34,300 $39,200 $367,500 $110,250 $28,665

DVD Inventory Rack
Ave
Revenue
Ave GP ROI
Initial $1,000 $500 $6,500 $3,250 $507 217%
All stores $54,000 $27,000 $351,000 $175,500 $27,378
Half the Stores $26,000 $13,000 $169,000 $84,500 $13,182
only Ontario $39,000 $19,500 $253,500 $126,750 $19,773
Ontario/Quebec $49,000 $24,500 $318,500 $159,250 $24,843

Both $1,700 $1,300 $14,000 $5,500 $1,092 183%
All stores $91,800 $70,200 $756,000 $297,000 $58,968
Half the Stores $44,200 $33,800 $364,000 $143,000 $28,392
only Ontario $66,300 $50,700 $546,000 $214,500 $42,588
Ontario/Quebec $83,300 $63,700 $686,000 $269,500 $53,508


136 CMA Canada
Exhibit 2 Alternative Store Expansion

Alberta Ontario B.C.
initial $137,000 $115,000 $115,000
Revenue $507,308 $554,667
GP 162,338 177,493
operating Profit $36,273 $40,602
N/I Cont 362.73 406.02
RRR 9%


CMA Canada 137
Markers Comments
Unsuccessful Attempt

General Comments

Although this response was not successful, it still demonstrates professional skills. For
example, it contains elements of a strategic approach to solving a business problem,
appropriate relevant data are gathered, and all strategic issues are identified and analyzed.
The main problem with this response is that the quality, depth and breadth of the analyses
are insufficient. Over half of the body of the report is devoted to a situational analysis; there
is limited analysis of the major issues and alternatives. Consequently, the recommendations
are not adequately supported and therefore are not convincing.
Overall, this response does not collectively meet the expected level of skills and
competencies required for this examination. It demonstrates the need for additional
preparation in examination writing techniques. As well, a better foundation of knowledge
and higher-level cognitive skills is required on which to build the candidates
competencies in Year 2 of the Strategic Leadership Program.


The quality of the situational analysis is adequate. Appropriate data is identified and
collected, and a financial assessment is provided.
Integrative thinking is not reasonably demonstrated in this response. This is partly due to the
fact that the extent of the integration is limited as a result of the brief qualitative analysis
provided for the alternatives. As well, the analyses of the alternatives are generic. For
example, the analysis of alternative #1 (Product Diversification)does not provide specific
pros and cons for each product line (e.g. space would be required for the collectible plate
option but not for the DVD option, given the case facts). In the analysis of alternative #2
(Store Expansion), it is not clear which geographic market is being addressed by the pro
opportunity in a growing market.
Examples of integrative thinking include the following:
In the analysis of the alternative to expand stores in B.C.,
o stating as a pro that this meets the board of directors expansion strategy
(uses the overall goals).
o stating as a pro that the current B.C. stores are profitable; sales revenue is
increasing by 8% each year; retail operating profit in 2007 is 19% above
the average CML store (uses a strength).
In the analysis of the alternative to expand stores in Alberta,

138 CMA Canada
o indicating as a pro that this takes advantage of the strong economic
growth in Alberta (uses an external opportunity).
o indicating as a con that retail lease costs are the highest in the country
(uses an external threat).
o indicating as a con that there is little available low-cost labour (uses an
external threat).

In the analysis of the alternative to expand stores in Ontario,
o indicating as a con that CMLs stores in Ontario have been in slow decline
in sales and operating profits the last few years (uses an internal
weakness.)
o indicating as a point that Ontario will experience only moderate growth in
the next few years (uses an external factor.)
In the analysis of minor and implementation issues,
o recommending an incentive plan (identified weakness) to help reduce staff
turnover (identified weakness).
o recommending a point of sale/inventory tracking system (identified
weakness) to manage inventory and minimize obsolescence (new issue).
Implementation Plan
The implementation plan does not match tasks to appropriate individuals or consider
resources required (e.g. financing of the major recommendations). As well, the
implementation plan does not sufficiently address how weaknesses of the
recommended strategies can be overcome. For example, the con of having to create
space for the plates is not considered, nor is the con for shoplifting related to the DVDs.
As well, the operational recommendations proposed are very general and insufficient
(e.g. Contract a third partyto help instate Best Practices, Provide interim-reports to
Bank, Create Business Assessment for Bank).

