9-12 Mini-Case

APV Valuation

Flowmaster Forge Inc. is a designer and manufacturer of industrial air-handling equipment that

is a wholly owned subsidiary of Howden Industrial Inc. Howden is interested in selling

Flowmaster to an investment group formed by company CFO Gary Burton.

Burton prepared a set of financial projections for Flowmaster under the new ownership. For the

first year of operations, firm revenues were estimated to be $160 million, variable and fixed

operating expenses (excluding depreciation expense) were projected to be $80 million, and

depreciation expense was estimated to be $15 million. Revenues and expenses were projected

to grow at a rate of 4% per year in perpetuity.

Flowmaster currently has $125 million in debt outstanding that carries an interest rate of 6%.

The debt trades at par (i.e., at a price equal to its face value). The investment group intends to

keep the debt outstanding after the acquisition is completed, and the level of debt is expected

to grow by the same 4% rate as firm revenues.

Projected income statements for the first three years of operation of Flowmaster following the

acquisition are as follows:

Burton anticipates that efficiency gains can be implemented that will allow Flowmaster to

reduce its needs for net working capital. Currently, Flowmaster has net working capital equal to

30% of anticipated revenues for year 1. He estimates that, for year 1, the firm’s net working

capital can be reduced to 25% of year 2 revenues, then 20% of revenues for all subsequent

years. Estimated net working capital for years 1 through 3 is as follows:

To sustain the firm’s expected revenue growth, Burton estimates that annual capital

expenditures that equal the firm’s annual depreciation expense will be required.

Burton has been thinking for some time about whether to use Howden’s corporate cost of

capital of 9% to value Flowmaster and has come to the conclusion that an independent

estimate should be made. To make the estimate, he collected the following information on the

betas and leverage ratios for three publicly traded firms with manufacturing operations that are

very similar to Flowmaster’s:

1. Calculate the unlevered cash flows (i.e., the firm FCFs for Flowmaster for years 1 to 3).

2. Calculate the unlevered cost of equity capital for Flowmaster. The risk-free rate of

interest is 4.5% and the market risk premium is estimated to be 6%.

3. Calculate the value of Flowmaster’s unlevered business.

4. What is the value of Flowmaster’s interest tax savings, based on the assumption that the

$125 million in debt remains outstanding (i.e., the investment group assumes the debt

obligation) and that the firm’s debt and consequently its interest expenses grow at the

same rate as revenues?

5. What is your estimate of the enterprise value of Flowmaster based on your analysis in

Problem 9-13(a) to (d)? How much is the equity of the firm worth today, assuming the

$125 million in debt remains outstanding?

*

The leverage ratio is the ratio of the market value of debt to the sum of the market values of

debt and equity. Debt ratios are assumed to be constraint.

†

Revenues are the entire firm’s revenues for the most recent fiscal year.

Note 1—Property, plant, and equipment grow at the same rate as revenues so that

depreciation expenses grow at 4% per year.

Conduct a ONE WAY ANOVA using the following data in Excel.

Group 1 : 11, 17, 22, 15

Group 2 : 21, 15, 16

Group 3 : 7, 8, 3, 10, 6, 4

Group 4 : 13, 6, 17, 27, 20

LearningExchange Ltd offers specialised exchange programs for Australian students to live overseas and study in a local school from two to twelve months. The company’s exchange programs also include local tours. The sales and direct cost data on the two popular programs for last year are as follows:
Thailand New Zealand Number of exchange programs sold 10 15 Number of students per program 6 6 Revenue per student $14,000 $17,000 Direct cost per program: Program leaders' salary (percentage of revenue per program) 5% 7% Program assistant salary $5,000 $6,000 Local school fees (percentage of revenue per program) 25% 30% Local tour guides $2,000 $4,200 Air travel cost $4,500 $1,900 Accommodation and meals $20,000 $38,000 Insurance $2,100 $2,200

The overhead costs for the last year as follows:
Managers' salaries $100,000 Sales personnel salaries $120,000 Rent and property taxes $22,000 Utilities $8,000 Depreciation on equipment $6,000 Other operating costs $9,000

To calculate the profitability of each exchange program, overheads are allocated to each program in proportion to the actual sales revenue.

