For Case (A)
1. Using Excel sheet provided, and the recommended consequential disclosures as a basis for your analysis, what recommendations would you give Phillips on each of the items listed below? In each case, justify your recommendations and estimate how much the decision will change the true value of the company and its value in the eyes of an investor in a private company. a. The lease or buy decision, including whether to structure an operating lease. b. The regular price of the soup, whether or not to run an end-of year promotion or target end-of-year inventory level. c. Whether or not to ask Dunwood to guarantee accounts receivable. d. Whether or not to reduce the end-of-year provision for bad debts due to recent strong collection experience. e. Whether or not to sell different investments and, if the recommendation is not to sell the mortgage-backed securities, how to value them on the end-of-year balance sheet assuming market conditions do not change. Given your recommendations, how much do you think a potential buyer will offer based upon a valuation earnings multiple of ten times sustainable earnings, plus the value of cash and marketable investments on the balance sheet?
2. In the case, Phillips questioned how far he should push the envelope. Why should he be concerned if all the actions you recommend are legal? Do you think the associated disclosures satisfy the SEC requirement that a company provides a narrative explanation of its financial statements that enables investors to see the company through the eyes of the management?
For Case (B)
As stated in the case, Kerr had given the task of valuing Dragon’s equity for possible acquisition, assuming a valuation of ten times sustainable earnings, plus the value of cash and marketable investments on the balance sheet.
He understood that most companies preparing for the sale would “window dress” their financial statements. However, he had no reason to believe Dunwoody and Phillips would do anything deliberately dishonest. In any event, it was Kerr’s job to try to unwind any such behavior to establish Dragon’s true value.
3. Using the Excel spreadsheet provided and the footnote disclosures it contains as a basis for your analysis, estimate the true value of the company in the eyes of an investor in a private company.
4. Assuming Phillips had prepared the forecasts for you, would you want him to join your team? Please justify your decision. Assuming you want to hire him, would you offer a similar payment structure to the “Tomato Farm” deal? Please describe how you think such a transaction should be treated in accounting terms.
5. The footnote disclosures in Excel spreadsheet are designed to generally satisfy the SEC requirements to provide a narrative explanation of a company’s financial statements, which enables investors to see company the through the eyes of management. What additional information would you like to see in the so-called “standard” disclosures?
As part of your submission, please provide an Excel spreadsheet that justifies your answers. To the extent that you change any assumptions from those contained in the Excel spreadsheet provided to your group, please provide a detailed explanation of the reasons for these changes and details of the magnitude of their impact on the valuation you propose.
If your valuation includes information and/or calculations that cannot easily be incorporated into the spreadsheet provided, please provide additional explanations with your submission
MW PETROLEUM (A)
JETBLUE AIRWAYS IPO VALUATION
For Case (A)
For Case (B)