Some relevant external risks associated with alternative strategies are used in the analyses
of the alternatives, such as the scarcity of low cost labour and the higher operating costs in
Alberta. Although a number of internal risks are identified in the response, few are used in
the analysis of the strategic alternatives or resolved.
Compliance
Compliance issues are not adequately identified or resolved in the response.

Relevant revenues and costs are not reasonably used in the analysis of the alternatives. For
example, the analysis of Collectible Plates does not include opportunity costs related to
reducing 20 square feet of other products; the analysis for expanding stores is very brief and

CMA Canada 139
does not include the additional travel costs to Western Canada; and there is no analysis
provided for the warehousing alternative, even though this alternative is recommended.
Performance management concepts and tools are not adequately used in the qualitative
analysis. For example, the recommendation to hire a regional manger for every ten stores,
thus two more does not adequately resolve the issue of sales managers having to cover a
wide area, i.e. there are only 3 stores in B.C. so at least one manager would still have to
cover a wide area. The recommendations in the implementation plan are too brief to
demonstrate sufficient understanding of the underlying performance management concepts.
For example, recommendations such as arrange a training session, implement monthly
inventory audits, and access store productivity and set-up store plan are not explained
well enough to convince the stakeholders of their usefulness.

Corporate performance measurement concepts or tools are not used in the response.
Incentive systems issues are identified but not appropriately discussed. For example, a
generic recommendation is made to review current incentives for regional managers. As
well, the recommendation to implement a residual income * require return on investment
compensation for store managers is not explained.

Capital Budgeting
No capital budgeting methods for evaluating investment alternatives (net present value,
internal rate of return) are used in the response.
There is no attempt to calculate the financing available or the financing required for the
individual alternatives or for the recommendations.
The response does not use any other relevant financial management concepts.

Financial Analysis
Liquidity, activity, profitability, debt-to-equity, and earnings per share ratios are appropriately
calculated for 3 years and are reasonably interpreted.
Although the response considers the increase required in net income in order to attain the
desired earnings per share, the response does not calculate the earnings per share resulting
from the recommendations and compare it to the board of directors target of $6.25 by 2010.
No other financial reporting concepts or tools are considered or applied in the response.

140 CMA Canada

Prioritization can be improved given the time-constrained examination conditions, too
much of the response is devoted to the situational analysis and not enough on the analyses
of the issues and alternatives. Both the qualitative and quantitative analyses of the issues
and alternatives are of unreasonable breadth and depth, such that recommendations are
not convincing. As well, the minor and implementation issues are not addressed in
reasonable depth. Although many of the weaknesses and minor issues are identified in the
situational analysis, few are referred to again in the response.
E2 Leadership

The recommended strategy is not presented in a convincing manner because it does not
demonstrate the following:
1. the 9% after-tax hurdle rate is achieved for the recommended capital
investments.
2. the desired earnings per share of $6.25 will be achieved by 2010.
3. the $30,000 per month cash outflow to repay Durand is feasible.
4. the funding to implement all the recommended actions is feasible.
The absence of supporting analysis for the above reduces the usefulness of the report.

