Business Finance
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Question Description


  1. Research risk management approaches for managers.
  2. View Videos:
    1. Price Your Flight Algorithm
    2. Set D: Management Functions and Risk Management

Also,you must read the factsheet and the PDF about Heritage Doll that I attach it

you must write the question first then the answer

the discussion must at least 500 words


Discuss how a similar “set your price” approach could be used for Heritage Doll with -

      1. Match my Doll product line.
      2. Design your own Doll product line.
      the videos link

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New Heritage Doll Akram Nader Overview The heritage doll company is the US established cooperation that has for long being involved in the toys and games sector since the 1980´s.Their targeted market is divided into two broad segment that is the video games segment (48%)through electronic platform whereas the rest of their markets like traditional toys and games. They produce toys that are suit for their customer’s segments. There has been a shift in their company profit from 2012 that has allowed the company to venture into the new opportunity. Investment opportunity Emily Harris who is the current organization vice president to the new heritage doll company has come up with two expansion proposal for the production sector thus will increase the way to operate. The two-brilliant entrepreneurial which is also innovative plan that she raises are; 1. “Match my Doll Clothing Line.” 2. “Design Your Own Doll”. Due to the limited resource from the company the company committee might only have one of the project done. Thus, the manager will be in a good condition to conduct some analytics of the project to see which will be feasible and will be of much impact to the company free cash flow 30000 25000 20000 15000 10000 5000 0 -5000 -10000 2011 2012 2013 MMDCL -3020 -557.18 168.97 682.19 540.95 583.29 629.99 680.31 734.7 793.4 26120 DYOD -5330 -1261 306.05 -309 -1189.6 1141 1141.38 1209.8 1282.6 1359.42 26178.89 3 5 Series 3 MMDCL evaluation will be access on the underlying fundamental assumption • their ought to be 3% working capital • The high risk of doing the operation due to innovation and start of the design your own doll to be assessed at 9.0% whereas the small risk of the 1st project to be estimated at 7.7% • the risk of Taxes assumption is at 40% • Discount rate at 8.4% • We assumed That cash flow forecast, and capital is obtained from a given operation projection The below diagram is a free cash flow statistic Table 2.3 DYOD Series 3 Table2.3 continuation in the making of the decision of which type of project that should be taken as per free cash flow will depend on the project that takes the shortest time to bring a positive return and by the data from my table below. “Match my Doll Clothing Line” will fast bring back the revenue and this will make me choose it over the others IRR evaluation based on NPV, IRR, Payback Period and PI: Internal rate of return is sometimes done and written in percentage and its where the Highers value in term of the highest proportion is accepted and in our case we ought to accepted or agreed that we will take the “Match my Doll Clothing Line” because it has a percentage of 24% and leave the other one of the “Design Your Own Doll” which has a lower percentage of 18%. years 18% 24% MMDCL DYOD Net Present Value From the table below the net present of the twoproject different from one another and the decision to choose the best method in accordance to the two is to look at the one with the higher net present value among the two Look and analyzing the table above we can see that the MMDCL has a high NPV over the DYOD: So I will accept the MMDCL over the other DYOD Sales Payback period In payback period the decision to accept a given project will primarily involve the shortest time for the project to pay back it cash and from the look of thing is that “Match my Doll Clothing Line will return 7.39year which is less than the time frame of the Design Your Own Doll which take 9.05 years which is a long time thus we will again choose the former over the later PI Profitability index will be determined by the project that is higher than the other once, and it MMDCL DYOD is more less the same to the NPV in term of its excellent characteristics. Thus why we shall choose MMDCL which has a value of above 3 and leave the other DYOD which value is roughly around 2 Recommendation With the two-project having analysis them in dark detail I would highly recommend the “Matching my doll clothing line” for the above company this is due to how less it is position in term of its finances. The project take less time to implicates and this main that the break-even period will earn and it will be first at stabilizing itself and also the project will require less of the require capital than the DYOD In term of risk assessment is that MMDCL is less risky as it has been in the market for a long time, improving the product is very easy and the company has known the market acceptance of the product over the other product which is new to the market, has high risk because the market share can reject it, this will slowly sit on the company resources 4212 SEPTEMBER 15, 2010 TIMOTHY LUEHRMAN HEIDE ABELLI New Heritage Doll Company: Capital Budgeting In mid-September of 2010, Emily Harris, vice president of New Heritage Doll Company’s production