Henry Doyle the president of King’s sugar is evaluating the addition of a new sugar-processing mill, to make white sugar, and eliminate the need to buy white sugar from its competitor, Kennard’s sugar company. King’s sugar makes brown sugar only, but would need a mill to process the brown sugar into white sugar. Kennard’s company produces white sugar from the raw sugar cane. Doyle believes that the new mill will bring in additional revenues and reduce operating costs. The competitor had excess capacity of white sugar that it sells to other sugar mills. Therefore, building the new mill would compete with Kennard’s mill. The new mill will cost $20 million in addition to the working capital requirements. Henry Doyle is wondering whether the investment can be justified. The project is expected to be 6 years until 2025.

The construction of the mill will take two years. $18 million will be spent in 2019, and $2 million in 2020. It is expected that when the plant start operating fully in 2020, the company’s operating costs will be reduced because the savings will be derived from the cost differences of producing versus buying white sugar from Kennard’s mill. The cost savings will be $ 2.8 million in 2020 and $ 3.7 million for the next five years. The company uses 15 % as the cost of capital. The following are the financial projections for the new mill.

Net working capital (10% of incremental sales)

SG&A (5% sales)

Taxes 40%

Answer all of the questions.

1. What is the net present value (NPV) and internal rate of return (IRR) for the investment?
2. What is the payback period of the project?
3. Would you recommend that King’s sugar go ahead with making this investment? Why?

SWOT analysis is a strategic planning technique for analyzing strengths, weaknesses, opportunities and threats faced by an organization. Based on the case study, prepare a SWOT analysis for Al-Ikhsan.

