International Research Journal of Applied Finance (IRJAF)

(ISSN 2229-6891)Since 2010

Whilst Wine?
Kathryn Schumann (James Madison University, USA)

It’s early January 2016, David Retsof is working on fulfilling his dreams of opening a winery in the Charlottesville, VA area.  He is anxious about the decision to quit his current job and start this new venture because the financial viability of this project is uncertain. Retsof is prepared to work hard and take the risks necessary to open the winery, but first he wants to do some additional analysis to choose among his growth options. Ideally, he would like to choose a growth option that allows him to obtain profitability within the next ten years.

Student Perception of Using a Monopoly-Based Accounting Simulation Game: Evidence in Hong Kong
Anson Wong* and Bruce Lee
Monopoly-based accounting stimulation game is one of the most popular accounting simulation games in business faculties of universities around the world.  Numerous studies (Tanner and Lindquist, 1998; Albrecht, 1995; Heyman,1975; Knechel and Rand, 1994 and Lewis and Mierzwa,1989) have reported that the Monopoly-based accounting stimulation game could effectively facilitate students’ learning in accounting courses. Based on the previous studies, we believe that students will find the simulation game is practical, enjoyable, motivating and useful in their learning. However, most of prior studies are not talking about Chinese students and previous studies seldom investigate the gender difference of student perceptions on using this stimulation game in learning.  Hence, the study is to fill in the gap to collect Hong Kong students’ perception on using Monopoly-based accounting stimulation game in the accounting courses. The results of the study can help instructors assess the impacts of the Monopoly-based accounting simulation game when considering using it as an active learning tool in Chinese community.

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Using Financial Ratio Analysis to Evaluate the Relative Valuations of Close Competitors
Patrick J. Larkin (Fayetteville State University, USA)

Lowe’s and Home Depot are close competitors in the North American retail home improvement market. The business models of the two firms are very similar and they operate a similar number of stores with a similar amount of total square footage of retail selling space. Despite these similarities, Home Depot and Lowe’s had market capitalizations of about $176 billion and $70 billion, respectively, as of April 5th, 2017, the date that this case takes place on. This case provides students with five years of financial statement and market data for both firms and challenges them to perform a complete financial ratio analysis that will help them to develop an explanation for the difference in the valuation of the two companies.

Link between Currency Swaps and Interest Rate Swap
Chee Ng (Fairleigh Dickinson University, USA)
We exposition the link between interest rate swaps and currency swaps. We then illustrate using numerical examples, with given term structure of the respective interest rates, on the pricing of the swaps at contract initiation. With elapse of time, we next show how to price the swaps before the next settlement date. Given changes in exchange rate, we proceed to price the currency swaps. Ensuing exercises highlight the actual cash flows among counterparties, and the netting effects in swap settlements.

Revolving Line of Credit: Mercury Electronics Corporation Case Study
Ronald Richter and Arthur S. Guarino*
This case study focuses on a firm’s working capital needs by presenting historical and pro-forma financial statements in order to analyze the amount of the line of credit necessary for short-term financing.  Three alternative offers for a revolving line of credit are available for evaluation regarding the firm’s credit needs.  The alternative offers must be carefully weighed while considering the firm’s financial situation using financial statement analysis, forecasting techniques, and calculating the effective annual cost of these offers.

Employees’ Annuity Corporation: Alternative Investment Decisions
Thomas Patrick, and Julie Patrick (The College of New Jersey, USA)

This case requires the student to determine which investments to recommend for further analysis out of a pool of nine projects.  In addition to selecting up to three investments, the student is to defend both his or her recommendation for further consideration as well as explain why the other projects were rejected for further review.  The student is also required to state the maximum amount to invest in each project selected for further review.

Cross Rates in Foreign Exchange
Halil D. Kaya
This case deals with the calculation of cross rates given the rates between foreign currencies and the dollar. Students will first learn about the direct and indirect quotations. They will learn how to convert a direct quotation into an indirect quotation, and an indirect quotation into a direct quotation. Then, given a currency dealer’s bid and ask rates for two foreign currencies (stated in U.S. dollars), they will learn how to compute the bid and ask cross rates between those two foreign currencies. They will first compute the bid and ask rates for one foreign currency stated in the other foreign currency. They will then do the same calculations for the other foreign currency. This case is a hands-on experience for students who want to learn the direct-indirect quotations and cross rates in the real world where we have two prices (i.e. bid and ask) for currencies.

Financial Ratio Analysis: Milan Fashions Coat Company Case Study
Ronald Richter and Arthur S. Guarino*

This case study focuses on a firm’s debt situation as it attempts to expand its manufacturing operations.  The firm needs financial capital to grow but its business venture and financial situation are considered risky and it must approach a commercial bank in order to acquire funds.  A bank lending officer must examine the firm’s financial statements and evaluate whether a loan is possible.  The lending officer must examine key segments of the firm’s financial statements, perform ratio analysis, and then render a decision as to whether to extend the loan or not.

Will the Gillette Acquisition Ever Pay Off for Proctor and Gamble?
Robert McDonald ( University of New Haven, USA)
The case reviews P & G’s acquisition of Gillette in 2005 for $57 billion.  An article in a trade publication reviewed the acquisition after four years, and questioned the acquisition for not delivering on its promised benefits.  This case focuses on the financial statements after four years and examines the article’s negative conclusions.  The case then goes on to use financial statements at the end of ten years of consolidation to evaluate the acquisition and it promised benefits.

Arbitrage in Currency Markets
Halil D. Kaya

This case deals with arbitrage opportunities in currency markets. Students will first learn about the meaning of arbitrage. Then, they will learn about a specific form of arbitrage in currency markets, which is called “triangular arbitrage.” They will learn the conditions in which a triangular arbitrage is possible. They will design an arbitrage and compute the potential profit with that arbitrage. This case is a hands-on experience for students who want to learn about arbitrage and its steps in international currency markets.