division, was weighing project proposals for the company’s upcoming capital budgeting meetings in October. Two proposals stood out based on their potential to strengthen the division’s innovative product lines and drive future growth. However, due to constraints on financial and managerial resources, Harris knew it was possible that the firm’s capital budgeting committee would decline to approve both projects. She also knew that New Heritage’s licensing and retail divisions would promote compelling projects of their own. Consequently, Harris had to be prepared to recommend one of her projects over the other. The Doll Industry Revenues in the U.S. toy and game industry totaled $42 billion in 2008 and were projected to increase by 4.6% per year to $52.5 billion by 2013. The market was divided into two broad segments: video games (48%) and traditional toys and games (52%). The second segment was further divided into infant/preschool toys (14.5%), dolls (14.1%), outdoor & sports toys (12.3%), and other toys & games (59.1%) including arts and crafts, plush toys, action figures, vehicles, and youth electronics. The U.S. market for toys and games was dominated by large global enterprises that enjoyed economies of scale in design, production, and distribution. Revenues were highly seasonal; the largest selling season in the United States coincided with the winter holiday period. Within the toy and game segment, U.S. retail sales of dolls totaled $3.1 billion in 2008 and were projected to grow by 3% per year to $3.6 billion by 2013. The doll category included large, soft, and mini dolls, as well as doll clothing and other accessories. The phenomenon of “age compression”— the tendency of younger children to acquire dolls that had traditionally been designed for older girls—reduced growth in the “baby-doll” sub-segment. Competition among doll producers was vigorous, as a small number of large producers targeted similar demographics and marketed their dolls through the same media. Lasting franchise value for a branded line of dolls was rare; the enormous success of Barbie® dolls was an obvious exception. More recently and on a much smaller scale, New Heritage also had created a durable franchise for its line of heirloom dolls. But the popularity of most doll lines waned after a few years. ________________________________________________________________________________________________________________ HBS Professor Timothy Luehrman and HBS MBA Heide Abelli prepared this case solely as a basis for class discussion and not as an endorsement, a source of primary data, or an illustration of effective or ineffective management. This case, though based on real events, is fictionalized, and any resemblance to actual persons or entities is coincidental. There are occasional references to actual companies in the narration. Copyright © 2010 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business Publishing, Boston, MA 02163, or go to This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School. This document is authorized for use only in FIN 620 by Pamela Queen at Morgan State University from January 2013 to July 2013. 4212 | New Heritage Doll Company: Capital Budgeting New Heritage Dolls The New Heritage Doll Company was founded in 1985 by Ingrid Beckwith, a retired psychologist specializing in child development and the grandmother of two young girls. Dr. Beckwith believed the dolls produced by the major toy companies did little to develop girls’ imagination or foster a positive self-image, so she created a line of dolls with unique storylines and wholesome themes. Dr. Beckwith’s dolls struck a chord among mothers and grandmothers who also rejected the dated, clichéd images portrayed by the popular dolls of the day. By 2009, New Heritage had grown to 450 employees and generated approximately $245 million of revenue1 and $27 million of operating profit from three divisions: production, retailing, and licensing. The production division, discussed further below, designed and produced dolls and doll accessories. The retailing division offered a unique “intergenerational experience” for grandmothers, mothers, and daughters, centered upon the character histories and storylines of the company’s dolls and delivered through an online website (42%), a mail-order paper catalog (33%), and a network of retail stores (25%). In fiscal 2009, the retailing division generated roughly $190 million of revenue and $4.8 million of operating profit. The licensing division was started in 1998, and represented the company’s newest and most profitable division. It sought to extend the New Heritage brand and capitalize on high levels of customer loyalty by selectively licensing the company’s doll characters and themes to a variety of media that reached the firm’s target demographic of toddler to pre-teen girls. In fiscal year 2009 the licensing division generated $24.5 million of revenue and $14.5 million in operating profit. New Heritage’s Production Division Production was New Heritage’s largest division as measured by total assets, and easily its most asset-intensive. Approximately 75% of the division’s sales were made to the company’s retailing division, with the remaining 25% comprising private label goods manufactured for other firms. Table 1 summarizes the division’s various sources of revenue and operating income. Table 1 Production Division Data: Revenue ($ millions) Operating Income ($ millions) New Heritage Dolls Accessories 80 14 4.4 0.5 