Required: 1. Calculate the contribution of each tour package towards the overall profit of the company. [10 marks]
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2. Should the company keep on offering both tour packages? Explain and support your answer with necessary calculations. [1 mark]
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3. Do you consider the company’s overhead allocation method to be appropriate or would you suggest an alternative? Explain. [1 mark]
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4. What should the company do to improve the profitability of each exchange program? Provide some suitable examples

Many European governments are reluctant to allow online betting in an attempt to protect
their national gambling businesses. A recent study found that seven countries out of the
27 in the European Union banned online gambling. Of the other 20 only 13 have opened
their markets to competition; in the rest gambling is dominated by monopolies owned or
licensed by the government. In the Netherlands, for example, residents can only place
online bets with a state monopoly: De Lotto. The Ministry of Justice even warned banks in
the country that they could be prosecuted if they transferred money to online gambling
companies. Other countries have ordered online betting companies to block access to
their sites. Their governments argue that this is to protect people from gambling
excessively. However the revenue they gain from their own monopolies should not be
ignored as a possible motive.
Questions
1. If governments believe that gambling is bad for their citizens then in economic
terms how would you classify this service?
2. Why might governments want to protect their own monopolies in the gambling
sector?
3. What might be the effect of greater competition in the gambling industry in these
countries?

Oriole Company’s balance sheet at December 31, 2021, is presented below.

During January 2022, the following transactions occurred. Oriole uses the perpetual inventory method.

Adjustment data:

(You may want to set up T-accounts to determine ending balances.)

Prepare journal entries for the transactions listed above and adjusting entries. (Include entries for cost of goods sold using the perpetual inventory system.) (Round answers to 0 decimal places, e.g. 1,250. Credit account titles are automatically indented when amount is entered. Do not indent manually. Record journal entries in the order presented in the problem.)

Prepare an adjusted trial balance at January 31, 2022. (Round answers to 0 decimal places, e.g. 1,250.)

Prepare an income statement for the month ending January 31, 2022. (Round answers to 0 decimal places, e.g. 1,250.)

Prepare a retained earnings statement for the month ending January 31, 2022. (Round answers to 0 decimal places, e.g. 1,250.)

Prepare a classified balance sheet as of January 31, 2022. (List Current Assets in order of liquidity. Round answers to 0 decimal places, e.g. 1,250.)

CASE-STUDY

Aggressive Sales Quotas or Unfair Business Practice?

"In the advertising industry, money is the bottom line-regardless," said Peter Allen, a customer service representative for a large-scale online directory. It was 1999 and the online business was booming. Everyone in the city wanted to get in on the Internet revolution, but many didn't really understand what that even involved.

Peter was new to the industry. He was given his territory, the city of San Francisco, and told to sell as much advertising as possible-at any cost-both to the company's existing clients and to new customers. For his first few months on the job, Peter focused on getting to know the existing customers and evaluating their current advertising packages with the company. Peter was surprised to find that many of his customers were small business owners-auto-body shops and family-owned restaurants that already had large advertising packages way beyond their needs. His boss, the director of customer service, had already set Peter's quota at a level that presumed that many more sales were possible. Yet, in Peter's judgment, the market was saturated.

"These small shops thought that the Internet was the next best thing," said Peter. "They didn't even understand what the Internet actually was."

Peter couldn't fathom how these small businesses got persuaded into spending so much money on advertising. "The businesses you would least think to look up online were the businesses with the most expensive advertising packages," said Peter.

Peter was getting daily phone calls from the home office, pressuring him to meet his numbers and sell the most in his territory. Peter complained to the sales manager, who said that Peter had to be honest. "It was my obligation to set things straight," said Peter.

