In 1998 a national vital statistics report indicated that about 2.3 % of all births produced twins. Is the rate of twin births the same among very young mothers? Data from a large city hospital found only 9 sets of twins were born to 481 teenage girls. Test an appropriate hypothesis and state your conclusion. Be sure the appropriate assumptions and conditions are satisfied before you proceed.
Are the assumptions and the conditions to perform a one-proportion z-test met?
No Yes
State the null and alternative hypotheses. Choose the correct answer below.
A. H0: pequals0.023 HA: pnot equals0.023
B. H0: pequals0.023 HA: pless than0.023
C. H0: pequals0.023 HA: pgreater than0.023
D. The assumptions and conditions are not met, so the test cannot proceed.
Determine the z-test statistic. Select the correct choice below and, if necessary, fill in the answer box to complete your choice.
A. z= __________ (Round to two decimal places as needed.)
B. The assumptions and conditions are not met, so the test cannot proceed.
Find the P-value. Select the correct choice below and, if necessary, fill in the answer box to complete your choice.
A. P-value+ ______ (Round to three decimal places as needed.)
B. The assumptions and conditions are not met, so the test cannot proceed.
What is your conclusion? Choose the correct answer below.
A) Reject H0. The proportion of twin births for teenage mothers is different from the proportion of twin births for all mothers.
B) Fail to reject H0. The proportion of twin births for teenage mothers is not different from the proportion of twin births for all mothers.
C)Reject H0. The proportion of twins births for teenage mothers is greater than the proportion of twin births for all mothers.
D) The assumptions and conditions are not met, so the test cannot proceed.
In: Statistics and Probability
Sixteen-year-old Michelle Portman was out driving at night near
Sandusky, Ohio with her friend Katie Webster in the front passenger
seat. They came to a railroad crossing with multiple tracks, where
the mechanical arm had descended and warning bells were sounding. A
Conrail train had suffered mechanical problems and was stopped 200
hundred feet from the crossing, where it had been stalled for close
to an hour. Michelle and Katie saw several cars ahead of them go
around the barrier and cross the tracks, despite the fact that
Ohio’s vehicle and traffic laws prohibited this practice. Michelle
had to decide whether she would do the same.
Long before Michelle made her decision, the train’s engineer (a
Conrail employee) had seen the heavy Saturday night traffic
crossing the tracks and realized the danger. The conductor and
brakeman also understood the peril, but rather than posting a
flagman who could have stopped traffic when a train approached,
they walked to the far end of their train to repair the mechanical
problem. A police officer had come upon the scene, told his
dispatcher to notify the train’s parent company Conrail of the
situation, and left.
Michelle made the decision to cross the tracks. She slowly followed
the cars ahead of her. Seconds later, both girls were dead. A
freight train traveling 60 miles per hour struck the vehicle
broadside, killing Michelle and Katie instantly.
Michelle’s mother sued Conrail for negligence. The company argued
that it was Michelle’s decision, one that violated Ohio traffic
laws, which led to her death. Ohio is a comparative negligence
state. Discuss both the plaintiff’s claim and Conrail’s defense.
What verdict will result?
Please answer in the IRAC format.
Issue
Rule
Analysis
Conclusion
In: Operations Management
Case Study - Whole Foods Market
Overview
Whole Foods Market is a supermarket chain that specializes in fresh, organic produce from local sources. As an international company with locations around the world, it has a large operation to watch over and a very specific mission to uphold: to sell the highest-quality natural and organic products available.
Sticking to this goal and keeping up with the demands of a rapidly expanding business aren’t always easy, however. In order to stay committed to stocking sustainable goods, Whole Foods relies on an organizational structure that combines aspects of a mom-and-pop operation with a traditional corporate hierarchy. Thanks to this unique organizational structure, the company has been able to expand to 360 stores and hire more than 58,000 employees without sacrificing its core principles.
Whole Foods got its start when John Mackey and Rene Lawson borrowed money from friends and family to open a small natural food store in Austin, Texas. The couple soon ended up living in the market after they were evicted from their apartment for storing some of their grocery stock there. Fortunately, business began to boom once the pair took on a couple of partners and merged with another store. But they quickly faced another huge setback when the most destructive flood Austin had experienced in 70 years took its toll on the market. Along with incurring damage to their building, the store also lost all of its produce and inventory. Thanks to a massive community cleanup effort, however, the market was soon back in business.
Whole Foods has never forgotten that lesson—that having a local, grass-roots structure sensitive to drastic and sudden changes in the business environment can keep an organization nimble and responsive. In the company’s early days, the staff was small enough that everyone could do every job. While this kept things running smoothly at first, the situation had to change as the company grew and opened more stores. It divided the labor between the four partners, with each specializing in one or more of the tasks critical to the business. After designating the leaders for departments like finance, human resources, and sales, Whole Foods began to look like a big company.
But John Mackey and his partners still wanted their stores to appear like small local markets, not corporate mega-grocers. That meant they had to make tough choices, like whether they should centralize supply in warehouses or depend on separate, local suppliers in each region they had stores. Whole Foods ultimately opted for the latter option. To stay responsive to market changes, each region received its own manager and the autonomy to make certain decisions about supply sources and pricing based on the needs of that region, without being slowed down waiting for responses from the home office. This decentralized structure gives Whole Foods the flexibility to adapt to important changes without involving needless bureaucracy.
Whole Foods Market continues to expand into new markets around the world. Despite that fact, it has managed to keep what is unique about its culture and pure about its mission: focusing on great, natural sources at the local level.
Economies of scales are important in business. In the case of Whole Foods, it made sense to centralize supply and apply concepts of Supply Chain Management so that cost of inventory could take advantage of quantity discounts to lower cost of goods.
Why do you think they decided not to do that and instead, allowed local stores to handle their own supply of goods?
In: Operations Management
Problem 1. Corporate Reorganizations. Middle Products Inc.
(MPI), is a client of yours that is a closely held, calendar-
year, accrual-method corporation located in Grand Rapids, Michigan.
MPI has two operating divisions. One division
manufactures lawn and garden furniture and decorative objects
(furniture division), while the other division
manufactures garden tools and hardware (tool division). MPI’s
single class of voting common stock is owned by three
unrelated shareholders as follows:
Shares Adjusted Basis FMV
Amanda Iris Green 300 $2,000,000 $3,000,000
Beth Rose Ruby 100 $1,200,000 $1,000,000
Cam Lily White 100 $800,000 $1,000,000
Totals 500 $4,000,000 $5,000,000
Open Spaces Living Company (OSLC), a publicly held corporation that
does business in several midwestern states, has
approached MPI about acquiring its furniture division. OSLC has no
interest in acquiring the tool division, however.
OSLC’s management is particularly interested in expanding its
market into Michigan. Amanda, Beth, and Cam are
amenable to the acquisition provided it can be accomplished in a
tax-deferred manner.
