International Research Journal of Applied Finance

(ISSN 2229-6891)Since 2010(Online + Print journal)

Teaching Notes are available to Faculty Members on request. Send a request to editor@irjaf.com

Operating Profits, Free Cash Flows, and Firm Value: An Application
Halil D. Kaya*, Julia S. Kwok, & Elizabeth C. Rabe                                                                                  
After decades of grande growth in the price of Starbucks stocks, Starbucks Coffee Company experienced continuous drop of stock price from the beginning of 2007 to the end of 2007.  Upon first glance of their financial statements, there was about a 20% increase in both revenues and net income in 2007. The 40% drop of market price of Starbucks’ shares from 2006 to 2007 appears to be counter intuitive when viewed in terms of actual revenues and net incomes.  This case encourages an examination of the company’s free cash flows over the 2005-2007 period as a potential factor that may influence the company’s stock price. Students will go through several steps in order to calculate the company’s free cash flows during that three year period and then to evaluate the trend in the free cash flows. Students are encouraged to consider what changes to Starbucks’ strategies could increase the company’s free cash flows.

The Cost of Float to a Firm: Commercial Banking Treasury Management Analysis
Patricia R. Robertson                                                                                                                                    
This case is ideal for an upper-level finance course that has an emphasis on short-term financial management.  Despite significant advancements in electronic payment systems, most U.S. firms continue to pay invoices with paper checks mailed to suppliers.  So long as the checks are received by the due date, firms are in compliance with supplier credit terms.  However, paper checks must be processed and recorded by the supplier, deposited in the supplier’s bank, and cleared against the payer’s bank before the cash is transferred from the payer’s checking account to the supplier’s checking account.  This delay in the conversion of a check to cash is known as float and has a cost to the receiver of a check. This case includes elements to measure and quantify the cost of float from the perspective of the receiver of a check using time value of money principles.  In addition, the case includes an analysis on how services provided through the Treasury Management divisions of commercial banks can shorten float time and enhance the value of the firm’s operating activities.

Project Evaluation:  Tortuga Fishing Equipment Company
Judson W. Russell                                                                                                                                        
This case study on project evaluation is applicable for beginning courses in corporate finance or finance strategy. Two alternative investment options are available to evaluate. Challenges are presented with the inclusion of equity, bank debt, and bonds in the capital structure. Each investment option need to be evaluated carefully and decision should be made on the basis of thorough analysis of the data available using various capital structure and capital budgeting techniques.

Greener Pastures?  The Morning Dew Dairy Case
Jack Young and Larry Watkins*                                                                                                                 
This case study deals with some of the practical considerations surrounding the accounting for the acquisition of a closely-held integrated dairy products operation and the subsequent disposal of a portion of the acquired assets.  Specifically use and oversight of appraisers for determining fair value amounts necessary for acquisition accounting is examined.  Additionally, the accounting implications of the subsequent disposal of assets are considered in light of the initial acquisition accounting.

Cannabis, Dude? Case
Hugh Grove and Mac Clouse                                                                                                                   
Students play the role of the key decision maker in this case, Dale Marin, who is attempting to offset his declining Colorado CPA firm practice, which has specialized in real estate and construction clients.  His clients had suffered significantly from the economic slowdown resulting from the great recession of 2008.    Dale was thinking about two potential expansions of his business:  1) accepting cannabis business clients into his CPA firm practice and 2) starting a real estate business that would own and rent cultivation centers (marijuana grow houses) to cannabis businesses, as well as helping such clients find dispensary rental space.  He had found that none of the large or medium sized CPA firms operating in Colorado would accept cannabis business clients and found only two sole CPA practitioners who accepted such clients.  Dale wanted to make these two business expansion decisions soon since his traditional CPA firm practice was still declining and he wanted somehow to reverse this trend.

Consolidation or Non-consolidation of Variable Interest Entities: Ethical Dilemma Facing Newly Hired Controller
Timothy Kelley and Loren Margheim                                                                                                    
In this case, students take on the role of a newly hired controller (of a fictitious manufacturing company) who must interpret GAAP requirements with respect to the accounting for variable interest entities. The fictitious company is highly leveraged and has two large variable interest entities. The CEO and CFO of the company are determined to keep these entities off of the company’s financial statements. The case requires critical thinking and judgment to determine if one or both of the company’s variable interest entities must be consolidated according to current GAAP. Students need to determine if consolidation is likely to cause deterioration in the company’s financial ratios resulting in a technical default on one or more debt covenants the company has with its long term lender. Students are to summarize their findings in a memo to the CEO and CFO of the company.