No ethical issues or conflicts of interest are identified.
The response does not exhibit a reasonable professional tone. For example, the use of the
first person (e.g. I, we) and other language (get rid of, cashflows are tight as they are)
are inappropriate for a professional report. As well, it is not reasonable or tactful to
recommend that the company slow down repayment of the loan to the majority shareholder
and founder of the company when she needs the cash to support her sick husband.
E4 Communication

The format of the report appropriately includes an executive summary, introduction, body,
conclusion, and appendices. The introduction does not indicate the purpose and the scope
of the report. The executive summary briefly summarizes the main strategic alternatives and
provides the strategic recommendations; however, it could be improved by also identifying
some of the other significant issues and operational recommendations. The conclusion does
not summarize the findings and draw the report to a close. The appendices are brief, not
cross-referenced in the body of the report, and do not include titles.

CMA Canada 141
There are some instances of poor grammar and incomplete sentences in the report.
Abbreviations that are used in the report are not always clearly defined prior to using them
(e.g. LYs, GP). Points in the analyses are not always clear (e.g. some points are too brief
to discern what is intended). The audit trail for some of the quantitative analysis is
unreasonable. Details should be given for calculations and amounts should be clearly
labeled.

142 CMA Canada
Supplement of Formulae

1. CAPITAL STRUCTURE
a) After-Tax Marginal Cost of Debt:
( )
k k T or
T I
F
b
=

1
1 ( )

where k =interest rate
T =corporate tax rate
I =annual interest payment on debt
F =face value of debt

b) Cost of Preferred Shares:
k
D
NP
p
p
p
=
where D
p
=stated annual dividend payment on shares
NP
p
=net proceeds on preferred share issue

c) Cost of Common Equity:
i) Cost of Common Shares (Capitalization of Dividends with Constant
Growth Rate):
k
D
NP
g
e
e
= +
1

where D
1
=dividend expected for period 1
NP
e
=net proceeds on common share issue
g =annual long-term dividend growth rate
ii) Cost of Retained Earnings:
k r
D
P
g
re e
e
= = +
1

where P
e
=market price of a share
r
e
=expected return on common equity
iii) Capital Asset Pricing Model:
( )
R R R R
j f j m f
= +
where R
j
=expected rate of return on security j
R
f
=risk-free rate
R
m
=expected return for the market portfolio

j
=beta coefficient for security j (measure of
systematic risk)

CMA Canada 143
d) Weighted Average Cost of Capital:
k
B
V
k
P
V
k
E
V
k
b p e
=

where B =amount of debt outstanding
P =amount of preferred shares outstanding
E =amount of common equity outstanding
V =B +P +E =total value of firm

2. PRESENT VALUE OF TAX SHIELD FOR AMORTIZABLE ASSETS

a) Present Value of Total Tax Shield from CCA for a New Asset
Present Value =
( ) ( ) ( )

+
+
+
=
+
+
+ k 1
0.5k 1
k d
CdT
k 1 2
k 2
k d
Ctd

b) Present Value of Total Tax Shield from CCA for an Asset that is Not Newly
Acquired
Present Value =
+ k d
dT
UCC
c) Present Value of Total Tax Shield Lost From Salvage
Present Value =
( ) ( )
,
+ +
+ +

k d
dT
k 1 k d
dT
k 1
S
1 n
n
n
n
S
or depending on cash flow
assumptions

Notation for above formulae:
C =net initial investment
UCC =undepreciated capital cost of asset
S
n
=salvage value of asset realized at end of year n
T =corporate tax rate
k =discount rate or time value of money
d =maximum rate of capital cost allowance
n =total life of investment