OSLC has proposed the following transaction for acquiring MPI’s
furniture division. On April 30, OSLC will create a 100-
percent owned subsidiary, OSLC Acquisition Inc. (OSLC-A). OSLC will
transfer to the subsidiary 60,000 shares of OSLC
voting common stock and $2,000,000. The current fair market value
of the OSLC voting stock is $50 per share
($3,000,000 in total). Each of the three MPI shareholders will
receive a pro rata amount of OSLC stock and cash.
As part of the agreement, MPI will sell the tool division before
the acquisition, after which MPI will merge into OSLC-A
under Michigan and Ohio state laws (a forward triangular Type A
merger). Pursuant to the merger agreement, OSLC-A
will acquire all of MPI’s assets, including 100 percent of the cash
received from the sale of the tool division
($2,000,000), and will assume all of MPI’s liabilities. The cash
from the sale of the tool division will be used to
modernize and upgrade much of the furniture division’s production
facilities. OSLC’s management is convinced that the
cash infusion, coupled with new management, will make MPI’s
furniture business profitable. OSLC management has no
plans to liquidate OSLC-A into OSLC at any time subsequent to the
merger. After the merger, OSLC-A will be renamed
Michigan Garden Furniture Inc.
a. Does the proposed transaction meets the requirements to qualify
as a tax-deferred forward triangular Type A
merger based on (i) the structure of the transaction and (ii) the
judicial doctrines for such transactions (continuity of
interest, continuity of business enterprise, and business
purpose)?
b. Could the proposed transaction qualify as a reverse triangular Type A merger if OSLC-A merged into MPI?
Problem 2. Asset or Stock Sale. Continuing the facts of Problem
1 above. MPI identified a buyer for its tools division
that is willing to purchase the division’s assets or do a stock
purchase. The assets of the division include manufacturing
equipment worth $1,500,000 with an adjusted basis of $300,000 and
goodwill worth $500,000 with no basis. In order
to do a stock purchase, MPI would place the assets and operations
of the tools division into a subsidiary corporation
called Tool Time, Inc. (or TTI) in exchange for 100 shares that
would be sold to the buyer. What transaction would the
sellers prefer? Does your answer change if the buyer were willing
to pay $100,000 more for an asset sale?
In: Accounting
Case Study The Tale of Chromatic to Lucent
Instructions
Go to page 276 of your textbook From concept to Wall Street: A complete guide to entrepreneurship and venture capital and read the case study “The Sale of Chromatic to Lucent”.
In one paragraph, briefly summarize the case.
Then, discuss what you learned from the case.
What would you have done differently?
Case Study—The Sale of Chromatis to Lucent
In May 2000, Lucent Technologies announced it was acquiring an almost unknown private company, Chromatis, for approximately $5 billion in Lucent stock. An analysis of the foundation and sale of Chromatis sheds light on and provides a practical example of some of the issues reviewed in this book, with an emphasis on issues relating to the company’s sale.
Beginnings
Chromatis was founded in 1997 by Dr. Rafi Gidron and Orni Petrushka, two men who had cooperated before when they founded Scorpio Communications and sold it to U.S. Robotics for $72 million in cash in August 1996. Petrushka continued managing Scorpio under its new ownership, and Dr. Gidron worked at U.S. Robotics headquarters until it was bought out by 3Com.
Gidron and Petrushka say that after Scorpio was sold, they felt the need to experience again the sense of entrepreneurship involved in a startup. They started looking for a market in need of solutions which they were capable of offering. Gidron and Petruschka knew that after their successful experience with Scorpio, almost any initiative they would undertake would attract the keen interest of venture capital funds. Their success was not regarded as mere chance, due to their experience in corporate management and their solid theoretical background (Gidron, for instance, had been a Professor at Columbia University specializing in the area of communications).
The chosen target market was infrastructure for metropolitan communications networks (“metro”). The fundamental factors driving the market were the observations that while the volume of voice communications rises by 5–10% every year, data traffic was increasing exponentially. Consequently, without dramatically upgrading the efficiency of data communications transmissions, the existing metro infrastructure was not expected to be able to handle the data volume. A principal stimulus for the development of a market for products addressing the new congestion problem was the deregulation of the communications market in 1996, which opened the local calls market to competition. This change led to a massive wave of investments in infrastructure by existing companies, as well as by companies which wanted to enter the local markets. Obviously, the giant communications infrastructure companies such as Cisco, Lucent, Ciena, and Nortel, as well as younger companies such as Sycamore, were also interested in entering this market and capturing a significant share of it.
After concluding that communications companies were about to make massive capital investments in the metropolitan networking market, the entrepreneurs decided to examine it. First, they met with potential customers and studied their needs. This market-orientation approach, although the product was essentially technological, was different from the route Gidron and Petruschka had taken before when establishing Scorpio. This time, thorough market research was conducted before they started the development, in order to increase the likelihood of success.
Chromatis’ entrepreneurs aspired to develop a full networking solution which would optimize the capacity of optical fibers by increasing the volume of traffic transmitted through them. The system integrated hardware for multiplexing several different wavelengths (DWDM – Dense Wavelength Division Multiplexing), technology for transmitting data using IP (Internet Protocol), technology for connecting telephone exchanges, and other technologies. The system was to be installed at the facilities of communications carriers, and the target market was metropolitan telephone companies. Thus was Chromatis born.
Building the Company
After deciding on their strategic direction, the entrepreneurs founded the company in 1997. The company was organized as a Delaware company with a development center in Israel, and its main offices were in Bethesda, Maryland (where several communications companies are centered and switching engineers are relatively abundant). The entrepreneurs used their own money for the initial capital. It was important to them that a leading U.S. fund participate in the first-stage financing round, which would expose them to customers and competitors in the target market. Therefore, they brought together the venture capital fund JVP (Jerusalem Venture Partners) and Crosspoint fund as their initial investors. JVP had previously invested in Scorpio, Gidron and Petruschka’s previous company, and since the entrepreneurs had had a good experience with the fund, and in particular its managing partners, Fred Margalit, they decided to allow the fund to act as the lead investor in the new company in the first round, which took place in March 1998, in which Chromatis raised $7 million. In October 1998, the company raised another $5 million, this round being led by Lucent Venture Partners. All of the previous investors also took part in the second round. In November 1999, when the company was finishing its beta testing and was ready to go to market, the company raised approximately $38 million from its previous investors, including Lucent’s venture capital fund, and from new investors, including the Soros and Hambrecht funds. This round was based on a company valuation of more than $100 million.
At first, Gidron and Petruschka acted as joint CEOs, but later recruited the outside CEO Bob Barron, who had approximately one year earlier declined a similar offer from Cerent, a company operating in a similar field which was later bought by Cisco for around $7 billion. Chromatis’ top management team also included some former Scorpio and U.S. Robotics employees.
All along the way, Chromatis recruited first-rate employees and managers. For example, it managed to recruit Mory Ejabat, one of the best known managers in the field of communications and the active CEO of the communications equipment company Ascend Communications, a company bought by Lucent one year earlier for more than $20 billion.
Before the sale, the company employed about 160 workers. In 1999, the company launched some beta trials with telecom companies, including Quest and Bell Atlantic, but had substantially no revenue.
