Case Study Guidance

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Case Study Guidance

Case Study Guidance

MPRBA-302

28th

January 2013

Adapted from: Thomas L Wheelen & J. David Hunger

Leben Johnson


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Case Study Guidance

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 Study Guidance

Case Analysis

Research:

Annual reports

10K form Income statements

Balance sheets

Cash flow statements

Economic conditions

Industry information

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Case Study Guidance

Case Analysis

Resources for Case Library Research:

Company Information: Moodys Manuals on Investment

Standard & Poors Register ofCorporations, Directors, and Executives

Value Lines Investment Survey Findex: The Directory of Market Research

Reports, Studies and Surveys

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Case Analysis


Economic Information:

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


Industry Information: Business Week

Fortune

Industry Survey

Industry Week Forbes

Inc.

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Case Study Guidance

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 Study Guidance

Case Analysis


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 Study Guidance

Case Analysis


Online Information:

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 Study Guidance

Case Analysis

Financial Analysis:

Ratio analysis

Liquidity ratios

Profitability ratios

Activity ratios

Leverage ratios

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Case Study Guidance

Financial Ratio AnalysisLiquidity

1. Liquidity Ratios

Current ratio

Quick (acid test) ratio

Inventory to networking capital

Cash ratio

HowFormula Expressed Meaning

Current assets

Current liabilities Decimal

Decimal

Decimal

Decimal

A short-term indicator of the companysability to pay its short-term liabilitiesfrom short-term assets; how much ofcurrent assets are available to cover

each dollar of current liabilities.Measures the companys ability to pay

off its short-term obligations fromcurrent assets, excluding inventories.

A measure of inventory balance;measures the extent to which thecushion of excess current assets overcurrent liabilities may be threatened by

unfavorable changes in inventory.Measures the extent to which thecompanys capital is in cash or cash

equivalents; shows how much of thecurrent obligations can be paid fromcash or near-cash assets.

Current assets Inventory

Current liabilities

InventoryCurrent assets Current liabilities

Cash + Cash equivalents

Current liabilities

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Case Study Guidance

Financial Ratio Analysis

Profitability

2. Profitability Ratios

Net profit margin

Gross profit margin

Return on investment(ROI)

Return on equity

(ROE)

Earnings per share(EPS)


Net profit after taxes

Net sales Percentage

Percentage

Percentage

Percentage

Dollars pershare

Shows how much after-tax profits aregenerated by each dollar of sales.

Indicates the total margin available tocover other expenses beyond cost of

goods sold, and still yield a profit.

Measures the rate of return on the totalassets utilized in the company; ameasure of managements efficiency, it

shows the return on all the assetsunder its control regardless of sourceof financing.

Measures the rate of return on the

book value of shareholders totalinvestment in the company.

Shows the after-tax earningsgenerated for each share of commonstock.

Sales Cost of goods sold

Net sales


Shareholders equity

Net profit after taxespreferred stock dividends

Average number of

common shares


Total assets

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Case Study Guidance

Financial Ratio AnalysisActivity

3. Activity Ratios

Inventory turnover

Days of inventory

Net working capitalturnover

Asset turnover

Fixed asset turnover

Average collectionperiod

Accounts receivableturnover

Accounts payableperiod

Days of cash

How

Formula Expressed Meaning

Net sales

Inventory Decimal

Days

Decimal

Decimal

Decimal

Days

Decimal

Days

Days

Measures the number of times that average inventory offinished goods was turned over or sold during a period oftime, usually a year.

Measures the number of one days worth of inventory thata company has on hand at any given time.

Measures how effectively the net working capital is usedto generate sales.

Measures the utilization of all the companys assets;measures how many sales are generated by each dollarof assets.

Measures the utilization of the companys fixed assets(i.e., plant and equipment); measures how many salesare generated by each dollar of f ixed assets.

Indicates the average length of time in days that acompany must wait to collect a sale after making it; may

be compared to the credit terms offered by the companyto its customers.

Indicates the number of times that accounts receivableare cycled during the period (usually a year).

Indicates the average length of time in days that thecompany takes to pay its credit purchases.

Indicates the number of days of cash on hand, at presentsales levels.

InventoryCost of goods sold 365

Net salesNet working capital

Sales

Total assets

Sales

Fixed assets

Accounts receivableSales for year 365

Annual credit salesAccounts receivable

Accounts payablePurchases for year 365

CashNet sales for year 365

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Case Study Guidance

Financial Ratio AnalysisLeverage

4. Leverage Ratios

Debt to asset ratio

Debt to equity ratio

Long-term debt tocapital structure

Times interest earned

Coverage of fixedcharges

Current liabilities toequity


Total debt

Total assetsPercentage

Percentage

Percentage

Decimal

Decimal

Percentage

Measures the extent to which borrowedfunds have been used to finance thecompanys assets.