144 CMA Canada
Table 1
Present Value of One Dollar Due at the End of n Years
( )
P
i
n
=
+
1
1

n 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
01
02
03
04
05
0.990
.980
.971
.961
.951
0.980
.961
.942
.924
.906
0.971
.943
.915
.888
.863
0.962
.925
.889
.855
.822
0.952
.907
.864
.823
.784
0.943
.890
.840
.792
.747
0.935
.873
.816
.763
.713
0.926
.857
.794
.735
.681
0.917
.842
.772
.708
.650
0.909
.826
.751
.683
.621
06
07
08
09
10
.942
.933
.923
.914
.905
.888
.871
.853
.837
.820
.837
.813
.789
.766
.744
.790
.760
.731
.703
.676
.746
.711
.677
.645
.614
.705
.665
.627
.592
.558
.666
.623
.582
.544
.508
.630
.583
.540
.500
.463
.596
.547
.502
.460
.422
.564
.513
.467
.424
.386
11
12
13
14
15
.896
.887
.879
.870
.861
.804
.788
.773
.758
.743
.722
.701
.681
.661
.642
.650
.625
.601
.577
.555
.585
.557
.530
.505
.481
.527
.497
.469
.442
.417
.475
.444
.415
.388
.362
.429
.397
.368
.340
.315
.388
.356
.326
.299
.275
.350
.319
.290
.263
.239
16
17
18
19
20
.853
.844
.836
.828
.820
.728
.714
.700
.686
.673
.623
.605
.587
.570
.554
.534
.513
.494
.475
.456
.458
.436
.416
.396
.377
.394
.371
.350
.331
.312
.339
.317
.296
.277
.258
.292
.270
.250
.232
.215
.252
.231
.212
.194
.178
.218
.198
.180
.164
.149
21
22
23
24
25
.811
.803
.795
.788
.780
.660
.647
.634
.622
.610
.538
.522
.507
.492
.478
.439
.422
.406
.390
.375
.359
.342
.326
.310
.295
.294
.278
.262
.247
.233
.242
.226
.211
.197
.184
.199
.184
.170
.158
.146
.164
.150
.138
.126
.116
.135
.123
.112
.102
.092


CMA Canada 145
Table 1 (contd)
( )
P
i
n
=
+
1
1

n 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
01
02
03
04
05
0.901
.812
.731
.659
.593
0.893
.797
.712
.636
.567
0.885
.783
.693
.613
.543
0.877
.769
.675
.592
.519
0.870
.756
.658
.572
.497
0.862
.743
.641
.552
.476
0.855
.731
.624
.534
.456
0.847
.718
.609
.516
.437
0.840
.706
.593
.499
.419
0.833
.694
.579
.482
.402
06
07
08
09
10
.535
.482
.434
.391
.352
.507
.452
.404
.361
.322
.480
.425
.376
.333
.295
.456
.400
.351
.308
.270
.432
.376
.327
.284
.247
.410
.354
.305
.263
.227
.390
.333
.285
.243
.208
.370
.314
.266
.225
.191
.352
.296
.249
.209
.176
.335
.279
.233
.194
.162
11
12
13
14
15
.317
.286
.258
.232
.209
.287
.257
.229
.205
.183
.261
.231
.204
.181
.160
.237
.208
.182
.160
.140
.215
.187
.163
.141
.123
.195
.168
.145
.125
.108
.178
.152
.130
.111
.095
.162
.137
.116
.099
.084
.148
.124
.104
.088
.074
.135
.112
.093
.078
.065
16
17
18
19
20
.188
.170
.153
.138
.124
.163
.146
.130
.116
.104
.142
.125
.111
.098
.087
.123
.108
.095
.083
.073
.107
.093
.081
.070
.061
.093
.080
.069
.060
.051
.081
.069
.059
.051
.043
.071
.060
.051
.043
.037
.062
.052
.044
.037
.031
.054
.045
.038
.031
.026
21
22
23
24
25
.112
.101
.091
.082
.074
.093
.083
.074
.066
.059
.077
.068
.060
.053
.047
.064
.056
.049
.043
.038
.053
.046
.040
.035
.030
.044
.038
.033
.028
.024
.037
.032
.027
.023
.020
.031
.026
.022
.019
.016
.026
.022
.018
.015
.013
.022
.018
.015
.013
.010


