Case Study Guidance

MPRBA-302 28th January 2013

Adapted from: Thomas L Wheelen & J. David Hunger

Case Study Guidance

Leben Johnson

Case Analysis
Research: Go beyond information in the case Research environmental setting Check decision date of case Use information services
COMPUSTAT, Compact Disclosure, CD/International www.hoovers.com www.sec.gov
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Case Analysis
Research: Annual reports 10K form Income statements Balance sheets Cash flow statements Economic conditions Industry information
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Case Analysis

Resources for Case Library Research:

Company Information:
Moodys Manuals on Investment Standard & Poors Register of Corporations, Directors, and Executives Value Lines Investment Survey Findex: The Directory of Market Research Reports, Studies and Surveys
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Case Analysis
Resources for Case Library Research:
Economic Information:

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Business Cycle Development U.S. Census Bureau Current Business Reports Economic Indicators Long-Term Economic Growth Monthly Labor Review U.S. Industrial Outlook Overseas Business Reports
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Case Analysis
Resources for Case Library Research:
Industry Information:

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Business Week Fortune Industry Survey Industry Week Forbes Inc.

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Case Analysis
Resources for Case Library Research:
Directory and Index Information:
Business Periodical Index Directory of National Trade Associations Encyclopedia of Associations Funk and Scotts Index of Corporations and Industries Thomass Register of American Manufacturers Wall Street Journal Index
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Case Analysis

Resources for Case Library Research:

Ratio Analysis Information:
Almanac of Business and Industrial Financial Ratios Annual Statement Studies Duns Review Industry Norms and Key Business Ratios
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Case Analysis
Resources for Case Library Research:
Online Information:

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www.hoovers.com www.sec.gov www.pathfinder.com www.dbisna.com/dnb/dnbhome.htm www.fuld.com www.economist.com www.w100.com www.bloomberg.com

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Case Analysis
Financial Analysis:
Ratio analysis
Liquidity ratios Profitability ratios Activity ratios Leverage ratios

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Financial Ratio Analysis Liquidity

Formula
1. Liquidity Ratios Current ratio
Current assets Current liabilities

How Expressed

Meaning

Decimal

A short-term indicator of the companys ability to pay its short-term liabilities from short-term assets; how much of current assets are available to cover each dollar of current liabilities. Measures the companys ability to pay off its short-term obligations from current assets, excluding inventories. A measure of inventory balance; measures the extent to which the cushion of excess current assets over current liabilities may be threatened by unfavorable changes in inventory. Measures the extent to which the companys capital is in cash or cash equivalents; shows how much of the current obligations can be paid from cash or near-cash assets.

Quick (acid test) ratio

Current assets Inventory Current liabilities Inventory Current assets Current liabilities

Decimal

Inventory to net working capital

Decimal

Cash ratio

Cash + Cash equivalents Current liabilities

Decimal

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Financial Ratio Analysis Profitability

Formula
2. Profitability Ratios Net profit margin Gross profit margin
Net profit after taxes Net sales Sales Cost of goods sold Net sales Net profit after taxes Total assets

How Expressed

Meaning

Percentage Percentage

Shows how much after-tax profits are generated by each dollar of sales. Indicates the total margin available to cover other expenses beyond cost of goods sold, and still yield a profit. Measures the rate of return on the total assets utilized in the company; a measure of managements efficiency, it shows the return on all the assets under its control regardless of source of financing. Measures the rate of return on the book value of shareholders total investment in the company. Shows the after-tax earnings generated for each share of common stock.

Return on investment (ROI)

Percentage

Return on equity (ROE) Earnings per share (EPS)

Net profit after taxes Shareholders equity Net profit after taxes preferred stock dividends Average number of common shares

Percentage

Dollars per share

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Financial Ratio Analysis Activity

Formula
3. Activity Ratios Inventory turnover Net sales Inventory Inventory Cost of goods sold 365 Net sales Net working capital Sales Total assets Sales Fixed assets Accounts receivable Sales for year 365 Annual credit sales Accounts receivable Accounts payable Purchases for year 365 Cash Net sales for year 365

How Expressed

Meaning

Decimal

Days of inventory Net working capital turnover Asset turnover

Days Decimal Decimal

Fixed asset turnover

Decimal

Average collection period

Days

Accounts receivable turnover Accounts payable period Days of cash

Decimal Days Days

Measures the number of times that average inventory of finished goods was turned over or sold during a period of time, usually a year. Measures the number of one days worth of inventory that a company has on hand at any given time. Measures how effectively the net working capital is used to generate sales. Measures the utilization of all the companys assets; measures how many sales are generated by each dollar of assets. Measures the utilization of the companys fixed assets (i.e., plant and equipment); measures how many sales are generated by each dollar of fixed assets. Indicates the average length of time in days that a company must wait to collect a sale after making it; may be compared to the credit terms offered by the company to its customers. Indicates the number of times that accounts receivable are cycled during the period (usually a year). Indicates the average length of time in days that the company takes to pay its credit purchases. Indicates the number of days of cash on hand, at present sales levels.

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Financial Ratio Analysis Leverage

Formula
4. Leverage Ratios Debt to asset ratio
Total debt Total assets

How Expressed

Meaning

Percentage

Measures the extent to which borrowed funds have been used to finance the companys assets. Measures the funds provided by creditors versus the funds provided by owners. Measures the long-term component of capital structure. Indicates the ability of the company to meet its annual interest costs. A measure of the companys ability to meet all of its fixed-charge obligations. Measures the short-term financing portion versus that provided by owners.