Measures the funds provided by creditorsversus the funds provided by owners.

Measures the long-term component ofcapital structure.

Indicates the ability of the company tomeet its annual interest costs.

A measure of the companys ability to

meet all of its fixed-charge obligations.

Measures the short-term financingportion versus that provided by owners.

Total debtShareholders equity

Long-term debtShareholders equity

Profit before taxes +Interest charges + Lease charges

Interest charges + Lease obligations

Profit before taxes + Interest charges

Interest charges

Current liabilitiesShareholders equity

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Case Study Guidance

Financial Ratio AnalysisOther

5. Other Ratios

Price/earning ratio

Dividend payout ratio

Dividend yield oncommon stock


Market price per shareEarnings per share Decimal

Percentage

Percentage

Shows the current markets evaluation

of a stock, based on its earnings;shows how much the investor is willingto pay for each dollar of earnings.

Indicates the percentage of profit thatis paid out as dividends.

Indicates the dividend rate of return tocommon shareholders at the current

market price.

Annual dividends per shareAnnual earnings per share

Annual dividends per share

Current market price per share

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

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Case Study Guidance

Case Analysis

Analyzing Financial Statements:

Scrutinize historical statements

Compare historical statements over

time

Calculate changes in categories fromyear to year

Determine the change as a percentage Adjust for inflation

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Case Study Guidance

Case Analysis

Common Size Statements: Income statements and balance

sheets in which the dollar figures havebeen converted into percentages.

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Case Study Guidance

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 dividedby total assets.

x4 = Market value of equity divided by totalliabilities.

x5 = Sales divided by total assets.Z= Overall index of corporate fiscal health.

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Case Study Guidance

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 Study Guidance

Case Analysis

Operating cash flow:

Amount of money generated by acompany before the cost of financingand taxes.

Net income + depletion, amortization,interest expense, and income tax expense

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Case Study Guidance

Case Analysis

Economic Measures: Constant dollars

Dollars adjusted for inflation to make themcomparable 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 acountrys borders.

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Case Study Guidance

Strategic Audit Worksheet: Part 1

Analysis CommentsStrategic Audit Heading

(+) Factors (-) Factors

I. Current Situation

A. Past C orporate Performance Indexes

B. Strategic PostureCurrent MissionCurrent ObjectivesCurrent StrategiesCurrent Policies

SWOT Analysis Begins:

II. Corporate Governance

A. Board of Directors

B. Top Management

III. External Environment (EFAS):

Opportunities and Threats(SWO T)

A. Societal Environment

B. Task Environment Industry AnalysisIV. Internal Environment (IFAS):

Strengths and Weaknesses(SWOT)A. Corporate Structure

B. Corporate Culture

C. Corporate Resources

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Case Study Guidance

Strategic Audit Worksheet: Part 2

Analysis CommentsStrategic Audit Heading

(+) Factors (-) Factors

1. Marketing

2. Finance

3. Research and Development

4. Operations and Logistics

5. Human Resources

6. Information SystemsV. Analysis of Strategic Factors

(SFAS)

A. Key Internal and ExternalStrategic Factors (SWO T)

B. Review of Mission and Objectives

SWO T Analysis Ends. Recomm endation Begins:

VI. Alternatives and Recom mend ations

A. Strategic Alternatives

B. Recommended Strategy

VII. Implementation

VIII. Evaluation and Control

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Case Study Guidance

Convert the following two years of income statements from the Maytag Corporation into common-sizestatements. 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 78,567 191,507Interest 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 beforeaccounting changes (8,354) 79,017

Effects of accounting changes for

post-retirement benefits (307,000)

Net income (loss) $(315,354) $79,017

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Case Study Guidance

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 Study Guidance

Case Analysis

Case Analysis Method:

Write Strategic Audit Parts I IV

Write Strategic Audit

Part V SFAS

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Case Study Guidance

Case Analysis

Past Strategic Initiatives:

Elaborate on past strategicinitiatives

Stating when, why, what, how and the

outcome. Who where the competitors

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Case Analysis


Part VI Alternatives

Recommendations


Part VII Implementation

Write Strategic Audit Part VIII

Evaluation & Control

Proof & Fine-Tune Audit Final Draft

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Case Study Guidance