Private Label Dolls Accessories 26 5 2.3 0.3 Total $125 $ 7.5 New Heritage’s dolls and accessories were offered under distinct brands with different price points, targeting girls between the ages of 3 and 12 years. The company’s baby dolls were generally priced from $15–$30, and were offered to younger girls in earlier stages of development. These dolls typically came with a “birth certificate” and a short personal history. Dolls in the higher-end of this category incorporated technology that produced a limited amount of speech and motion. For the $75–$150 price range, New Heritage produced a line of heirloom-quality dolls and accessories. These were designed to appeal to older girls and to convey a sense of cultural and family tradition among grandmothers, mothers, and daughters. The heirloom dolls had more elaborate accessories and personal histories. Finally, the company offered a line of high-end dolls based on fictional “celebrities,” each associated with a charitable cause and embracing more contemporary fashion 1 The division revenue figures include approximately $95 million of internal sales within divisions which are eliminated when considering consolidated revenue for the company. 2 BRIEFCASES | HARVARD BUSINESS SCHOOL This document is authorized for use only in FIN 620 by Pamela Queen at Morgan State University from January 2013 to July 2013. New Heritage Doll Company: Capital Budgeting | 4212 trends. These dolls targeted girls in the so-called “tween” age range of 8–12 years, and also were priced from $75–$150. Like the heirloom dolls, celebrity dolls also came with more elaborate stories and accessories. New Heritage outsourced much of its production to a select number of contract manufacturers in Asia. To ensure product quality and safety, the company maintained a fulltime staff to oversee material sourcing, production, and quality control on site at each of its manufacturing partners. Manufacturing activities that required precise tolerances or proprietary processes, along with all the creative elements (design and product prototyping, for example), were handled in-house at the company’s headquarters facilities in Sacramento, California. Capital Budgeting at New Heritage New Heritage’s capital budgeting process retained some of the informality that characterized the company’s early years as an innovative startup. As the company grew, deliberate steps were taken to decentralize some of the project approval process and increase spending authority at the division level. However, large and/or strategic spending proposals were reviewed at the corporate level by a capital budgeting committee consisting of the CEO, CFO, COO, the controller, and the division presidents. The committee examined projects for consistency with New Heritage’s business strategy and sought to balance the needs and priorities of each division against practical financial and organizational constraints. The committee also sought to understand project interdependencies and the potential for a given investment to strengthen the whole company, not solely the division proposing it. New Heritage’s capital budget was set by the board of directors in consultation with top officers, who in turn sought input from each of the divisions. The capital and operating budgets were linked; historically, the capital budget comprised approximately 15% of the company’s EBITDA. The committee had limited discretion to expand or contract the budget, according to its view of the quality of the investment opportunities, competitive dynamics, and general industry conditions. Before being considered by the committee, projects were described, analyzed, and summarized in self-contained proposal documents prepared by each division. These contained business descriptions, at least five years of operating and cash flow forecasts, spending requirements by asset category, personnel requirements, calculations of standard investment metrics, and identification of key project risks and milestones. Financial Analyses Financial analysis began with operating forecasts developed with oversight from New Heritage operating managers. Revenue projections were derived from forecasts of future prices and volumes. Fixed and variable costs were estimated separately, by expense category. Forecasts of working capital requirements were likewise vetted by line managers, who paid particular attention to a project’s requirements for various types of inventory. Forecasts for fixed assets and related depreciation charges were developed in cooperation with analysts reporting to the controller. Operating projections for a given project were used to develop cash flow forecasts that would underpin calculations of net present value (NPV), internal rates of return (IRR), payback period, and other investment metrics. Cash flow forecasts were intended to capture the incremental effect of a proposed project on the firm’s cash flow for each year within the forecast period. That is, each project’s cash flow forecasts excluded non-cash items, such as depreciation charges, and nonincremental items such as sunk costs (i.e., costs that would be incurred regardless of whether a given project was undertaken or not). The cash flow forecasts were computed on an after-corporate-tax HARVARD BUSINESS SCHOOL | BRIEFCASES This document is authorized for use only in FIN 620 by Pamela Queen at Morgan State University from January 2013 to July 2013. 