Debt to equity ratio

Total debt Shareholders equity Long-term debt Shareholders equity Profit before taxes + Interest charges Interest charges Profit before taxes + Interest charges + Lease charges Interest charges + Lease obligations Current liabilities Shareholders equity

Percentage

Long-term debt to capital structure Times interest earned Coverage of fixed charges Current liabilities to equity

Percentage

Decimal

Decimal

Percentage

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Financial Ratio Analysis Other

Formula
5. Other Ratios Price/earning ratio
Market price per share Earnings per share

How Expressed

Meaning

Decimal

Shows the current markets evaluation of a stock, based on its earnings; shows how much the investor is willing to pay for each dollar of earnings.

Dividend payout ratio

Annual dividends per share Annual earnings per share

Percentage

Indicates the percentage of profit that is paid out as dividends.

Dividend yield on common stock

Annual dividends per share Current market price per share

Percentage

Indicates the dividend rate of return to common shareholders at the current market price.

Note: In using ratios for analysis, calculate ratios for the corporation and compare them to the average and quartile ratios for the particular industry. Refer to Standard and Poors and Robert Morris Associates for average industry data. Special thanks to Dr. Moustafa H. Abdelsamad, Dean, Business School, Texas A&M UniversityCorpus Christi, Corpus Christi, Texas, for his definitions of these ratios.

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Case Analysis
Analyzing Financial Statements:
Scrutinize historical statements Compare historical statements over time Calculate changes in categories from year to year Determine the change as a percentage Adjust for inflation
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Case Analysis

Common Size Statements:

Income statements and balance sheets in which the dollar figures have been converted into percentages.

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Altmans Bankruptcy Formula

Z = 1.2x1 + 1.4x2 + 3.3x3 + 0.6x4 + 1.0x5

where
x1 = Working capital divided by total assets. x2 = Retained earnings divided by total assets. x3 = Earnings before interest and taxes divided by total assets. x4 = Market value of equity divided by total liabilities. x5 = Sales divided by total assets. Z = Overall index of corporate fiscal health.

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Index of Sustainable Growth

g*= [ p (1 D) (1 + L)] / [T P (1 D) (1+L)]
where P = Net profit before taxes/net sales x 100 D = Target dividends/profit after tax L = Total liabilities/net worth T = Total assets/net sales x 100
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Case Analysis

Operating cash flow:

Amount of money generated by a company before the cost of financing and taxes.
Net income + depletion, amortization, interest expense, and income tax expense

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Case Analysis
Economic Measures:
Constant dollars
Dollars adjusted for inflation to make them comparable over various years.
CPI

Prime interest rate

Rate of interest banks charge on their lowest risk loans.

Gross Domestic Product (GDP)

Total output of goods and services within a countrys borders.
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Strategic Audit Worksheet: Part 1

Strategic Audit Heading (+) Factors I. Current Situation
A. Past Corporate Performance Indexes B. Strategic Posture Current Mission Current Objectives Current Strategies Current Policies

Analysis (-) Factors

Com m ents

SW OT Analysis Begins: II. Corporate Governance

A. Board of Directors B. Top Management

III. External Environment (EFAS): Opportunities and Threats(SW OT)

A. Societal Environment B. Task Environment Industry Analysis

IV. Internal Environment (IFAS): Strengths and Weaknesses(SWOT)

A. Corporate Structure B. Corporate Culture C. Corporate Resources

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Strategic Audit Worksheet: Part 2

S trategic Aud it Heading (+) Factors
1. M arketing 2. Finance 3. Research and Developm ent 4. Operations and Logistics 5. Hum an Resources 6. Inform ation System s

Analysis (-) Factors

C om m ents

V. Analysis of Strategic Factors (SFAS)

A. Key Internal and External Strategic Factors (SW OT) B. Review of Mission and Objectives

SW OT Analysis Ends. Recom m endation Begins: V I. Alternatives and Recom m endations

A. Strategic Alternatives B. Recomm ended Strategy

V II. Im ple m entation V III. E valuation and C ontrol

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Convert the following two years of income statements from the Maytag Corporation into common-size statements. The dollar figures are in thousands. What does converting to a common size reveal? 1992 % 1991 % Net sales $3,041,223 $2,970,626 Cost of sales 2,339,406 2,254,221 Gross profits 701,817 716,405 Selling, general, and admin. 528,250 524,898 expenses Reorganization expenses 95,000 Operating income 78,567 191,507 Interest expense (75,004) (75,159) Othernet 3,983 7,069 Income before taxes and accounting changes 7,546 123,417 Income taxes (15,900) (44,400) Income before accounting changes (8,354) 79,017 Effects of accounting changes for post-retirement benefits (307,000) Net income (loss) $(315,354) $79,017 Case Study Guidance 24

Case Analysis
Case Analysis Method: Read case Read case with strategic audit Do outside research Begin SWOT analysis
EFAS IFAS
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Case Analysis

Case Analysis Method: Write Strategic Audit

Parts I IV

Write Strategic Audit

Part V SFAS

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Case Analysis

Past Strategic Initiatives: Elaborate on past strategic initiatives

Stating when, why, what, how and the outcome. Who where the competitors
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Case Analysis
Write Strategic Audit
Part VI
Alternatives Recommendations

Write Strategic Audit

Part VII
Implementation

Write Strategic Audit

Part VIII
Evaluation & Control

Proof & Fine-Tune Audit

Final Draft
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Case Study Guidance