CASE STUDY
Source: The Star Online, New Straits Times
THE economy may be slowing and the retail industry is going through a rough patch, but Al-Ikhsan Sports Sdn Bhd believes this is as good a time as any for it to shine. “The economy is soft, even globally. I think Malaysia is fairly stable in that sense. When the economy faces rough weather, that’s when the true strength of retailers can be seen. “When the economy does well, everyone does well. You can hide your inefficiencies and all that. But if you can grow your business when the economy is down, it shows the strength of the company. As the economy gets tougher, Al-Ikhsan will become more relevant,” says chief executive officer Vach Pillutla. At a time when most businesses are looking to downsize their physical presence, Al-Ikhsan is looking at ways to expand its number of outlets. The company currently has 131 stores under five different retail models, namely, the Al-Ikhsan Sports chain (116 outlets), Sports Warehouse (4), Football Republic (6), Sneaker Street (2) and Factory Outlets (3). The homegrown sports retailer has carved a name for itself in the market by selling products from international sporting brands such as Nike, Adidas, Puma and Umbro at an affordable price. Pillutla says it is planning to open 12 to 14 new doors every year, with 80% of its expansion plans focused on the entry- to mid-level concept. Although the retail industry has become increasingly competitive, he notes that the company’s advantage in staying ahead of the pack is its core mission to stay affordable.
2
“Our core purpose will keep us going for the next few years. As long as we are able to communicate our core purpose properly to consumers, I think they will keep coming back,” he says. Tapping the bottom As consumers become a little more tight-fisted, retailers have been trying to diversify into either the more premium or niche markets to maintain margins and profitability. Pillutla notes that unlike most emerging markets, the local retail space has two very distinct segments: the high-end and entry-level segments. “Most emerging markets have a very big middle-class segment. It works like a typical pyramid, where the well-heeled consumers make up the smaller segment at the top and the entry level is much bigger. As the economy grows, the middle-class will expand and other consumers will aspire to move up the pyramid. “Malaysia is different in the sense that people are either at the top end or at the entry level. There’s very little middle-class. So brands and retailers who try to stay in the middle of the spectrum don’t do well because consumers who see a middle-class brand are either willing to trade up or trade down. So you either have to be at the upper-end or lower-end of the market, ” he explains. Hence, he believes that there is also money to be made at the bottom of the pyramid. “People at the bottom of the pyramid are also aspirational. They, too, want things and if you can make it affordable for them, you can tap that market. Consumers are the king. So we have to keep our brand focus and give them what they want,” he adds. Although margins may be thinner at the entry-level, Al-Ikhsan has a variety of retail concepts which can be pushed out to meet the needs of the market it is in and grow its volume. Pillutla says its Sports Warehouse brand, for example, which focuses on entry-level consumers, is a concept that still has legs to go, particularly in smaller towns. “Wherever that has a catchment of 50,000 people, we can do any one of our concepts. We started the Warehouse this year and it has shown very strong results so far. We can
3
see another 35 to 40 Sports Warehouse outlets over the next three to five years. Our next position is to move down, deeper,” he says. That said, he maintains that Al-Ikhsan also has enough variety of products to cater to a wider range of consumers. “Our stores have products from different brands. We can have prices for certain products that go up to RM600. So while we make products affordable to consumers, we are also able to sell them at a certain level of prices if the brand can command that price. In that way, we can cater to a wider range. “But we always try to stay to our core purpose, to stay affordable. We are about making Malaysia fit and active since 1993 by making brands affordable to consumers. That is our strength and our core purpose. It cannot go away.” Al-Ikhsan was founded by Ali Hassan Mohd Hassan in 1993 in a small shop in Holiday Plaza, Johor. His entrepreneurial pursuit had started earlier on as a student in Universiti Teknologi Malaysia to fund his studies. He sold trinkets and such and managed to graduate with a diploma. When he started the business, he was diligent to ensure that he maximised every opportunity to keep sales going. He built a good rapport with his customers and kept his sports products affordable. Ali Hassan’s success in growing Al-Ikhsan was obvious when the retailer caught the eye of government-linked private equity firm Ekuinas, which bought a 35% stake in the company in 2016. Ali Hassan and his wife still holds the remaining 65% of the company and he has stayed on as its chairman. Pillutla thinks the company is only halfway through “what we are really capable of doing”. As long as the sports industry continues to grow, Al-Ikhsan will be able to grow in tandem. He adds that its retail concepts are also applicable to any emerging market, making it easier for it to expand overseas when the time is right.
4
On the horizon Over the next three years, the company will continue to expand into tier-2 and -3 cities. It will also continue its focus on the entry-level concept stores like the Sports Warehouse. Another thing that the company will be paying close attention to in the coming years is its private label. Pillutla hopes to make its private label and licences more relevant to the masses as he views this as a good channel for Al-Ikhsan to have a deeper engagement with its consumers. “We want to create products that consumers want. I think our house brand can grow to be a significant brand pillar for us, maybe making up to 30% of the brands we have,” he says. With these strategies in place, the retailer is aiming to keep its double-digit growth every year – a target that Pillutla says is “absolutely achievable”. “That’s the job of professional CEOs like us. There’s a limit to what founders and entrepreneurs can do for a company because the thing about professional CEOs is that we don’t think from our hearts. “We see opportunities, we look at our current capabilities and we think in terms of how we can build that capability for future growth. We are a bit disconnected, so we don’t make decisions based on emotions. But that is not to say that one is right and one is wrong. It is just a way of working. “In business, you need data and experience to take a very informed action, so that you’ll have stronger chances of success. And we believe we have a formula here,” he says. “The challenge for us is more internal. We are no longer small. And we need to continue to drive and align our people towards our mission. As long as we understand our core, we can have market share,” he says.If all goes well, the company is eyeing listing plans in two to three years’ time. The company’s three concepts – Al-Ikhsan, Football Republic and Sneakers Street – are vital to promote sustainable growth for its retail sports business in order to mitigate the seasonal impact.
