Book ACC 6350 001 BY Pearson(author)- Book name is Management control systems

Raven Capital, LLC

(pg. 384-393, Merchant & Van der Stede 4th edition)

I am looking for the solution for my case:

Case

Raven Capital, LLC

(pg. 384-393, Merchant & Van der Stede 4thedition)

1. Play the role of a Raven portfolio manager who has to allocate a bonus pool to the four

analysts working for him. Assume that Raven earns a 20% incentive fee on the total

return and that all of the 2009 returns were above the funds' high water marks. Use 3

0% of the incentive fee as the bonus pool to be allocated to the four analysts. The four

analysts' backgrounds and 2009 portfolio performance are described in Figures A and B

below.

Please review these figures carefully. Then, answer the following questions:

a). How would you allocate bonuses to these four analysts? What alternatives did you

consider? Why did you make the choices you did?

b). Is there any other information you would like to have had available before making

your decisions? If so, what?

c). Do you think you should pay out the entire bonus pool this year, or hold some money in a "bonus bank reserve"? Why or why not?

2. Evaluate Raven Capital's performance evaluation and incentive compensation system.

What features do you like? What changes would you recommend, if any?

Figure A

Background Information about Four Raven Analysts

Nick Steinberg (NS) has been with Raven for 10 years, longer than any other analyst. He has a BA from Cal Tech and an MBA from USC. Nick analyzes consumer stocks, a sector which

performed very well in 2009. Nick's stocks were responsible for most of Raven's fund's long

returns. He communicates well with the PMs, and there is a great deal of trust between them.

James Johnston (JJ)

has been with Raven for 8 years. He has a BS from UC San Diego. James analyzes healthcare stocks. He is thought to have been a consistently strong performer during his tenure at Raven. In 2008 his stocks generated significant profits for Raven, but the management team believes that he was not adequately compensated for his 2008 performance because the bonus pool was small. This year James' stocks only returned +2%, despite the fact that the healthcare index fund was up +8%. His poor performance is explined by his heavy weighting in short positions. But James was said to have saved Raven $7 million by recommending that they exit their position in a large healthcare provider shortly before the company lost a large government contract and its stock price plummeted.

Kate Landry (KL) has been with Raven for 5 years, with a prior industry focus on technology

stocks. She has a BA from USC and an MBA from Wharton. Kate's stocks delivered strong

returns, even though relatively little capital was allocated to them. Kate's stocks solidly

outperformed the tech indexes, but the PMs were not sure that Kate should be given full credit for choosing the stocks. She was perceived not to be very effective at filtering ideas. On average,

the PMs estimated that they had to sort through about 20 of her ideas to find one that

they were willing to invest in. Although they had not done the calculation, the PMs believed that if they had implemented all of Kate's recommendations that their results would not have been nearly as strong.

Christopher (Chris) Frost (CF) has been with Raven for 3 years. His specialty is financial

stocks. He has a BS from Columbia University. The financial sector was down in 2009, and

very little capital was allocated to it. But Chris's stocks beat the industry index. He could also point to a list of recommendations he made that were not implemented by the PMs, but that turned out, in retrospect, to be winners. He insists that he could have earned the fund an extra $10 million, had the PMs allocated more capital to his ideas. But Chris is seen by some Raven employees as being arrogant and stubborn, and he is not among the more popular members of the Raven team.

note:

please look the table below as well as properly presented in the attachment for your clarification and answer that with your explanations of how you arrive at the solution with calculations, answers need to be detailed.

Assignment

Figure B Information on the Performances of the Portfolios of Four Raven Analysts,

2009

Short Long Total Industry Benchmark

Analyst Dollars Allocated % Return Dollar Return

Dollars Allocated % Return Dollar Return

Dollars Allocated % Return Dollar Return

% Return

NS $250,000,000 1.2% $3,000,000 $650,000,000 6.2% $40,200,000

$900,000,000 4.8% $43,200,000

9.0% JJ $400,000,000 -6.8% ($27,000,000) $500,000,000 9.0% $45,000,000

$900,000,000 2.0% $18,000,000 8.0%

KL $105,000,000 1.1% $1,200,000 $195,000,000 14.8% $28,800,000

$300,000,000 10.0% $30,000,000 5.0%

CF $100,000,000 1.8% $1,800,000 $50,000,000 0.9% $450,000

$150,000,000 1.5% $2,250,000 -2.0%

Total $855,000,000 -2.5% ($21,000,000) $1,395,000,000 8.2% $114,450,000

$2,250,000,000 4.2% $93,450,000 6.0%

Assignment Figure B Information on the Performances of the Portfolios of Four Raven Analysts, 2009 Industry Short Long Total Benchmark Dollars Dollars Dollar Dollars Dollar Analyst Allocated Return Dollar Return Allocated Return Return Allocated Return Return Return NS $250,000,000 1.2% $3,000,000 $650,000,000 6.2% $40,200,000 $900,000,000 4.8% $43,200,000 9.0% JJ $400,000,000 -6.8% ($27,000,000) $500,000,000 9.0% $45,000,000 $900,000,000 2.0% $18,000,000 8.0% KL $105,000,000 1.1% $1,200,000 $195,000,000 14.8% $28,800,000 $300,000,000 10.0% $30,000,000 5.0% CF $100,000,000 1.8% $1,800,000 $50,000,000 0.9% $450,000 $150,000,000 1.5% $2,250,000 -2.0% Total $855,000,000 -2.5% ($21,000,000) $1,395,000,000 8.2% $114,450,000 $2,250,000,000 4.2% $93,450,000 6.0%