GPE: A Slippery Slope into a Tangled Web
Jeffrey L. Hillard and Ali Sedaghat                                                                                                       
This is a case study regarding an international manufacturing company (GPE in the united states) based out of Europe that produces machinery used to generate electricity. The European Corporate organization is comprised of several subsidiary organizations and incorporated subsidiaries. In our opinion, this is a multidimensional case that would be appropriate for courses in Advanced Accounting, Advanced Managerial Cost Accounting, Auditing, Accounting Ethics and a Business Strategy course for Accounting majors. Points of emphasis for Advanced Accounting and Auditing would be consolidation, revenue recognition, internal controls and ethics. In a Managerial Accounting or a Business Strategy course, the instructor should place emphasis on transfer pricing, forecasting and performance evaluation  and Ethics.

Of Haircuts and Extensions: An Analysis of Greek Government Debt 
Mathias Moersch, and Carolin Schmidt                                                                                                 
In light of the current negotiations concerning the Greek debt, this paper conducts a valuation analysis based on the Present Value (PV) method. We explain the rationale for the PV method and use it to model a simplified representation of the Greek debt situation. We illustrate the effects of changes in the variables in the PV function and show that if the Greek loan interest rate was decreased by 50 basis points and the maturity of the debt was extended from 30 to 50 years, the effect would be equivalent to a haircut of roughly 59%.

Dichotomous Choice between a Hybrid and an all-Electric Car: A Capital Budgeting Analysis
Chee Ng                                                                                                                                                          
In the financial pathway to a sustainable economy, the dichotomous choice between a hybrid car and an all-electric car is an inevitable transitional step. We first use the Toyota Prius and the Nissan Leaf to conduct capital-budgeting base-case analyses using the various traditional techniques. We next delve deeper into the decision-making process by conducting a sensitivity analysis on pairs of variables that have policy implications.

A Stock Valuation Case: An Application of the “Method of Comparables” for Macy’s Shares
Halil D. Kaya* and Julia S. Kwok                                                                                                           
The primary focus of this case is the application of the “Method of Comparables” in the estimation of the value of a security. An investment decision will be made based on the comparison of the selling price and the estimated value. A security will be good for purchase if the estimated value is higher than the market price. This method utilizes basic financial ratios that are commonly provided by financial web sites. First, using Yahoo Finance website, the pricing, sales, book value of equity and shares outstanding data are collected for both the target firm and the competitor firms. Then, the pricing multiples (i.e. price earnings ratio, price to sales ratio and price to book ratio) of the competitors are calculated. After that, those multiples along with the target firm’s earnings, sales, book value and shares outstanding data are used to estimate target firm’s share value. The case also examines the impact of treating “negatives” in the data.  Students will learn that replacing negative earnings with zeros tend to induce less bias in target firm’s value estimation than excluding the “negative” data altogether.

Revenue Recognition:  Understanding the Impact of IFRS 15 - Revenue from Contracts with Customers
Rodney Redding and Brent T. McCallum                                                                                               
In May 2014, the International Accounting Standards Board issued International Financial Reporting Standard (hereafter IFRS) 15 “Revenue from Contracts with Customers”.  The standard replaces the International Accounting Standards (IAS) 18, “Revenue” and IAS 11, “Construction Contracts.”  The accounting guidelines under IFRS 15 will become authoritative in 2018.  Some companies may not see significant changes in the amount of revenue recognized.  However, in certain industries such as telecom, software development, real estate, and some retailers, the effect on revenue recognition timing may be significant.  The purpose of this case is to contrast the accounting for a transaction under the present IAS standard for revenue recognition and the guidance to be implemented in 2018.  The case is relevant not only for those majoring in accounting but also for majors such as finance that analyze corporate financial statements.  The case requires the performance of a web search to obtain details of the guidelines provided in IFRS 15 and a contrasting of the accounting treatment under IAS 18 with the approach required by the new IFRS 15 for a mobile telecommunications company.

Growing Up is Hard to Do or Sophia’s Choices
Allen B. Atkins,*  Roxanne Stell, and Larry Watkins                                                                       
Sophia sat at her parent’s kitchen table mulling over many thoughts. One thought was that sitting at this table would soon become a thing of the past. Another was “growing up” included a lot of tedium and decision making that wasn’t as much fun as she had assumed it would be.  Sophia’s mind hurt.  She was trying to make some important decisions and the process was difficult and exhausting.
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