5
“Our three concepts are catered for entry to mid-level consumers and up to high-end consumers. Football Republic is a specifically designed for personalisation or customisation of football’s boots and attire, targeting professional amateur players or fans”. “Sneakers Street category is a sports lifestyle concept that offers affordability for sneakers and accessories to consumers,” he said. Pillutla said the company aspires to have stability in its business earnings with promising growth for long-term sustainability, while adapting to the current market needs. “We want to aggressively expand our market reach, especially in East Malaysia and outside the country with about eight stores are expected to be opened this year. “For long-term expansion plan, we target to open up to 30 stores by 2021,” he said, adding that this would allow the company to reach about 145 Al-Ikhsan stores nationwide. Pillutla said the company also plans to open 15 Sneakers Street stores in the next three years, with initial four stores to be opened this year, followed by additional five Football Republic stores in the future from the current five stores. He said Al-Ikhsan is currently in the discussion with various parties to expand its business in other market in Southeast Asia region, while providing numerous choices to consumers. “We have ‘reasonable’ allocation for capital expenditure (capex) as it will be financed internally. The cost of each store will typically be depended on its size and location,” he said, citing that it is important for the company to have single-digit or lowest double-digit rent-to-sales ratio. Pillutla said capex should not be extremely high as the company on its self-sustaining mode to generate sustainable earnings, while reducing its debt. The company’s inventories is also important to keep its earnings healthily to avoid inventories not age beyond certain points. “We will also embark on digital platform – Omni Channel – to complement our existing retail stores. This allows customers to choose and buy our products virtually through
6
mobile app or online platform. The initiative would also enhance our efficiency and productivity, as it easily helps us to monitor our inventories,” he said. "Our commitment is to keep Malaysia fit and active by making sports affordable for all. We also need to understand consumers well and must change ourselves based on what consumers want,” he said in a media interview here recently. Al-Ikhsan will launch a new e-commerce online platform (website) next month, a move that will help the company become a global player in the sports retail segment. “We are ranked 64th largest sports retailer in the world. Therefore, when consumers look at us, they don’t just perceive us as a Malaysian company but rather benchmark us as a global player,” Pillutla said. “I don’t think, even our founder Tuan Haji Ali, thought that we could reach this stage,” says Vach Pillutla, Chief Executive Officer of Al-Ikhsan from his office at Taman Tun Dr Ismail. The company, with its various concept outlets, is by far the largest sports retailer in Malaysia, commanding over 20 percent market share in the sports equipment, apparel and footwear segment. “Ten million people have walked through our doors every year. To put things into perspective, almost one third of the Malaysian population visited Al-Ikhsan stores.” He expects Al-Ikhsan’s e-commerce platform to contribute about 5.0 per cent of the total sales over three years. “In general, the overall retail sector grows about 4.0 per cent to 5.0 per cent annually, while the sports retail around 8.0 per cent to 9.0 per cent. “Globally, most markets are likely to remain stagnant but I think Malaysia continues to perform quite well in sports retail,” he said. He also said Al-Ikhsan continued to learn about consumers and offered products and services at prices preferred by customers. “As long as we continue to pursue it, we are not worry about competitions. For the next three years, we intend to open up to 14 stores annually in the Peninsular Malaysia with
7
concepts including Football Republic and Sneakers Street, depending on the market and catchment to match consumers’ demand,” he said. He did not divulge further on how much capital the company would invest, saying that it had sufficient money to fork out internally. As stated earlier, Ekuiti Nasional Bhd (Ekuinas) acquired a 35 per cent stake in Al-Ikhsan in July 2016 for RM68.6 million. Ekuinas chief executive officer Syed Yasir Arafat Syed Abd Kadir said the first two years since the partnership with Al-Ikhsan were about stabilising the company, in particular improving its back-end support. “We need to ensure that we have strong back-end processes before exploring growth. We focus on effective resource planning - an inventory software system - as well as execute strategic business plans, recruit the right talent and strengthen existing brands under us,” he said. Syed Yasir Arafat said it was important for the government-linked private equity fund manager to strengthen Al-Ikhsan’s foundation and expand in certain areas, while offering different products not only active brands but promoting in-house products. “We have about 30 brands under Al-Ikhsan. We employ around 1,200 staff and command about 30 per cent local market share in multi-retailer segment.” Syed Yasir added that since Ekuinas invested in Al-Ikhsan, the former had managed to more than recoup its investment. “From Ekuinas’ perspective, Al-Ikhsan has strong liquidity and sufficient cashflow to grow, with good inventory management. Hence, Al-Ikhsan doesn’t require further capital injection to expand further,” he added. Al-Ikhsan founder and chairman Ali Hassan Mohd Hassan believes the sports retail business was growing with abundance of opportunities locally. “We are investing about RM1mil in each new outlet, inclusive of renovation and stocks.” Ali Hassan said strengthening the company’s position in the local sports goods retailing segment would discourage foreign companies from taking over the domestic market.
8
He said it was important to stop these companies from expanding in Malaysia, as local players should be given the opportunities. He said prospects for sports goods in Malaysia were bright as the goods sold here were the second cheapest in the world after the US. Ali Hassan said by having a formidable presence in the urban and rural areas, it would be almost impossible for foreign sports goods retailers to gain a strong footing here. He said the company catered to customers who were serious in sports and those who were into sports fashion. He said Malaysians were brand conscious and more customers were willing to spend money on branded items. “Previously, there was a huge pressure from the sports brand principals as they demanded for growth based on the global trend. “Similarly, they expected growth from Al-Ikhsan in Malaysia due to opportunities in sight. Hence, we decided to partner with Ekuinas to support our future growth and become more competitive,” he said. Through the partnership, Ali Hassan said Al-Ikhsan had undergone due diligence exercise to evaluate the company’s weaknesses and strengthens. “Ekuinas had helped us to find new team members, while consolidating our stores and improving the back-end processes.
9