The Transaction
In May 2000, Chromatis announced that it had been acquired by Lucent in a stock transaction based on a value of around $5 billion. Under the agreement, Lucent allotted 78 million of its shares to Chromatis, excluding the 7% stake of Lucent Venture Partners. Lucent allotted another 2.5 million of its shares to several key employees of Chromatis, contingent upon Chromatis meeting certain performance-based goals after the sale.
The deal left almost everyone involved in the industry dumbstruck. The company was founded less than two years before the sale and had no meaningful revenues or guaranteed contracts. Apparently, a successful combination of technology, management, and strategic alliances, particularly the one with Lucent, had a material impact on the mere fact of the company’s sale.
Analysis and Prologue
Confirmation that the optical networking industry had become a hot field in the capital market had already been given when Cisco bought Cerent, Chromatis’ competitor, in a $7 billion stock transaction in 1998. Without any comparable self-developed technology, it was only a matter of time before Lucent, one of Cisco’s most prominent competitors, would acquire a similar company. The area in which Chromatis operated appeared to be even hotter when Cisco announced that orders for Cerent’s product, which integrates data flow on fiber optic networks, had risen to approximately $2 billion per year.
As it appeared when the acquisition was announced, Chromatis’ price tag resulted not only from a comparison with the sale of Cerent to Cisco, but also from Lucent’s relative disadvantage in the metropolitan communications market in which Chromatis operated. Chromatis offered Lucent almost a complete solution for an existing and emerging need in the metropolitan communications market, a solution with which Lucent was familiar from a relatively early stage due to its investment in Chromatis through its venture capital fund. In other words, although Chromatis had an independent market (as its beta trials with telecom companies had proven) which enabled it to keep going as an independent company, Lucent always stood in the background as a potential buyer. Thus, the need to become acquainted with one another, a stage which is necessary in any merger negotiations, was obviated. From the perspective of real options, the introduction of Lucent’s venture capital fund to the company increased the likelihood that Lucent would acquire the company (as indeed was the case). In other words, introducing Lucent as an investor was tantamount to buying a partial put option. However, Chromatis paid no small premium for this option—stemming from the fact that Lucent’s competitors attributed a lower probability to their possibility of buying Chromatis. As discussed in the chapter on valuation, any decision on the creation of a binding and long-term relationship with a leading company in the field can entail a cost in the form of a reduced likelihood of relationships with competing companies.
Nevertheless, it is important to note that despite its relationship with Lucent, the company also attracted the interest of other companies that considered buying it, such as the communications equipment company Sycamore.
As was apparent all along, a major key to Chromatis’ success was recruiting leaders in every field. The two entrepreneurs understood that the product they were planning was needed in the market, understood how important it was to raise capital quickly, and how essential the money was, mainly to recruit the best people in the market in each field. The recruitment of such people, along with their superb product, enabled the company to demand and receive investments with the relatively high valuation of $100 million.
Lucent, on its part, had performed 33 acquisitions in the four years preceding its acquisition of Chromatis as part of its strategy of expanding into markets with faster growth rates than its traditional core business, and to complement lines of products it had had no time to develop independently in its laboratories. Starting from the point in which it entered the company as an investor, Lucent’s investment in Chromatis was clearly of interest to it for strategic reasons, namely, reinvigorating its leading position in the optical networking market. Chromatis was addressing the metropolitan networking market, which was particularly attractive to Lucent since this market lacked a dominant player such as Nortel was in the long haul networking market.
How can such a high acquisition price be explained when the annual value of the equipment market targeted by Chromatis was $2 billion (even when one takes into account projected sales of around $8 billion in 2004)? The explanation lies in the valuation of companies by strategic investors: From Lucent’s point of view, sales in Chromatis’ target market were expected to encourage sales of other equipment sold by the company. In addition, until that time, Lucent still depended on obtaining large contracts with, among other companies, AT&T, from which it was spun off. Therefore, expanding its spectrum of products in order to appeal also to smaller clients could help Lucent in broadening its product offering and the scopes of its contracts. In the acquisition of Chromatis, as well as in acquisitions in similar markets in which there are few major suppliers, the explanation for the price lies more in the acquirer’s strategic considerations than in the valuation of the target as an independent company. In addition, in stock transactions both the target and the acquirer take into account other considerations that could affect the value of the deal. For instance, the value of the acquirer’s stock, as well as the ability to sell the stock received in the transaction, could affect the value of the deal. A cash transaction is not equivalent to a stock transaction with the same announced value, as the plummeting of Lucent’s stock price in the coming year indicates.
In August 2001, Lucent had announced that it is shutting down the Chromatis division (originating from the acquisition of Chromatis). The potential clients for the products developed by Chromatis, the Competitive Local Exchange Carriers (CLECs), were themselves facing a dramatic reduction in sales with some of them collapsing into bankruptcy, and hence almost stopped acquiring new equipment. Lucent itself was facing a meltdown in most of its businesses, and was trying to reduce its own “burn-rate.” As part of its restructuring, which included the layoffs of over 50,000 employees and refocusing on existing products, Lucent gave up on Chromatis.
The closing of Chromatis only one year following its acquisition for $5 billion signifies the dramatic shakedown in the technology area in general, and the communication field in particular. This shakedown, which started in the later part of 2000, and which people felt was associated primarily with the “Internet bubble,” rapidly spread to most areas in technology. Again it was shown that the timing of investments, as well as of venture development and of exiting it, is by no means less important in determining the prospects of a venture, its entrepreneurs and its investors, than the actual strategy of the company, which includes an optimized composition of employees, technology, cost structure, “sweet spots” in target markets, innovative pricing models, and astute strategic alliances.
In: Finance
multiple choice questions
83. Ollie negotiates an order instrument to Phil by
a. assignment of its rights under a contract.
b. delivery with any necessary indorsement.
c. making an unconditional promise to pay.
d. presenting it in response to a demand by B.
84. Lauren transfers an instrument to Miguel in a form and by a means that makes Miguel a “holder.” This is
a. a holding.
b. an assignment.
c. negotiation.
d. presentment.
85. Petra signs a check payable to Quincy, who indorses the back, gives it to Regional Credit Union, and receives cash. The transfer of the check from Quincy to the credit union is
a. an assignment.
b. a negotiation.
c. a payment.
d. a sale.
86. Ivy signs a check payable to Jon and gives it to him. Jon indorses the back, and transfers the check to Ked. To negotiate the check to Luis, Ked must
a. write “Ked” on the back.
b. write “pay to the order of Luis [signed] Ked” on the back.
c. deliver the check to Luis.
d. obtain Luis’s signature on the back.
Fact Pattern 25-A1 (Questions A5–A8 apply)
Rollo obtains a check payable to his order from Simone. Rollo signs the back and gives the check to Trey. Trey writes “Pay to Trey” above Rollo’s signature.
87. Refer to Fact Pattern 25-A1. When Trey writes “Pay to Trey” above Rollo’s signature, Rollo’s signature becomes
a. a blank indorsement.
b. a qualified indorsement.
c. a special indorsement.
d. a restrictive indorsement.
