Case Study Questions
1. Identify all quotes and show the source. Avoid
plagiarism.
2. Support your assumption regarding sales revenues.
3. Support every line item on the income statement. If your
numbers vary in direct proportion to sales, give reasons for
that relationship (other than history). If you allow
administrative expense and other period costs to vary in
direct proportion to sales, give reasons why there are no
economies of scale. Give special attention to things like
marketing expense and research and development and
explain the relationship between these expenses and sales.
If you adopt a tax rate other than 40 percent, explain why
your tax rate is more appropriate.
4. Support every line item on your balance sheet. Review
the chapter in your textbook on projected financial
statements. Identify which items vary with sales
spontaneously, and which do not. Give special attention to
items like cash, marketable securities, deferred taxes, notes
payable, long term debt, common stock, paid in capital, and
accumulated other comprehensive income. Does your
annual addition to retained earning agree with your net
income, as stated on your income statement (articulations).
5. Do a sensitivity analysis to show which of your
assumptions are critical and which are not.
6. Explain what the balance in your Flexible Financing
Account means, and reconcile and show the differences, if
any, between your balance in Flexible Financing and free
cash flow.
7. If you have free cash flow, explain what you would do
with it. Would you retire debt, pay a dividend, buy back
stock, or accumulate the cash for potential acquisitions.
And provide a justification for your strategy.
8. Reconcile your projections with the current trading price
of the stock.
Case Study Grading
Points
Items to be included in spreadsheet:
(1 ) Include 5 years of historical balance sheets and income statements
1
(1a) All spreadsheet data should be easily read and easily navigated. It should
all be on one spreadsheet, so the reader need not travel back and forth
between numerous sources.
3
(1b) On spreadsheets, all cells should contain their formulas, so the reader
can see what items are included in a total.
3
(1c) All spreadsheet totals should add up.
3
(1d) Retained earning should reconcile from one year to the next. In other
words: beginning retained earnings plus net income minus dividends should
equal ending retained earnings.
3
(2) Project 5 years of future balance sheets and income statements
1
(2a) In your balance sheets, separate out operating cash from excess cash and
cash equivalents.
3
(2b) In your projected balance sheets, assume no change in excess cash or
non operating assets.
2
(2c) Consider this report a first pass; and assume that there is no change in
long term debt obligations, notes payable, common stock ir treasury stock.
That will make your free cash flow computation easier.
3
(2d) If you are projecting a change in deferred tax assets or deferred tax
liabilities, explain why you are projecting that change. (Remember that, in the
long run, deferred tax assets and deferred tax liabilities zero out, since they
are all based upon timing differences which will reverse.)
3
(2e) If you are projecting a change in non-operating assets explain why.
2
(2f) To make your projected liabilities and equity equal to your projected
assets, include a line item between your liability section and equity section
called Flexible Financing. Generally, this will represent cumulative additional
funds needed AFN. And if it is negative, it will generally indicate cumulative
free cash flow. Use the Flexible financing account as a balancing account.
5
(2g) Assume no change in Other Accumulated Comprehensive Income. This
account appears in the equity section of the balance sheet and represents the
unrealized gain or loss on marketable securities and foreign exchange. It is
only a temporary account and should zero out over time.
1
(3a) Compute free cash flow for all years.
5
(3b) Show the disposition of free cash flow in all years, both historical and
projected.
2
Items to be included in final report.
Respond to each of these questions in the final report, repeating the question
number and question before responding.
2
(4a) In the historical period, were there any acquisitions? And if so, were they
stock for stock, assets for stock, etc.?
1
(4b) Did another firm acquire shares in your company in the historical
period? And if so, were they stock for stock, or assets for stock, etc.?
1
(4c) If the firm is growing, is its growth real, or is it merely growth through
acquisition?
2
(5a) Justify your revenue projections and your gross margin assumptions.
5
(5b) Explain which costs are fixed and which costs are variable and which
costs have a fixed and variable component. If some of your costs are fixed,
then there will be economies of scale, and your profit margins should
improve.
5
(5c) If the provision for income tax differs significantly from 40 percent,
explain why the difference.
2
(6) Analyze the firm in terms of Porters Five Forces: In other words outline to
what extent the firm’s growth and profitability might be limited by (i) the
power of its consumers, (ii) competition from rival producers, (iii) potential
competition from new entrants into its market, (iv) the power of its input
suppliers, or (v) the existence of substitute goods.
5
(7) If your firm is in the technology sector, explain the firm’s position in its
industry. Is it a market leader? And if so, is it a market leader based upon its
technological advantage? And what must the firm do to remain a leader in its
industry?
2
(8) Are there any legal problems, or outstanding lawsuits pending, or lawsuits
which have recently been settled? Explain. And explain what impact that
might have on future results.
1
(9) Do a ratio analysis to compare your firm with 3 firms in its industry, but
only report key ratios, which may include PE ratio, ROE, ROA, net profit
margin, gross profit margin. A comparative Du Pont analysis might be
helpful. But do not report other ratios, unless there is a significant difference.
If your company is trading at a significantly higher PE ration than other firms
in its industry, is there an opportunity to make acquisitions on a stock for
stock basis? Identify potential acquisition targets.