146 CMA Canada
Table 1 (contd)
( )
P
i
n
=
+
1
1

n 21% 22% 23% 24% 25% 26% 27% 28% 29% 30%
01
02
03
04
05
0.826
.683
.564
.467
.386
0.820
.672
.551
.451
.370
0.813
.661
.537
.437
.355
0.806
.650
.524
.423
.341
0.800
.640
.512
.410
.328
0.794
.630
.500
.397
.315
0.787
.620
.488
.384
.303
0.781
.610
.477
.373
.291
0.775
.601
.466
.361
.280
0.769
.592
.455
.350
.269
06
07
08
09
10
.319
.263
.218
.180
.149
.303
.249
.204
.167
.137
.289
.235
.191
.155
.126
.275
.222
.179
.144
.116
.262
.210
.168
.134
.107
.250
.198
.157
.125
.099
.238
.188
.148
.116
.092
.227
.178
.139
.108
.085
.217
.168
.130
.101
.078
.207
.159
.123
.094
.073
11
12
13
14
15
.123
.102
.084
.069
.057
.112
.092
.075
.062
.051
.103
.083
.068
.055
.045
.094
.076
.061
.049
.040
.086
.069
.055
.044
.035
.079
.062
.050
.039
.031
.072
.057
.045
.035
.028
.066
.052
.040
.032
.025
.061
.047
.037
.028
.022
.056
.043
.033
.025
.020
16
17
18
19
20
.047
.039
.032
.027
.022
.042
.034
.028
.023
.019
.036
.030
.024
.020
.016
.032
.026
.021
.017
.014
.028
.023
.018
.014
.012
.025
.020
.016
.012
.010
.022
.017
.014
.011
.008
.019
.015
.012
.009
.007
.017
.013
.010
.008
.006
.015
.012
.009
.007
.005
21
22
23
24
25
.018
.015
.012
.010
.009
.015
.013
.010
.008
.007
.013
.011
.009
.007
.006
.011
.009
.007
.006
.005
.009
.007
.006
.005
.004
.008
.006
.005
.004
.003
.007
.005
.004
.003
.003
.006
.004
.003
.003
.002
.005
.004
.003
.002
.002
.004
.003
.002
.002
.001


CMA Canada 147
Table 1 (contd)
( )
P
i
n
=
+
1
1

n 31% 32% 33% 34% 35% 36% 37% 38% 39% 40%
01
02
03
04
05
0.763
.583
.445
.340
.259
0.758
.574
.435
.329
.250
0.752
.565
.425
.320
.240
0.746
.557
.416
.310
.231
0.741
.549
.406
.301
.223
0.735
.541
.398
.292
.215
0.730
.533
.389
.284
.207
0.725
.525
.381
.276
.200
0.719
.518
.372
.268
.193
0.714
.510
.364
.260
.186
06
07
08
09
10
.198
.151
.115
.088
.067
.189
.143
.108
.082
.062
.181
.136
.102
.077
.058
.173
.129
.096
.072
.054
.165
.122
.091
.067
.050
.158
.116
.085
.063
.046
.151
.110
.081
.059
.043
.145
.105
.076
.055
.040
.139
.100
.072
.052
.037
.133
.095
.068
.048
.035
11
12
13
14
15
.051
.039
.030
.023
.017
.047
.036
.027
.021
.016
.043
.033
.025
.018
.014
.040
.030
.022
.017
.012
.037
.027
.020
.015
.011
.034
.025
.018
.014
.010
.031
.023
.017
.012
.009
.029
.021
.015
.011
.008
.027
.019
.014
.010
.007
.025
.018
.013
.009
.006
16
17
18
19
20
.013
.010
.008
.006
.005
.012
.009
.007
.005
.004
.010
.008
.006
.004
.003
.009
.007
.005
.004
.003
.008
.006
.005
.003
.002
.007
.005
.004
.003
.002
.006
.005
.003
.003
.002
.006
.004
.003
.002
.002
.005
.004
.003
.002
.001
.005
.003
.002
.002
.001
21
22
23
24
25
.003
.003
.002
.002
.001
.003
.002
.002
.001
.001
.003
.002
.001
.001
.001
.002
.002
.001
.001
.001
.002
.001
.001
.001
.001
.002
.001
.001
.001
.001
.001
.001
.001
.001
.001
.001
.001
.001
.001
.001
.001
.001
.001
.001
.001
.001
.001
.001
.001
.001