Q3.

Consider the CEO of “Zeus Engineering” who knows very well how to use the Bloomberg Terminals and download the most contemporary data in the global financial markets. He calculates the historical returns by employing the CAPM MODEL.

Consider the following table and assist him in order to estimate the following relationships for Kronos (K) and Titan (T) Multinationals (hereafter, MNEs).

YEAR             MNE (K)                    MNE (T)                    MARKET

2016                14%                            13%                             12%

2017                19%                            7%                             10%

2018                -16%                           - 5%                            -12%

2019                   3%                            1%                                1%

2020                20%                            11%                             15%

Assume that the Risk-Free Rate is 2%

1. What are the betas of the MNE’s K and T respectively?
2. What are the required rates of return for MNE’s K and T?
3. Are stocks for the MNE K and T aggressive or defensive stocks?
4. What is the slope of the SML LINE for MNE stocks K and T respectively? Draw them carefully and provide comments and explanations for the Sharpe’s and Treynor’s Ratios.
5. How different is the CAPM model from the Mean Variance Model?
6. What is the Efficient Frontier? Carefully explain your answer.               

On January 1, 2017, Palka, Inc., acquired 70 percent of the outstanding shares of Sellinger Company for $1,274,000 in cash. The price paid was proportionate to Sellinger’s total fair value, although at the acquisition date, Sellinger had a total book value of $1,540,000. All assets acquired and liabilities assumed had fair values equal to book values except for a patent (six-year remaining life) that was undervalued on Sellinger’s accounting records by $270,000. On January 1, 2018, Palka acquired an additional 25 percent common stock equity interest in Sellinger Company for $512,500 in cash. On its internal records, Palka uses the equity method to account for its shares of Sellinger.

During the two years following the acquisition, Sellinger reported the following net income and dividends:

1. Show Palka’s journal entry to record its January 1, 2018, acquisition of an additional 25 percent ownership of Sellinger Company shares.

2. Prepare a schedule showing Palka’s December 31, 2018, equity method balance for its Investment in Sellinger account.

On January 1, 2017, Palka, Inc., acquired 70 percent of the outstanding shares of Sellinger Company for $1,789,900 in cash. The price paid was proportionate to Sellinger’s total fair value, although at the acquisition date, Sellinger had a total book value of $2,250,000. All assets acquired and liabilities assumed had fair values equal to book values except for a patent (six-year remaining life) that was undervalued on Sellinger’s accounting records by $297,000. On January 1, 2018, Palka acquired an additional 25 percent common stock equity interest in Sellinger Company for $665,625 in cash. On its internal records, Palka uses the equity method to account for its shares of Sellinger.

During the two years following the acquisition, Sellinger reported the following net income and dividends:

Show Palka’s journal entry to record its January 1, 2018, acquisition of an additional 25 percent ownership of Sellinger Company shares.

Prepare a schedule showing Palka’s December 31, 2018, equity method balance for its Investment in Sellinger account.