3 4212 | New Heritage Doll Company: Capital Budgeting basis, but excluded all financing charges. Some elements of the cash flow forecasts were prepared with assistance from treasury analysts, but most of the necessary adjustments were well understood by division staff. New Heritage assigned discount rates to projects according to a subjective assessment of each project’s risk. High-, medium-, and low-risk categories for each division were associated with a corresponding discount rate set by the capital budgeting committee in consultation with the corporate treasurer. Assessments of each project’s risk were made at the division level, but subject to review by the capital committee. Factors considered in the assessment of a project’s risk included, for example, whether it required new consumer acceptance or new technology, high levels of fixed costs and hence high breakeven production volumes, the sensitivity of price or volume to macroeconomic recession, the anticipated degree of price competition, and so forth. In 2010, “medium”-risk projects in the production division received a discount rate of 8.4%. High- and low-risk projects were assessed at 9.0% and 7.7%, respectively. Projects that created value indefinitely, given continuing investment, were treated as going concerns with a perpetual life. That is, NPV calculations included a terminal value computed as the value of a perpetuity growing at a constant rate. However, to preserve an element of conservatism, the capital committee generally insisted on relatively low perpetual growth rates – lower than New Heritage’s historical growth and lower than near-term growth forecasts for a given division. Investment Opportunities in the Production Division Emily Harris was focused on two of the production division’s most attractive current proposals. The first involved expanding the successful Match My Doll Clothing Line to include matching allseason clothing for tween girls and their favorite dolls. The second involved a new initiative, the Design Your Own Doll line, which employed web-based doll-design software to let users “customize” a doll’s features to the customer’s specifications. Match My Doll Clothing Line Expansion The Match My Doll Clothing line originally consisted of a few sets of matching doll and child clothing and accessories for warm weather. It quickly became successful after the daughters of a few celebrities were spotted and photographed wearing items from the line, and girls’ magazines included some of the line in “what’s hot to wear” sections. Given recent publicity, Marcy McAdams, the brand manager responsible for the line, believed the timing was perfect to expand. Specifically, McAdams proposed to create an “All Seasons Collection” of apparel and gear covering all four seasons of the year. She expected the new offerings to be at least as profitable as the existing line, since its current popularity would make it possible to maintain premium prices. She also hoped to take advantage of off-peak discounts offered by some suppliers and contract manufacturers as they tried to smooth their capacity utilization. In the same fashion, McAdams argued the expansion would help reduce, or at least not exacerbate, the seasonality in New Heritage’s sales and earnings. To exploit the current popularity of the original Match My Doll Clothing line, especially given the fickle nature of children’s fashion trends, McAdams believed the opportunity had to be exploited without delay. Her investment proposal contained relatively large outlays for R&D, market research, and marketing to maximize the probability of quick acceptance and longer-term success for the follow-on line. Upfront investment expenditures are summarized in Table 2. 4 BR ...
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Final Answer



New Heritage Doll case study
Student’s Name



New Heritage Doll
Before making any investment decision, it’s crucial that each corporate management
carry’s out a risk appraisal analysis on the new proposed project. The New Heritage Doll is faced
with a dilemma on which Project they should forego while leaving the other one by limited
financial resources. The company is using different risk appraisal profiles based on the
technological uncertainty, costs and benefits, and customer acceptance of the two potential
The “Match My Cloth Doll line” seems to be more promising since it delivers an
increment to the already existing market segment by increasing the accessories line. This product
is likely to win the customers’ acceptance since the brand is still the same that the company has
been using, it’s only that now it will address different market segments. This project will have a
similar risk profile to the already existing project. This means that the risk management team will
definitely know what risks the project will likely face from the beginning and mitigate them
before they turn into disasters.
Financial calculations on the assessment of the two projects indicate that the “Match My
Cloth Doll line” project is more favorable based on Net Present Value and Internal Rate of
Return which is relatively higher than that of the “Design Your Own Doll” project. According to
the available data analysis on risk assessment, “Match My Cloth Doll line” expansion is a lowrisk project that the New Heritage Doll should strongly execute.
It would be wise if the company to uses a logarithm pricing system in setting the price of
“Match My Cloth Doll line”. This pricin...

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