148 CMA Canada
Table 2
Present Value of One Dollar Per Year n Years at i%
( )
P
i
i
n
n
=

+
1
1
1

n 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
01
02
03
04
05
0.990
1.970
2.941
3.902
4.854
0.980
1.942
2.884
3.808
4.713
0.971
1.914
2.829
3.717
4.580
0.962
1.886
2.775
3.630
4.452
0.952
1.859
2.723
3.547
4.330
0.943
1.833
2.673
3.465
4.212
0.935
1.808
2.624
3.387
4.100
0.926
1.783
2.577
3.312
3.993
0.917
1.759
2.531
3.240
3.890
0.909
1.736
2.487
3.170
3.791
06
07
08
09
10
5.796
6.728
7.652
8.566
9.471
5.601
6.472
7.325
8.162
8.983
5.417
6.230
7.020
7.786
8.530
5.242
6.002
6.733
7.435
8.111
5.076
5.786
6.463
7.108
7.722
4.917
5.582
6.210
6.802
7.360
4.767
5.389
5.971
6.515
7.024
4.623
5.206
5.747
6.247
6.710
4.486
5.033
5.535
5.995
6.418
4.355
4.868
5.335
5.759
6.145
11
12
13
14
15
10.368
11.255
12.134
13.004
13.865
9.787
10.575
11.348
12.106
12.849
9.253
9.954
10.635
11.296
11.938
8.760
9.385
9.986
10.563
11.118
8.306
8.863
9.394
9.899
10.380
7.887
8.384
8.853
9.295
9.712
7.499
7.943
8.358
8.745
9.108
7.139
7.536
7.904
8.224
8.560
6.805
7.161
7.487
7.786
8.061
6.495
6.814
7.103
7.367
7.606
16
17
18
19
20
14.718
15.562
16.398
17.226
18.046
13.578
14.292
14.992
15.678
16.351
12.561
13.166
13.753
14.324
14.877
11.652
12.166
12.659
13.134
13.590
10.838
11.274
11.690
12.085
12.462
10.106
10.477
10.828
11.158
11.470
9.447
9.763
10.059
10.336
10.594
8.851
9.122
9.372
9.604
9.818
8.313
8.544
8.756
8.950
9.129
7.824
8.022
8.201
8.365
8.514
21
22
23
24
25
18.857
19.661
20.456
21.244
22.023
17.011
17.658
18.292
18.914
19.523
15.415
15.937
16.444
16.936
17.413
14.029
14.451
14.857
15.247
15.622
12.821
13.163
13.489
13.799
14.094
11.764
12.042
12.303
12.550
12.783
10.836
11.061
11.272
11.469
11.654
10.017
10.201
10.371
10.529
10.675
9.292
9.442
9.580
9.707
9.823
8.649
8.772
8.883
8.985
9.077