88. Refer to Fact Pattern 25-A1. When Trey writes “Pay to Trey” above Rollo’s signature, the check becomes
a. a bearer instrument.
b. an order instrument.
c. a promissory note.
d. a nonnegotiable instrument.
89. Refer to Fact Pattern 25-A1. By writing “Pay to Trey” above Rollo’s signature, Trey
a. avoids the risk of loss from theft of the instrument.
b. relieves himself from liability on the instrument.
c. converts the check into a nonnegotiable instrument.
d. locks the instrument into the bank collection process.
90. Refer to Fact Pattern 25-A1. After Trey writes “Pay to Trey” above Rollo’s signature, further negotiation of the check
a. requires Rollo’s re-indorsement and delivery.
b. requires delivery alone.
c. requires Trey’s indorsement and delivery.
d. is not possible.
91. Velma transfers a note by signing it and delivering it to Woz. Woz is
a. a delivery person.
b. an indorsee.
c. a note passer.
d. a promisee.
92. Dora receives a check from Eagle Corporation. Dora indorses the check to First National Bank by writing “pay to First Nat’l Bank only” and signing her name. This is
a. a blank indorsement.
b. a qualified indorsement.
c. a restrictive indorsement.
d. a special indorsement.
93. Gina writes and signs a check payable to “Happy Market.” Ira, Happy’s manager, indorses the check “For deposit only.” This is
a. a blank indorsement.
b. a qualified indorsement.
c. a restrictive indorsement.
d. a special indorsement.
94. To pay for investment advice from financial consultants Smith and Jones, Tony signs a check payable to “Smith or Jones.” A proper indorsement of the check is
a. not possible.
b. “Smith” and “Jones” only.
c. “Smith” only, or “Jones” only, but not “Smith” and “Jones.”
d. “Smith” only, or “Jones” only, or “Smith” and “Jones.”
95. Blythe, an accountant for Credits & Debits, acquires a negotiable instrument from Eton by promising to pay its face value in thirty days. Blythe acquires the status of an HDC when she
a. acquires possession of the negotiable instrument.
b. agrees with Eton to buy the negotiable instrument.
c. pays the face value due on the instrument.
d. transfers the instrument to another party.
96. Jill, in good faith and for value, gets from Kit a check “payable to the order of bearer.” Jill does not know that Kit stole the check. Jill is
a. an HDC.
b. not an HDC, because Kit did not acquire the check for value.
c. not an HDC, because Kit did not acquire the check in good faith.
d. not an HDC, because the check is a bearer instrument.
97. Florencia, who is not a GigaBank customer, attempts to cash a check drawn on the bank. The check is considered dishonored if GigaBank
a. refuses to pay it.
b. charges a fee to cash it.
c. asks Florencia for reasonable identification.
d. asks Florencia to sign a receipt for the payment on the check.
98. Clem gets a $100 check as a gift from Daria. Clem crudely increases the amount of the check to $1,00—the alteration is obvious—and transfers it to eReady Sets, Inc., in exchange for a 3D HD TV. eReady deposits the check in its bank account at First Town Bank. HDCs of this check include
a. Clem, eReady, and First Town Bank.
b. Clem only.
c. eReady and First Town Bank only.
d. none of these parties.
99. Enter answer “A”
100. Enter answer “A”
In: Operations Management
19.Before 1990, there was a higher incidence of birth defects among pregnant mothers. Scientists hypothesized that was because the pregnant women were not getting sufficient amounts of folic acid in their diet. In 1985, the average folic acid intake of an American pregnant woman was 150 micrograms/day. After folic acid fortification of cereals and flour in the late 1990s, it was hypothesized that women were now taking in substantially more folic acid daily. A dietary survey of a sample of 49 pregnant women showed that their daily intakes in the year 2001 were 425 micrograms/day, with a standard deviation of 175 micrograms. Did these pregnant women take in statistically MORE folic acid in their diet in 2001 compared to 1985? Run the appropriate test at a 5% level of significance. Choose the correct response for Step 5: Conclusion of this hypothesis test.
Group of answer choices
Do NOT reject the null because (150-425)/(175/7) is LESS than 1.96
Do NOT reject the null hypothesis because (150-425)/(175/7) is LESS than 1.645.
Reject the null hypothesis because (425-150)/(175/7) > 1.645, p<0.001.
Reject the null hypothesis because (425-150)/(175/7) > 1.96, p<0.001
18.Before 1990, there was a higher incidence of birth defects among pregnant mothers. Scientists hypothesized that was because the pregnant women were not getting sufficient amounts of folic acid in their diet. In 1985, the average folic acid intake of an American pregnant woman was 150 micrograms/day. After folic acid fortification of cereals and flour in the late 1990s, it was hypothesized that women were now taking in substantially more folic acid daily. A dietary survey of a sample of 49 pregnant women showed that their daily intakes in the year 2001 were 425 micrograms/day, with a standard deviation of 175 micrograms. Did these pregnant women take in statistically LESS folic acid in their diet in 2001 compared to 1985? Run the appropriate test at a 5% level of significance. Choose the correct response for Step 5: Conclusion of this hypothesis test.
Group of answer choices
Reject the null hypothesis because (150-425)/(175/7) is < -1.645.
Do NOT reject the null hypothesis because (425-150)/(175/7) is NOT <-1.645.
Do NOT reject the null hypothesis because (150-425)/(175/7) > 1.645.
Reject the null hypothesis because (425-150)/(175/7) <- 1.645, p<0.001.
On average, a person who lives in Switzerland consumes the most chocolate each year compared to people in other countries, at 22.36 pounds per person. A sample of 100 Austrians shows they are not far behind, consuming an average of 20.13 pounds per person with a standard deviation of 3.6 pounds. Is the average amount of chocolate consumed by the Austrians significantly DIFFERENT from the amount consumed by those in Switzerland? Run the appropriate test at a 5% level of significance. Choose the correct response for Step 5: Conclusion of this hypothesis test.
Group of answer choices
Reject the null because (20.13-22.36)/(3.6/10) < -1.96, p<0.001.
Reject the null because (22.36-20.13)/(3.6/10) >1.645, p<0.001.
Reject the null because (22.36-20.13)/(3.6/10) >1.96, p<0.001.
Reject the null because (20.13-22.36)/(3.6/10) < -1.645, p<0.001.
17.On average, a person who lives in Switzerland consumes the most chocolate each year compared to people in other countries, at 22.36 pounds per person. A sample of 100 Austrians shows they are not far behind, consuming an average of 20.13 pounds per person with a standard deviation of 3.6 pounds. Is the average amount of chocolate consumed by the Austrians significantly DIFFERENT from the amount consumed by those in Switzerland? Run the appropriate test at a 5% level of significance. Choose the correct response for Step 5: Conclusion of this hypothesis test.
Group of answer choices
Reject the null because (20.13-22.36)/(3.6/10) < -1.96, p<0.001.
Reject the null because (22.36-20.13)/(3.6/10) >1.645, p<0.001.