With the support of his manager, Peter told the top executives of the company that the sales team in San Francisco needed to have some leeway in meeting the quota. Unlike other sales territories, San Francisco, as the hub of the high-tech world, was cluttered with competition and, with companies cropping up everywhere in Silicon Valley, Peter and his team didn't have the luxury to selectively pursue businesses. Instead, they had to go after any and every business possible because other online directories were quickly entering the San Francisco market. The executives feared that changing the quota for San Francisco would lead to other territories vying for lower quotas as well. But Peter's case proved strong enough: The executives decided to "look the other way" for the San Francisco territory.

Peter went to each business and gave them an honest evaluation of their advertising needs-often recommending they downgrade their packages with the company.

"We moved them into more appropriate packages and became number one in customer retention," said Peter. "We lost money in the short term, but in the long term we made money through referrals and retention."

Discussion Questions:

• Describe, specifically, the ethical dilemma that Peter faced.
• What are virtues Peter needed to act as he did? What do you think motivated him?
• What were the risks Peter faced in making this decision?
• What factors do you think assist people in making moral decisions in the face of a great deal of pressure?

Jessica Silliman was a 2006-07 Hackworth Fellow at The Markkula Center for Applied Ethics.

Required information

The general ledger of Zips Storage at January 1, 2021, includes the following account balances:

The following is a summary of the transactions for the year:

5. Record adjusting entries. Insurance expired during the year is $7,400. Supplies remaining on hand at the end of the year equal $3,300. Provide services of $12,200 related to cash paid in advance by customers. (If no entry is required for a particular transaction/event, select "No Journal Entry Required" in the first account field.)

Prepare an adjusted trial balance, as well.

Prepare the income statement for the year ended December 31, 2021.

There is a well-known bakery in the town, named Paris Bakery

A). what is the daily revenue of the bakery based on the following assumptions? (10 points)

- there are 10 customers in/out in 10 minutes

-each costumer buys 3 biscuits on average

-The price of biscuit is $1.50 each

-The bakery open from 8 A.M to 6 P.M

B) Owner of the Bakery wants to adopt Kanban system to reduce the inventory. Howmany Kanban containers will be needed to support the bakery based on the following assumptions?

-The daily demand is 100 batches

-The production lead time is 2 days

-Management has decided to have 1 day of safety stock

-One container fits 20 batches

C) At the Bakery, it takes 120 seconds to assemble one sandwich through 20 activities. If 30 customers arrive at the restaurant every hour on average, what is the Target Manpower the Restaurant needs to meet the demand of the sandwich?(10 points)

D) The weight of one batch has to be 3.6 lbs. to make constant size of biscuits. The Bakery has a low specification limit of 3.5 lbs. and upper specification limit of 3.7 lbs. The standard deviation is 0.1 lbs. Owner wants to reduce its defect probability 1.1%. To what level would the have to reduce the standard deviation in the process to meet this target? (10 points)

The Course Project requires you to act as consultants for a fast food chain and develop a new food product. Your competitor has just launched a new campaign introducing Junior and Grand sizes to their already famous and successful hamburger and is drawing sales away from your client. Time is of the essence, yet you do not want to over-react and make a costly mistake. You will need to be innovative and capitalize not only on your client’s success, but also focus on how to bring back lost revenue and launch a strong marketing campaign. Your market research and product launch strategy will be described both in a written paper as well as presentation of your recommendations to the class.

1. Complete product/service description, including the type of innovation represented, and the source for the idea.

2. Product/service offering and a description of benefits that customers will both recognize and realize

3. Competitive analysis

"Points awarded for description of the innovation of the new competitive product and how it will compete in the marketplace. Product offering and a description of benefits customers will realize over that of your client’s competitor. In short, how will your new innovative food product increase sales for your client and as well as win back sales from your client’s competitor. Include in this section an identification of competitor products and specific customer benefits. The material in this assignment covers sections 4-6 listed in the outline above."