CMA Canada 149
Table 2 (contd)
( )
P
i
i
n
n
=

+
1
1
1

n 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
01
02
03
04
05
0.901
1.713
2.444
3.102
3.696
0.893
1.690
2.402
3.037
3.605
0.885
1.668
2.361
2.975
3.517
0.877
1.647
2.322
2.914
3.433
0.870
1.626
2.283
2.855
3.352
0.862
1.605
2.246
2.798
3.274
0.855
1.585
2.210
2.743
3.199
0.848
1.566
2.174
2.690
3.127
0.840
1.547
2.140
2.639
3.058
0.833
1.528
2.107
2.589
2.991
06
07
08
09
10
4.231
4.712
5.146
5.537
5.889
4.111
4.564
4.968
5.328
5.650
3.998
4.423
4.799
5.132
5.426
3.889
4.288
4.639
4.946
5.216
3.785
4.160
4.487
4.772
5.019
3.685
4.039
4.344
4.607
4.833
3.589
3.922
4.207
4.451
4.659
3.498
3.812
4.078
4.303
4.494
3.410
3.706
3.954
4.163
4.339
3.326
3.605
3.837
4.031
4.193
11
12
13
14
15
6.207
6.492
6.750
6.982
7.191
5.938
6.194
6.424
6.628
6.811
5.687
5.918
6.122
6.303
6.462
5.453
5.660
5.842
6.002
6.142
5.234
5.421
5.583
5.725
5.847
5.029
5.197
5.342
5.468
5.576
4.836
4.988
5.118
5.229
5.324
4.656
4.793
4.910
5.008
5.092
4.487
4.611
4.715
4.802
4.876
4.327
4.439
4.533
4.611
4.676
16
17
18
19
20
7.379
7.549
7.702
7.839
7.963
6.974
7.120
7.250
7.366
7.469
6.604
6.729
6.840
6.938
7.025
6.265
6.373
6.467
6.550
6.623
5.954
6.047
6.128
6.198
6.259
5.669
5.749
5.818
5.878
5.929
5.405
5.475
5.534
5.585
5.628
5.162
5.222
5.273
5.316
5.353
4.938
4.990
5.033
5.070
5.101
4.730
4.775
4.812
4.844
4.870
21
22
23
24
25
8.075
8.176
8.266
8.348
8.422
7.562
7.645
7.718
7.784
7.843
7.102
7.170
7.230
7.283
7.330
6.687
6.743
6.792
6.835
6.873
6.313
6.359
6.399
6.434
6.464
5.973
6.011
6.044
6.073
6.097
5.665
5.696
5.723
5.747
5.766
5.384
5.410
5.432
5.451
5.467
5.127
5.149
5.167
5.182
5.195
4.891
4.909
4.925
4.937
4.948


150 CMA Canada
Table 2 (contd)
( )
P
i
i
n
n
=

+
1
1
1

n 21% 22% 23% 24% 25% 26% 27% 28% 29% 30%
01
02
03
04
05
0.826
1.510
2.074
2.540
2.926
0.820
1.492
2.042
2.494
2.864
0.813
1.474
2.011
2.448
2.804
0.807
1.457
1.981
2.404
2.745
0.800
1.440
1.952
2.362
2.689
0.794
1.424
1.923
2.320
2.635
0.787
1.407
1.896
2.280
2.583
0.781
1.392
1.868
2.241
2.532
0.775
1.376
1.842
2.203
2.483
0.769
1.361
1.816
2.166
2.436
06
07
08
09
10
3.245
3.508
3.726
3.905
4.054
3.167
3.416
3.619
3.786
3.923
3.092
3.327
3.518
3.673
3.799
3.021
3.242
3.421
3.566
3.682
2.951
3.161
3.329
3.463
3.571
2.885
3.083
3.241
3.366
3.465
2.821
3.009
3.156
3.273
3.364
2.759
2.937
3.076
3.184
3.269
2.700
2.868
2.999
3.100
3.178
2.643
2.802
2.925
3.019
3.092
11
12
13
14
15
4.177
4.279
4.362
4.432
4.489
4.035
4.127
4.203
4.265
4.315
3.902
3.985
4.053
4.108
4.153
3.776
3.851
3.912
3.962
4.001
3.656
3.725
3.780
3.824
3.859
3.543
3.606
3.656
3.695
3.726
3.437
3.493
3.538
3.573
3.601
3.335
3.387
3.427
3.459
3.483
3.239
3.286
3.322
3.351
3.373
3.147
3.190
3.223
3.249
3.268
16
17
18
19
20
4.536
4.576
4.608
4.635
4.657
4.357
4.391
4.419
4.442
4.460
4.189
4.219
4.243
4.263
4.279
4.033
4.059
4.080
4.097
4.110
3.887
3.910
3.928
3.942
3.954
3.751
3.771
3.786
3.799
3.808
3.623
3.640
3.654
3.664
3.673
3.503
3.518
3.529
3.539
3.546
3.390
3.403
3.413
3.421
3.427
3.283
3.295
3.304
3.311
3.316
21
22
23
24
25
4.675
4.690
4.703
4.713
4.721
4.476
4.488
4.499
4.507
4.514
4.292
4.302
4.311
4.318
4.323
4.121
4.130
4.137
4.143
4.147
3.963
3.971
3.976
3.981
3.985
3.816
3.822
3.827
3.831
3.834
3.679
3.684
3.689
3.692
3.694
3.551
3.556
3.559
3.562
3.564
3.432
3.436
3.438
3.441
3.442
3.320
3.323
3.325
3.327
3.329