Reject the null because (22.36-20.13)/(3.6/10) >1.96, p<0.001.
Reject the null because (20.13-22.36)/(3.6/10) < -1.645, p<0.001.
In: Statistics and Probability
It was February 2005, and Fred Gehring and Ludo Onnink—CEO and CFO, respectively, of Tommy Hilfiger Europe (the European subsidiary of Tommy Hilfiger)—had just left the conference room in Amsterdam after hearing Tommy Hilfiger’s quarterly results. For the fifth consecutive year, the results in the U.S. were disappointing; sales had declined by 11% on average over this period, dropping from $1.9 billion in 2000 to $1.1 billion in 2005. In Europe, however, the firm’s performance continued to be strong with sales growing at more than 40% a year, from $82 million in 2000 to $428 million in 2005 (see Exhibit 1). In an attempt to compensate for the decline in its core Tommy Hilfiger brand, the company had acquired the rights to the Karl Lagerfeld brand and was contemplating further brand acquisitions and expansions. Gehring and Onnink were concerned that Tommy Hilfiger’s steady decline in the U.S. would start spilling over to the European business, which thus far had been insulated and was growing at a healthy pace. Tommy Hilfiger, the second of nine children, had grown up in Elmira, New York. In 1969, while a senior in high school, Hilfiger began his fashion career with $150, just enough to purchase 20 pairs of bell-bottom jeans. He opened a shop called People’s Place which quickly grew to 10 stores, expanding to serve nearby college campuses, such as Cornell University. A big rock ‘n’ roll fan, Hilfiger was influenced by the British rock scene, and numerous young musicians—including a young Bruce Springsteen—visited his stores. Hilfiger’s goal was to bring London and New York City fashion to upstate New York. Over time, he gradually shifted from retailer to designer as he began to customize jeans and the other items he sold. Larger sizes, more prominent logos, and brighter colors became a staple of Tommy Hilfiger designs in the late 1990s. Customers responded with enthusiasm, and Tommy Hilfiger’s sales exploded, crossing the $2 billion mark in 2000. Riding its rapidly growing sales and increasing popularity, the Tommy Hilfiger brand expanded aggressively via additional lines—such as boys’ clothing—and licensing abroad in markets such as Australia, India, Korea, Japan, and South America. However, by the early 2000s the company was beginning to lose steam in the U.S. market. Hiphop artists and their fans had moved on to more urban brands, such as Marc Ecko and FUBU, while the Tommy Hilfiger brand had already become tarnished in the eyes of preppy consumers.In response to this decline, the company began to cut prices, filling the clearance racks of Macy’s and Bloomingdale’s. In addition, the company tried to get away from core design themes to pick up sales by mimicking designs that were selling well in department stores and to expand the brand lineup in order to cater to more audiences. When Tommy Hilfiger filed for its IPO in 1992 it had only its one flagship Tommy Hilfiger brand. By 2005, the company had significantly expanded its brand portfolio. The U.S. Distribution Channel The early 2000s coincided with massive consolidation in the U.S. department store channel. One notable example was Federated’s 2005 acquisition of Marshall Field’s to create the nation's secondlargest department store chain, accounting for 35% of conventional and chain department store sales in the U.S. Within the all-important department store channel, there was an inherent pecking order. At the top of the pyramid were luxury stores such as Neiman Marcus and Saks. The next step down included bridge retailers like Bloomingdale’s and Nordstrom. Below that was the better category, with stores like Macy’s and Parisian. Moderate stores—such as Dillard’s and J. C. Penney—came in next, followed by budget stores, which included Kohl’s and Mervyns. In 2005, department stores accounted for 18% of U.S. clothing sales. The 24-and-under age group—a fashionable, trend-driven market—accounted for 36.5% of Tommy Hilfiger’s sales, but only 29.7% of Polo’s sales. Additionally, while Polo children’s wear accounted for only 8.2% of total sales, this segment made up more than 15% of Tommy Hilfiger’s sales. Tommy Hilfiger ranked highly in terms of awareness relative to Polo (90% vs. 86%). However, the brand fared worse in terms of other key factors deemed to be important for apparel purchasers, such as quality, style, and fit. Market research conducted by the company showed that retailers were offering Tommy Hilfiger merchandise at prices 30% below Polo for comparable items, although customers were willing to pay prices just one tier below Polo (7% to 10% lower). This disconnect in pricing depended primarily on the economics of the U.S. wholesale sector. Department stores requested discounts or markdown support from Tommy Hilfiger to drive higher volumes and traffic to their stores. In order to protect the margins generated from the department store channel, Tommy Hilfiger responded by pushing more and more product volume at lower prices into the channel, which in turn created pressure to discount the products in order to sell through the large volumes. In 2005, Tommy Hilfiger changed its segment reporting to separately report the U.S. and international (including Canada and Europe) wholesale results, which had previously been consolidated in a single wholesale figure. (The financial results by geographic region are reported in Exhibits 5 and 6.) This revealed that, from 2004 to 2005, gross margins in the U.S. wholesale channel declined from 33.5% to 26.2%, and the U.S. wholesale EBITDA dropped from $111 million in 2004 to $11 million in 2005. During the same period, retail’s contribution to sales in the U.S. was increasing. Sales for the U.S. retail business increased from $320 million in 2004 to $345 million in 2005, while the U.S. retail EBITDA went from $64 million in 2004 to $65 million in 2005. Retail gross margins in 2005 were strong at about 50.4%, vs. 26.2% in the wholesale channel. In contrast, the European wholesale distribution channel contributed $365 million in sales in 2004 and $459 million in 2005, with EBITDA of $63 million in 2004 and $98 million in 2005. Gross margins in European wholesale were at 55.4%, more than double the gross margin in the U.S. wholesale business. The European retail channel generated $47 million in sales in 2004 and $72 million in 2005. European retail EBITDA reached $9 million in 2004 and $5 million in 2005. Tommy Hilfiger had already attempted to move into the upscale apparel segment in the spring of 2004 with the launch of the H Hilfiger line, a brand that was intended to be more fashionable and formal. The line, backed by a $10 million marketing budget and Hilfiger’s personal involvement with a tour of six U.S. department stores, did well in Europe and the U.S. (in the company’s own retail stores) but was relatively unsuccessful in the U.S. wholesale channel. The Lagerfeld acquisition was an even larger departure from Tommy Hilfiger’s traditional audience. In early March 2005, Gehring and Onnink presented their fully worked-out plans, first to the CEO and later to the entire board. To their surprise, while the board recognized that there was merit in the plan, they did not embrace it. Gehring and Onnink engaged in several conversations with Hilfiger to express their concerns about the developments in the business and Gehring’s possible interest in acquiring the company. Gehring also had conversations with Joel Horowitz, then chairman of the board, to express Gehring’s concerns about the financial results of the U.S. wholesale operations and his interest in the acquisition. From these interactions, Gehring concluded he would need to secure financing to make his bid credible to Tommy Hilfiger’s board, and he called Silas Chou to discuss potential options. Chou committed his financial support, conditional on Gehring finding a private equity firm to support his bid. Gehring also secured some financing from a European bank, but again the financing was conditional on a private equity-led transaction. In March and April 2005, Gehring and Onnink met with several private equity firms and financial institutions to discuss their interest in acquiring Tommy Hilfiger. In May 2005, Gehring delivered a letter to the board of directors of Tommy Hilfiger, backed with equity financing from Apax Funds and debt financing from Citibank, expressing their joint interest in making a proposal to acquire Tommy Hilfiger for $14.50 in cash per share (representing a 33% premium over the most recent closing price of $10.91). The board rejected the offer but retained J.P. Morgan as a financial advisor to seek additional offers from