Reformulated Financial Statements
Halil D. Kaya (Northeastern State University, USA)

This case deals with reformulated income statement and reformulated cash flow statement. First, students will learn the objective of reformulating the financial statements of a company. Then, they will prepare a reformulated cash flow statement for a company. Finally, they will prepare a reformulated income statement for a company. This case is a hands-on experience for students who want to learn about the reformulated financial statements.

A Case on Free Cash Flow
Halil D. Kaya (Northeastern State University, USA)

This case deals with free cash flow. Students will learn how to compute the free cash flow. They will also learn about the different components of free cash flow. This case forces students to think about the options that a Treasurer has in terms of debt and equity financing. It is a hands-on experience for students who want to learn about a corporation’s financing activities.

A Case on Mortgage Loans and Refinancing
Halil D. Kaya*   and  Julia S. Kwok
Since the mortgage crisis occurred between 2008 and 2012, the government has been keeping the interest rates low to boost the economy. Even with the improvement in the housing market, the 30-year rate has still been hovering around 3.5 - 4.5% in the past five years. The low mortgage rate has made the purchase of homes and refinancing very affordable, especially compared to the double-digit rates in the 80's.

Currency Futures, Daily Profits and Balances, and Margin Call
Halil D. Kaya (Northeastern State University, USA)
This case deals with currency futures. Students will learn how changes in the exchange rate affect a currency investor’s account balance. First, students will examine how changes in the exchange rate affect a “long” investor’s account balance. Then, they will learn about “margin call” and evaluate the possibility of “margin call” in the context of this investment. Finally, they will examine how changes in the exchange rate affect a “short” investor’s account balance. This case is a hands-on experience for students who want to learn how currency futures work.

Evaluating a Growth Company’s Valuation Using Discounted Cash Flow Analysis
Patrick J. Larkin
After releasing its 2016 annual results,, Inc. (AMZN) stock was hitting new all-time highs, closing at $842.70 on February 15, 2017, the date that the action of this case takes place on. The case provides students with a review of the widely used Free Cash Flow to the Firm version of the Discounted Cash Flow model, and then challenges them to use the model to evaluate Amazon’s valuation as of the case date. Students gain insights into the factors that drive value in the Discounted Cash Flow model by considering several different scenarios. Amazon’s financial statements and a variety of additional financial and market data are provided.    

Macroeconomic Variables and Visitor Arrivals in Taiwan: The Cases of Tourism and Business
Matthew C. Chang* and Ching-Sung Wu

In this case, students are supposed to examine the relationships among macroeconomic variables and number of visitor arrivals in Taiwan for business and tourism purposes from China, Hong Kong and Macau, and Japan. Students should find different relationships among numbers of visitor arrivals for the two purposes. Also, number of visitor arrivals for tourism purpose and that for business purpose influenced by macroeconomic variables should also be examined. In particular, the potential crowd-out effects of numbers of visitor arrivals from different countries, and influences of macroeconomic variables on numbers of visitor arrivals should be re-examined.

The First National Bank of Mount Dora, FL Case
James B. Bexley, PhD
The bank was founded and opened its doors as a state bank on September 12, 1925, as the The Bank of Mount Dora and Trust Company.  It continued to operate as a state bank until July 6, 1927, when it received its charter as a national bank and changed its name to The First National Bank of Mount Dora.  Even with the financial disruption of the Great Depression in 1929, the bank continued to operate and serve the citizens in its market.

The Relation between Inflation, Interest Rates and Exchange Rates
Halil D. Kaya (Northeastern State University, USA)
This case deals with the relation between the exchange rate between two currencies, the interest rates on these two currencies and the expected inflation rates in the two countries. First, students will learn how these different rates are linked to each other. Then, they will estimate the expected change in the exchange rate between two currencies using approximation. They will then use this expected percentage change to estimate the future exchange rate between these two currencies. Finally, they will estimate the expected change in the exchange rate between these two currencies without approximation and use this number to estimate the future exchange rate between these two currencies. This case is a hands-on experience for students who want to learn how different rates are related in the international markets.

Estimating Beta for Cost of Capital – Is It Fair to Apply Short Term Volatility for Long Term Investors?
Won Seuk Jang

This case deals primarily with the beta estimates for the cost of capital in updating fair value of investments on a regular basis such as financial reporting. The fair value of investments is highly sensitive to the changes in the cost of capital, given the fundamentals of underlying business do not substantially fluctuate over a short period of time. The cost of capital, in turn, is highly subject to the beta, which represents a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market. This raises a basic question of updating fair value of long term investments using the cost of capital which is vulnerable to the short term volatility of stock price movements. This case study is prepared for senior and the first year MBA students to learn the practical method of estimating beta and adjusting for financial leverage and non-operating assets such as cash. Finally, they will learn how to apply the adjusted beta to update the fair value of long term investment in practice.

The Cross-Border Real Estate Adventure
Allen B. Atkins*, Roxanne Stell, and Larry Watkins
This case demonstrates the risk inherent in cross-border real estate transactions.

Managing Payor Mix in Behavioral Healthcare – A Case Study
Peter M Vernig, PhD

In behavioral healthcare, inpatient facilities must increasingly look to manage the ratio of their payors in order to balance the costs of providing care for insurance providers with lower rates and for charity care. Although volume and reimbursement rates are key to these analyses, other tangible and intangible costs can be associated with different payors. This case study examines the situation facing Good Health Hospital, a behavioral health facility with a large percentage of its payor mix dependent on a local Medicaid MCO. The leadership of the hospital must weigh the benefits of the high volume with the reimbursement rates and other associated costs to determine a course of action.