CMA Canada 151
Table 2 (contd)
( )
P
i
i
n
n
=

+
1
1
1

n 31% 32% 33% 34% 35% 36% 37% 38% 39% 40%
01
02
03
04
05
0.763
1.346
1.791
2.131
2.390
0.758
1.332
1.766
2.096
2.345
0.752
1.317
1.742
2.062
2.302
0.746
1.303
1.719
2.029
2.260
0.741
1.289
1.696
1.997
2.220
0.735
1.276
1.674
1.966
2.181
0.730
1.263
1.652
1.936
2.143
0.725
1.250
1.630
1.906
2.106
0.719
1.237
1.609
1.877
2.070
0.714
1.225
1.589
1.849
2.035
06
07
08
09
10
2.588
2.739
2.854
2.942
3.009
2.534
2.678
2.786
2.868
2.930
2.483
2.619
2.721
2.798
2.855
2.433
2.562
2.658
2.730
2.784
2.385
2.508
2.598
2.665
2.715
2.339
2.455
2.540
2.603
2.650
2.294
2.404
2.485
2.544
2.587
2.251
2.356
2.432
2.487
2.527
2.209
2.308
2.380
2.432
2.469
2.168
2.263
2.331
2.379
2.414
11
12
13
14
15
3.060
3.100
3.129
3.152
3.170
2.978
3.013
3.040
3.061
3.076
2.899
2.931
2.956
2.974
2.988
2.824
2.853
2.876
2.892
2.905
2.752
2.779
2.799
2.814
2.826
2.683
2.708
2.727
2.740
2.750
2.618
2.641
2.658
2.670
2.679
2.556
2.576
2.592
2.603
2.611
2.496
2.515
2.529
2.539
2.546
2.438
2.456
2.469
2.478
2.484
16
17
18
19
20
3.183
3.193
3.201
3.207
3.211
3.088
3.097
3.104
3.109
3.113
2.999
3.007
3.012
3.017
3.020
2.914
2.921
2.926
2.930
2.933
2.834
2.840
2.844
2.848
2.850
2.758
2.763
2.767
2.770
2.772
2.685
2.690
2.693
2.696
2.698
2.616
2.621
2.624
2.626
2.627
2.551
2.555
2.557
2.559
2.561
2.489
2.492
2.494
2.496
2.497
21
22
23
24
25
3.215
3.217
3.219
3.221
3.222
3.116
3.118
3.120
3.121
3.122
3.023
3.025
3.026
3.027
3.028
2.935
2.937
2.938
2.939
2.939
2.852
2.853
2.854
2.855
2.856
2.773
2.775
2.775
2.776
2.777
2.699
2.700
2.701
2.701
2.702
2.629
2.629
2.630
2.630
2.631
2.562
2.562
2.563
2.563
2.563
2.498
2.499
2.499
2.499
2.499

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