potential buyers, whether strategic or financial. Gehring and Onnink were appointed the new CEO and CFO, respectively. Hilfiger and Horowitz were invited into the transaction as co-investors and board members. The Way Forward Gehring and Onnink were now in control of the business. They realized they needed to start executing their plan immediately. Could they turn the company’s performance around in the U.S.? And what changes, if any, should they make to support the global expansion of the company? What should their immediate next steps be? The Turnaround (2006–2010) Between signing the transaction documentation in December 2005 and completing the acquisition in May 2006, Gehring and Onnink worked with the Apax team to put together a detailed 100-day plan that included all initiatives the new management team was going to implement immediately after taking charge. Gehring relocated from Amsterdam to New York to take over and initiate a set of radical changes to the U.S. operations right after the closing in May 2006. Approximately 40% of wholesale and corporate staff positions in the U.S. were eliminated, and three distribution centers in the U.S. were consolidated into one site. In terms of the brand portfolio, Karl Lagerfeld and the Tommy Hilfiger brand extension “H” were closed in New York, which resulted in additional savings. The worldwide trademarks for Karl Lagerfeld, Lagerfeld Gallery, and KL Lagerfeld/Lagerfeld had been acquired by Tommy Hilfiger in January 2005. One of the core components of Gehring’s plan was the importance of changing the brand’s perception and positioning in the U.S. The objective was to move from the blurred positioning between low-tier urban street wear and the mid-tier “traditional” brand (competing with Nautica and Charter Club) to a best-in-class “neo-traditional” brand (competing with J. Crew and Polo Ralph Lauren). A turning point in the company’s wholesale strategy was an exclusive distribution deal with Macy’s. In a first-of-its-kind deal that was later adopted by several other brands, the company agreed to eliminate distribution through all other stores in exchange for “most favored nation” status with Macy’s. The collaboration between Gehring and Onnink on the one hand and Apax on the other was crucial to effect this transformation. In May 2010, Apax sold Tommy Hilfiger to Phillips-Van Heusen Corporation, now known as PVH Corp. (NYSE: PVH), for a total consideration of approximately €2.2 billion ($3.0 billion), including €1.9 billion ($2.6 billion) in cash and €276 million ($380 million) in PVH common stock. The price achieved by Apax at exit was almost twice what it paid for Tommy Hilfiger in 2006. This implied that Apax achieved a 5 times money multiple on its equity investment in the transaction. Tommy Hilfiger in 2014 The Tommy Hilfiger business progressed well after the transaction between Apax and PVH. European growth kept up its momentum even during the extremely turbulent European debt crisis and the related recessionary environment that was triggered by it. The pan-European penetration of the brand proved to be a significant strong point whereby a slowdown in business in the Southern European markets was offset by ongoing growth in the Northern markets. The Hilfiger brands generated significant revenue for PVH. In 2012, the Tommy Hilfiger North America segment generated earnings for interest and taxes (EBIT) of $183 million on total revenue of $1.4 billion. This represented significant growth over 2010, when EBIT for North America was $111 million. Meanwhile, the Tommy Hilfiger International segment generated EBIT of $243 million on $1.8 billion of total revenue. Similar to North America, the 2012 EBIT represented significant growth over the 2010 figure of $155 million. In November 2013 Gehring announced his plans to retire from his CEO position during the second half of 2014 and to hand over leadership of the company to long-time associate Daniel Grieder, a 52-year-old Swiss national who has been with the company in various roles since 1997, most recently as CEO of the European business. PVH reached an agreement with Gehring to continue with the company on an ongoing basis as chairman of Tommy Hilfiger and vice chairman of PVH Corp. Onnink also announced his planned resignation effective April 2014, when he would seek new entrepreneurial endeavors but remain involved with the company in an advisory capacity for another year.
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In: Economics
It was February 2005, and Fred Gehring and Ludo Onnink—CEO and CFO, respectively, of Tommy Hilfiger Europe (the European subsidiary of Tommy Hilfiger)—had just left the conference room in Amsterdam after hearing Tommy Hilfiger’s quarterly results. For the fifth consecutive year, the results in the U.S. were disappointing; sales had declined by 11% on average over this period, dropping from $1.9 billion in 2000 to $1.1 billion in 2005. In Europe, however, the firm’s performance continued to be strong with sales growing at more than 40% a year, from $82 million in 2000 to $428 million in 2005 (see Exhibit 1). In an attempt to compensate for the decline in its core Tommy Hilfiger brand, the company had acquired the rights to the Karl Lagerfeld brand and was contemplating further brand acquisitions and expansions. Gehring and Onnink were concerned that Tommy Hilfiger’s steady decline in the U.S. would start spilling over to the European business, which thus far had been insulated and was growing at a healthy pace. Tommy Hilfiger, the second of nine children, had grown up in Elmira, New York. In 1969, while a senior in high school, Hilfiger began his fashion career with $150, just enough to purchase 20 pairs of bell-bottom jeans. He opened a shop called People’s Place which quickly grew to 10 stores, expanding to serve nearby college campuses, such as Cornell University. A big rock ‘n’ roll fan, Hilfiger was influenced by the British rock scene, and numerous young musicians—including a young Bruce Springsteen—visited his stores. Hilfiger’s goal was to bring London and New York City fashion to upstate New York. Over time, he gradually shifted from retailer to designer as he began to customize jeans and the other items he sold. Larger sizes, more prominent logos, and brighter colors became a staple of Tommy Hilfiger designs in the late 1990s. Customers responded with enthusiasm, and Tommy Hilfiger’s sales exploded, crossing the $2 billion mark in 2000. Riding its rapidly growing sales and increasing popularity, the Tommy Hilfiger brand expanded aggressively via additional lines—such as boys’ clothing—and licensing abroad in markets such as Australia, India, Korea, Japan, and South America. However, by the early 2000s the company was beginning to lose steam in the U.S. market. Hiphop artists and their fans had moved on to more urban brands, such as Marc Ecko and FUBU, while the Tommy Hilfiger brand had already become tarnished in the eyes of preppy consumers.In response to this decline, the company began to cut prices, filling the clearance racks of Macy’s and Bloomingdale’s. In addition, the company tried to get away from core design themes to pick up sales by mimicking designs that were selling well in department stores and to expand the brand lineup in order to cater to more audiences. When Tommy Hilfiger filed for its IPO in 1992 it had only its one flagship Tommy Hilfiger brand. By 2005, the company had significantly expanded its brand portfolio. The U.S. Distribution Channel The early 2000s coincided with massive consolidation in the U.S. department store channel. One notable example was Federated’s 2005 acquisition of Marshall Field’s to create the nation's secondlargest department store chain, accounting for 35% of conventional and chain department store sales in the U.S. Within the all-important department store channel, there was an inherent pecking order. At the top of the pyramid were luxury stores such as Neiman Marcus and Saks. The next step down included bridge retailers like Bloomingdale’s and Nordstrom. Below that was the better category, with stores like Macy’s and Parisian. Moderate stores—such as Dillard’s and J. C. Penney—came in next, followed by budget stores, which included Kohl’s and Mervyns. In 2005, department stores accounted for 18% of U.S. clothing sales. The 24-and-under age group—a fashionable, trend-driven market—accounted for 36.5% of Tommy Hilfiger’s sales, but only 29.7% of Polo’s sales. Additionally, while Polo children’s wear accounted for only 8.2% of total sales, this segment made up more than 15% of Tommy Hilfiger’s sales. Tommy Hilfiger ranked highly in terms of awareness relative to Polo (90% vs. 86%). However, the brand fared worse in terms of other key factors deemed to be important