4
(9a) Ratio comparisons should be presented in tables which are self
explanatory.
2
(9b) Ratio comparisons should not be presented in narrative form.
2
(10) If the firm is facing possible insolvency, explain. If there is a possibility of
insolvency, you may wish to compute break even point.
2
(11) If your Flexible Financing account has a large positive balance, indicating
AFN, outline your plan for how the company will arrange outside financing.
Will it borrow on a short term basis, issue long term debt, or sell additional
shares? And do you estimate any problem with arranging that necessary
financing?
3
(12) If your Flexible Financing account has a large negative balance,
indicating FCF, how will you use that FCF? Will you begin to pay dividends?
Buy back stock? Use the FCF for acquisitions?
3
(13) Place a value on the stock of your firm and support your computation.
4
(13a) Any computations, such as valuation, should be done in the form of
tables which are easy to read. Use the same format as the valuation tables in
PowerPoint lecture slides. Tables should be self-explanatory. In other words,
the reader should not be forced to search the document for missing
information. Tables should clearly state your assumptions.
2
(13b) A separate table should be presented to compute Horizon value.
2
(13c) And a second table should be presented incorporating the FCF of years 15, along with the Horizon value, to arrive at valuation.
2
(13d) Your valuation should approximate the current market value of the
stock. If it does not approximate the current market value of the stock, then
you need to rework your projected cash flows and Horizon values, in order to
come up with a reasonable valuation.
5
(14) If you quote any analyst or news source, show your sources. Do not
plagiarize, as plagiarism is a serious breach of the academic honor code.
5
102
Comments
Liabilities and equity should include FFA and
should agrre with total assets.
Ten days of sales is reasonable, in the absence
of any other estimate.
Many students increased their excess cash
holdings.
By projecting all expenses as a fixed percentage
of sales, you are assuming that all costs are
variable and that there is no fixed component.
Generally, students did a really good job on
Porter's Five Forces.
Only applied to Apple and Samsung.
If the reader has to guess where the numbers
came from, or if he has to navigate all over the
spreadsheet to see where the numbers came
from,it is not easy to read.
Direct quotation need to be in quotation marks
with footnotes.
NIKE, Inc.
Fiscal year is June-May. All values in USD millions.
2,009
Sales/Revenue
Cost of Goods Sold
Depreciation, Depletion, Amortization
Gross Profit
Total operating expenses
Income before income taxes
Income taxes
Net Income
BALANCE SHEET
2,010
19,176
10,223
347
8,606
6,648
1,958
470
1,488
2,009
2,011
19,014
9,950
337
8,727
6,284
2,443
610
1,833
2,010
2,012
20,862
11,122
351
9,389
6,297
3,092
711
2,381
2,011
24,128
13,227
395
10,506
7,488
3,018
760
2,258
2,012
ASSETS
Cash and equivalents
Short-Term Investments
Accounts Receivables
Inventories
Deferred income taxes
Prepaid expenses and other current assets
Total Current Assets
Property, plant and equipment,net
Identifiable intangible assets, net
Goodwill
Deferred income taxes
Total assets
2,291
1,164
2,884
2,357
272
766
9,734
1,958
467
194
897
13,250
3,079
2,067
2,650
2,041
249
874
10,959
1,932
467
188
874
14,419
1,955
2,583
3,138
2,715
312
594
11,297
2,115
487
205
894
14,998
2,317
1,440
3,280
3,350
274
870
11,531
2,279
535
201
919
15,465
Current Portion of Long Term Debt
Notes payable
Accounts payable
Accrued liabilities
Income Tax Payable
Total current liabilities
Long-term debt
Deferred income taxes and other liabilities
Total longterm Liabilities
Total Liabilities
32
343
1,032
1,784
86
3,277
437
842
1,279
4,556
7
139
1,255
1,904
59
3,364
446
855
1,301
4,665
200
187
1,469
1,985
117
3,958
276
921
1,197
5,155
49
108
1,588
2,053
67
3,865
228
1,219
1,447
5,312
3
3
3
3
Flexible Financing (AFN)
Unreconciled difference
Common Stock
Additional paid-in capital