Sailing Voyages Inc. is a company operated by an individual as a summer tourist attraction on the Great Lakes. It operates a sailing schooner offering day cruises for individuals and groups. Over the last few years, the average number of tourists per cruise was 30. The average charge per person for the cruise including group discounts was $100. The company operates from mid-May until mid-September. On average, the ship sails 100 days during this period. ‘The Canadian’ (the name of the schooner) requires a crew of 6, and is captained by the owner of the company. University students with extensive sailing experience have been willing to work on a per diem basis of $100. They are paid only if the ship is cruising. The ship provides non-alcoholic refreshments and a light lunch. These are acquired daily from a local delicatessen and cost, on average, $25 per person. The daily operating expenses fuel and miscellaneous supplies average $50 per cruise. The company has a variety of annual expenses including: maintenance, depreciation, marketing, licenses, etc., totaling approximately $85,000. Required: Prepare an Excel Workbook to answer the following questions in a professional manner. Ensure that you are utilizing Excel features (including links between spreadsheets, formulas, formatting, graphing).

1. Compute the revenue and variable costs for each cruise. Use this to compute the contribution margin per cruise.

2. Compute the number of cruises that ‘Canadian’ must have each year to break-even. Use your knowledge gained in this course to show the different formulas, graphs etc for break-even analysis.

3. The owner expects a total return on capital and remuneration of $125,000. Using the concept of ‘contribution margin’, cost-volume-profit, and target profit calculations, estimate how many cruises the Canadian needs to make to reach this objective. Is this a realistic expectation? Add your thoughts, proposals, and recommendations.

4. Prepare a contribution margin income statement for Sailing Voyages Inc. If the owner wishes to adjust or achieve his income goal, what changes can he make? How can these changes be easily estimated and projected to show how these changes affect net income. Use your imagination, and your knowledge of cost-volume-profit analysis. Highlight your ideas by utilizing the various graphing tools in Excel.

Runiowa is a fashion shoe company that tries to manufacture much more durable heels in 2020. The management team of Runiowa suggests two rubber materials A and B and the research team of Runiowa is asked to design an experiment to gauge whether the rubber A is more durable than the rubber B. 300 people in the US aged between 18 and 65 were randomly chosen. The rubber A is allocated at random to the right shoe or the left shoe of each individual. Then, the rubber B has been assigned to the other. For example, if Mr. Nathaniel is one of 300 people randomly chosen, then the right heel of Mr. Nathaniel is randomly assigned to be made with the rubber A and then his left heel is to be made with the rubber B. The research team measures the amounts of heel wear both the rubber A (wA) and the rubber B (wB) in each individual and records the difference wA − wB of 300 individuals. Even though the individuals are heterogeneous with different heights and weights, those individual heterogeneities will not obscure the comparison of treatment groups by focusing on the paired differences of each individual. Also as long as the heel materials are randomly assigned for each individual, there has been no restrictions on shoe styles. Note that the age of subjects is ranging from 18 to 65. In this way, researchers compare treatments within blocks controlling heterogeneity of individuals. The research team also repeats this experiment design with 300 people in the US aged between 18 and 65 chosen at random.

Question:

Is there a conjecture?

What is the response variable?

What is the explanatory variable?

What levels of the factor(s) were used in the expereiment?

What are the treatments for this experiment?

What are the experimental units?

What is the control?

Hoe much replication was used?

How was randomization used?

6) Tuition and fees at Eastern Washington University Suppose state law allows the university to increase tuition and fees by 3.5% per year. You would like you child to have enough money for four years at Eastern Washington University 16 years from now (suppose your child is 2 years old). According to EWU the current tuition and fees for THIS year is $7109.61 (this is based on three quarters of attendance). Create an Excel Table with first column “Years from now” and second column “Tuition and Fees”. Under Years from the first cell should be 0 and under tuition and fees the first cell should be $7109.61. Use the fact that the tuition and fee rate will increase by 3.5% per year to fill out this table and answer these questions:

a) How much will your child need in tuition and fees 16 years from now to attend EWU the first year?

b) How much total will your child need in tuition and fees for their four years at EWU (this would be years 16,17,18 and 19 from now)

3. Prepare the journal entry to record receipt of payment by Hamada LLC if the spot rate on dirhams was 4.75 dirhams/GBP on April 2, 2020.

Suppose that on February 1, 2020, Victoria, Plc., a British company, makes a sale and ships goods to Hamada, LLC, an Emirati customer, for 100,000 (GBP).

However, it is agreed that Hamada will pay in dirhams on April 2, 2020. The exchange (spot) rate as of February 1, 2020 is 5 dirhams per Great British Pound.