for apparel purchasers, such as quality, style, and fit. Market research conducted by the company showed that retailers were offering Tommy Hilfiger merchandise at prices 30% below Polo for comparable items, although customers were willing to pay prices just one tier below Polo (7% to 10% lower). This disconnect in pricing depended primarily on the economics of the U.S. wholesale sector. Department stores requested discounts or markdown support from Tommy Hilfiger to drive higher volumes and traffic to their stores. In order to protect the margins generated from the department store channel, Tommy Hilfiger responded by pushing more and more product volume at lower prices into the channel, which in turn created pressure to discount the products in order to sell through the large volumes. In 2005, Tommy Hilfiger changed its segment reporting to separately report the U.S. and international (including Canada and Europe) wholesale results, which had previously been consolidated in a single wholesale figure. (The financial results by geographic region are reported in Exhibits 5 and 6.) This revealed that, from 2004 to 2005, gross margins in the U.S. wholesale channel declined from 33.5% to 26.2%, and the U.S. wholesale EBITDA dropped from $111 million in 2004 to $11 million in 2005. During the same period, retail’s contribution to sales in the U.S. was increasing. Sales for the U.S. retail business increased from $320 million in 2004 to $345 million in 2005, while the U.S. retail EBITDA went from $64 million in 2004 to $65 million in 2005. Retail gross margins in 2005 were strong at about 50.4%, vs. 26.2% in the wholesale channel. In contrast, the European wholesale distribution channel contributed $365 million in sales in 2004 and $459 million in 2005, with EBITDA of $63 million in 2004 and $98 million in 2005. Gross margins in European wholesale were at 55.4%, more than double the gross margin in the U.S. wholesale business. The European retail channel generated $47 million in sales in 2004 and $72 million in 2005. European retail EBITDA reached $9 million in 2004 and $5 million in 2005. Tommy Hilfiger had already attempted to move into the upscale apparel segment in the spring of 2004 with the launch of the H Hilfiger line, a brand that was intended to be more fashionable and formal. The line, backed by a $10 million marketing budget and Hilfiger’s personal involvement with a tour of six U.S. department stores, did well in Europe and the U.S. (in the company’s own retail stores) but was relatively unsuccessful in the U.S. wholesale channel. The Lagerfeld acquisition was an even larger departure from Tommy Hilfiger’s traditional audience. In early March 2005, Gehring and Onnink presented their fully worked-out plans, first to the CEO and later to the entire board. To their surprise, while the board recognized that there was merit in the plan, they did not embrace it. Gehring and Onnink engaged in several conversations with Hilfiger to express their concerns about the developments in the business and Gehring’s possible interest in acquiring the company. Gehring also had conversations with Joel Horowitz, then chairman of the board, to express Gehring’s concerns about the financial results of the U.S. wholesale operations and his interest in the acquisition. From these interactions, Gehring concluded he would need to secure financing to make his bid credible to Tommy Hilfiger’s board, and he called Silas Chou to discuss potential options. Chou committed his financial support, conditional on Gehring finding a private equity firm to support his bid. Gehring also secured some financing from a European bank, but again the financing was conditional on a private equity-led transaction. In March and April 2005, Gehring and Onnink met with several private equity firms and financial institutions to discuss their interest in acquiring Tommy Hilfiger. In May 2005, Gehring delivered a letter to the board of directors of Tommy Hilfiger, backed with equity financing from Apax Funds and debt financing from Citibank, expressing their joint interest in making a proposal to acquire Tommy Hilfiger for $14.50 in cash per share (representing a 33% premium over the most recent closing price of $10.91). The board rejected the offer but retained J.P. Morgan as a financial advisor to seek additional offers from potential buyers, whether strategic or financial. Gehring and Onnink were appointed the new CEO and CFO, respectively. Hilfiger and Horowitz were invited into the transaction as co-investors and board members. The Way Forward Gehring and Onnink were now in control of the business. They realized they needed to start executing their plan immediately. Could they turn the company’s performance around in the U.S.? And what changes, if any, should they make to support the global expansion of the company? What should their immediate next steps be? The Turnaround (2006–2010) Between signing the transaction documentation in December 2005 and completing the acquisition in May 2006, Gehring and Onnink worked with the Apax team to put together a detailed 100-day plan that included all initiatives the new management team was going to implement immediately after taking charge. Gehring relocated from Amsterdam to New York to take over and initiate a set of radical changes to the U.S. operations right after the closing in May 2006. Approximately 40% of wholesale and corporate staff positions in the U.S. were eliminated, and three distribution centers in the U.S. were consolidated into one site. In terms of the brand portfolio, Karl Lagerfeld and the Tommy Hilfiger brand extension “H” were closed in New York, which resulted in additional savings. The worldwide trademarks for Karl Lagerfeld, Lagerfeld Gallery, and KL Lagerfeld/Lagerfeld had been acquired by Tommy Hilfiger in January 2005. One of the core components of Gehring’s plan was the importance of changing the brand’s perception and positioning in the U.S. The objective was to move from the blurred positioning between low-tier urban street wear and the mid-tier “traditional” brand (competing with Nautica and Charter Club) to a best-in-class “neo-traditional” brand (competing with J. Crew and Polo Ralph Lauren). A turning point in the company’s wholesale strategy was an exclusive distribution deal with Macy’s. In a first-of-its-kind deal that was later adopted by several other brands, the company agreed to eliminate distribution through all other stores in exchange for “most favored nation” status with Macy’s. The collaboration between Gehring and Onnink on the one hand and Apax on the other was crucial to effect this transformation. In May 2010, Apax sold Tommy Hilfiger to Phillips-Van Heusen Corporation, now known as PVH Corp. (NYSE: PVH), for a total consideration of approximately €2.2 billion ($3.0 billion), including €1.9 billion ($2.6 billion) in cash and €276 million ($380 million) in PVH common stock. The price achieved by Apax at exit was almost twice what it paid for Tommy Hilfiger in 2006. This implied that Apax achieved a 5 times money multiple on its equity investment in the transaction. Tommy Hilfiger in 2014 The Tommy Hilfiger business progressed well after the transaction between Apax and PVH. European growth kept up its momentum even during the extremely turbulent European debt crisis and the related recessionary environment that was triggered by it. The pan-European penetration of the brand proved to be a significant strong point whereby a slowdown in business in the Southern European markets was offset by ongoing growth in the Northern markets. The Hilfiger brands generated significant revenue for PVH. In 2012, the Tommy Hilfiger North America segment generated earnings for interest and taxes (EBIT) of $183 million on total revenue of $1.4 billion. This represented significant growth over 2010, when EBIT for North America was $111 million. Meanwhile, the Tommy Hilfiger International segment generated EBIT of $243 million on $1.8 billion of total revenue. Similar to North America, the 2012 EBIT represented significant growth over the 2010 figure of $155 million. In November 2013 Gehring announced his plans to retire from his CEO position during the second half of 2014 and to hand over leadership of the company to long-time associate Daniel Grieder, a 52-year-old Swiss national who has been with the company in various roles since 1997, most recently as CEO of the European business. PVH reached an agreement with Gehring to continue with the company on an ongoing basis as chairman of Tommy Hilfiger and vice chairman of PVH Corp. Onnink also announced his planned resignation effective April 2014, when he would seek new entrepreneurial endeavors but remain involved with the company in an advisory capacity for another year.