Accumulated other comprehensive income
Retained Earnings
Total Shareholder Equity
2,871
368
5,451
8,693
3,441
215
6,096
9,754
3,944
95
5,801
9,843
4,641
149
5,588
10,381
13,249
14,419
14,998
15,465
8,693
(153)
1,833
(620)
9,754
9,754
(120)
2,381
(2,172)
9,843
9,843
54
2,258
(1,774)
10,381
13,250
(1,164)
(1,032)
(1,784)
(86)
(842)
8,342
1,164
9,506
14,419
(2,067)
(1,255)
(1,904)
(59)
(855)
8,279
2,067
10,346
14,998
(2,583)
(1,469)
(1,985)
(117)
(921)
7,923
2,583
10,506
15,465
(1,440)
(1,588)
(2,053)
(67)
(1,219)
9,098
1,440
10,538
Note Payable
Current portion of Long Term Debt
Long Term Debt
Flexible Financing Account
Unreconciled
Total Equity
Total Stakeholders
343
32
437
0
1
8,693
9,506
139
7
446
0
1
9,754
10,347
187
200
276
0
0
9,843
10,506
108
49
228
0
(228)
10,381
10,538
Net income
Other accum comp income
Add back interest expense, net of tax
NOPAT
Less (increase) in NOA
FCF
1,488
Total liability and Shareholders Equity
Beginning equity
Increase in Accum Other
Net income
Less Dividend
Ending equity
Total assets
Short term investments
Accounts payable
Accrued liabilities
Income tax payable
Long-term portion of deferred tax liability
Net operating assets
Financial assets
Book value of the Firm
(Incr) in Flexible Financing Account FFA
Dividend paid
Increase in Financial assets
Payoff on NP
1,833
(153)
xxx
1,681
63
1,743
2,381
(120)
xxx
2,261
356
2,617
2,258
54
xxx
2,312
(1,175)
1,137
620
903
204
2,172
516
(48)
1,774
(1,143)
79
Payoff on LTD
Unreconciled
FCF Disposal
(9)
25
1,743
170
(193)
2,617
48
379
1,137
2,013
2,014
25,313
13,780
513
11,020
7,762
3,258
808
2,450
2,013
2,015
25,819
14,268
245
11,306
8,242
3,065
735
2,330
2,014
2,016
26,645
14,522
264
11,860
8,505
3,355
805
2,550
2,015
2,017
27,205
14,691
285
12,230
8,684
3,546
735
2,811
2,016
2,018
27,994
14,977
313
12,704
8,936
3,769
735
3,033
2,017
28,834
15,138
337
13,359
9,204
4,156
735
3,420
2,018
3,337
2,628
3,117
3,434
308
802
13,626
2,452
382
131
993
17,584
3,739
2,628
3,553
3,870
308
802
14,900
2,636
390
131
993
19,051
4,190
2,628
4,049
4,362
308
802
16,339
2,847
399
131
993
20,709
4,696
2,628
4,616
4,916
308
802
17,965
3,129
408
131
993
22,626
5,262
2,628
5,261
5,540
308
802
19,801
3,367
417
131
993
24,709
5,897
2,628
5,996
6,243
308
802
21,874
3,643
426
131
993
27,067
57
121
1,646
1,986
116
3,926
1,210
1,292
2,502
6,428
57
121
1,646
1,986
98
3,908
1,210
1,292
2,502
6,410
57
121
1,646
1,986
98
3,908
1,210
1,292
2,502
6,410
57
121
1,646
1,986
98
3,908
1,210
1,292
2,502
6,410
57
121
1,646
1,986
98
3,908
1,210
1,292
2,502
6,410
57
121
1,646
1,986
98
3,908
1,210
1,292
2,502
6,410
(1,754)
(2,648)
(3,599)
(4,660)
(863)
(18)
3
3
3
3
3
3
5,184
292
5,695
11,174
5,184
292
8,025
13,504
5,184
292
10,575
16,054
5,184
292
13,385
18,864
5,184
292
16,418
21,897
5,184
292
19,839
25,318
17,602
19,051
20,709
22,626
24,709
27,067
10,381
143
2,450
(1,800)
11,174
11,174
0
2,330
0
13,504
13,504
0
2,550
0
16,054
16,054
0
2,811
0
18,864
18,864
0
3,033
0
21,897
21,897
0
3,420
0
25,318
17,584
(2,628)
(1,646)
(1,986)
(116)
(1,292)
9,916
2,628
12,544
19,051
(2,628)
(1,646)
(1,986)
(98)
(1,292)
11,401
2,628
14,029
20,709
(2,628)
(1,646)
(1,986)
(98)
(1,292)
13,059
2,628
15,687
22,626
(2,628)
(1,646)
(1,986)
(98)
(1,292)
14,976
2,628
17,604
24,709
(2,628)
(1,646)
(1,986)
(98)
(1,292)
17,059
2,628
19,687
27,067
(2,628)
(1,646)
(1,986)
(98)
(1,292)
19,417
2,628
22,045
1,210
0
(18)
11,174
12,487
121
57
1,210
(863)
0
13,504
14,029
121
57
1,210
(1,754)
0
16,054
15,687
121
57
1,210
(2,648)
0
18,864
17,604
121
57
1,210
(3,599)
0
21,897
19,687
121
57
1,210
(4,660)
0
25,318
22,045
2,450
143
xxx
2,593
(818)
1,775
2,330
0
xxx
2,330
(1,485)
845
2,550
0
xxx
2,550
(1,659)
891
2,811
0
xxx
2,811
(1,917)
894
3,033
0
xxx
3,033
(2,083)
951
3,420
0
xxx
3,420
(2,359)
1,061
121
1,800
1,188
(13)
863
0
0
0
891
0
0
0
894
0
0
0
951
0
0
0
1,061
0
0
0
(982)
(218)
1,775
0
(18)
845
0
0
891
0
0
894
0
0
951
0
0
1,061
11,531
15,465
Statement of Equity
Net Operating assets
Book value of the firm
Broken down by stakeholders
Computation of FCF
Disposition of FCF
Purchase answer to see full
attachment