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In: Finance
Robert Montoya, Inc., is a leading producer of wine in the United States. The firm was founded in 1950 by Robert Montoya, an Air Force veteran who had spent several years in France both before and after World War II. This experience convinced him that California could produce wines that were as good as or better than the best France had to offer. Originally, Robert Montoya sold his wine to wholesalers for distribution under their own brand names. Then in the early 1950s, when wine sales were expanding rapidly, he joined with his brother Marshall and several other producers to form Robert Montoya, Inc., which then began an aggressive promotion campaign. Today, its wines are sold throughout the world.
The table Wine market has matured and Robert Montoya's wine cooler sales have been steadily decreasing. Consequently, to increase winery sales, management is currently considering a potential new product: a premium red wine using the cabernet sauvignon grape. The new wine' is designed to appeal to middle-to-upper-income professionals. The new product, Suave Mauve, would be positioned between the traditional table wines and super premium table wines. In market research samplings at the company's Napa Valley headquarters, it was judged superior to various competing products. Sarah Sharpe, the financial vice president, must analyze this project, along with two other potential investments, and then present her findings to the company's executive committee.
Production facilities for the new wine would be set up in an unused section of Robert Montoya's main plant. New machinery with an estimated cost of $1,800,000 would be purchased, but shipping costs to- move the machinery to Robert Montoya's plant would total $80,000, and installation charges would add another $120,000 to the total equipment cost. Furthermore, Robert Montoya's inventories (the new product requires aging for 5 years in oak barrels made in France) would have to be increased by $100,000. This cash flow is assumed to occur at the time of the initial investment. The machinery has a remaining economic life of 4 years, and the company has obtained a special tax ruling that allows it to depreciate the equipment under the MACRS 3-year class life. Under current tax law, the depreciation allowances are 0.33, 0.45, 0.15, and 0.07 in Years 1 through 4, respectively. The machinery is expected to have a salvage value of $200,000 after 4 years of use.
The section of the plant in which production would occur had not been used for several years and, consequently, had suffered some deterioration. Last year, as part of a routine facilities improvement program, $300,000 was spent to rehabilitate that section of the main plant. Earnie Jones, the chief accountant, believes that this outlay, which has already been paid and expensed for tax purposes, should be charged to the wine project. His contention is that if the rehabilitation had not taken place, the firm would have had to spend the $300,000 to make the plant suitable for the wine project.
Robert Montoya's management expects to sell 125,000 bottles of the new wine in each of the next 4 years, at a wholesale price of $50 per bottle, but $30 per bottle would be needed to cover cash operating costs. In examining the sales figures, Sharpe noted a short memo from Robert Montoya's sales manager which expressed concern that the wine project would cut into the firm's sales of other wines-this type of effect is called cannibalization. Specifically, the sales manager estimated that existing wine sales would fall by 5 percent if the new wine were introduced. Sharpe then talked to both the sales and production managers and concluded that the new project would probably lower the firm's existing wine sales by $60,000 per year, but, at the same time, it would also reduce production costs by $40,000 per year, all on a pre-tax basis. Thus, the net externality effect would be -$60,000 + $40,000 = -$20,000. Robert Montoya's federal-plus-state tax rate is 40 percent, and its overall cost of capital is 10 percent, calculated as follows:
WACC = Wd r d (1-T) + Wsrs
= 0.5(10%) (0.6) + 0.5(14%)
= 10%.
Now assume that you are Sharpe's assistant and she has asked you to analyze this project, along with two other projects, and then to present your findings in a "tutorial" manner to Robert Montoya's executive committee. As financial vice president, Sharpe wants to educate some of the other executives, especially the marketing and sales managers, in the theory of capital budgeting so that these executives will have a better understanding of capital budgeting decisions. Therefore, Sharpe wants you to ask and then answer a series of questions as set forth next. Keep in mind that you will be questioned closely during your presentation, so you should understand every step of the analysis, including any assumptions and weaknesses that may be lurking in the background and that someone might spring on you in the meeting.
5. Estimate the project’s operating cash flows. (Hint: Again use Table 1 as a guide.) What are the project’s NPV, IRR, modified IRR (MIRR), and payback? Should the project be under-taken?
Fill in Xs. Payback period of S = about 2 years, L = about 3 years. Omit MIRR.
6. Now suppose the project had involved replacement rather than expansion of existing facilities. Describe briefly how the analysis would have to be changed to deal with a replacement project.
Depreciable basis = price + freight + installation. In year 1, 2,000,000 X 33% (or 0.33) MACRS factor = 660,000 (depreciation expense). 2,000,000 – 660,000 = 1,340,000 end-of-year book value.
MACRS Depr. End-of-year
Year Factor Expense Book Value
1 33% 660,000 1,340,000
2 X X X
3 X X X
4 7 140,000 0
100% 1,800,000
Cash Flow Statements:
Year 0 Year 1 Year 2 Year 3 Year 4
Unit price $ 50 X X $ 50
Unit sales 100,000 X X 100,000
Revenues 5,000,000 X X 5,000,000
Operating costs 3,000,000 X X 3,000,000
Depreciation 660,000 X X 140,000
Other project effects 20,000 X X 20,000
Before tax income 1,320,000 X X 1,840,000
Taxes 528,000 X X 736,000
Net income 792,000 X X 1,104,000
Plus depreciation 660,000 X X 140,000
Net op cash flow 1,452,000 X X 1,244,000
Salvage value 200,000
SV tax X
Recovery of NWC X
Termination CF X
Project NCF ($-2,100,000) X X X X
========= = = = =
In: Accounting