CASE 4 2 LA POSTA MEXICAN RESTAURANTS, INC. FINANCIAL ANALYSIS AND BUSINESS ETHICS Cindy Garcia was putting the finishing touches on her financial analysis for La Posta Mexican Restaurants for the 1994 Annual Institutional Investment Conference at the Four Seasons Hotel in Dallas. The conference was sponsored by her employer, Dillon Sutton and Company, a Dallas-based regional invest- ment banking firm. Cindy was not entirely satisfied with the outcome of her analysis, and she knew that her boss, Lazar Freed, the director of institutional research, was even less satisfied with the results of her analysis. He told her that the people on the corporate finance side of the firm would be furious about her analysis and proposed recommendation. CINDY GARCIA'S BACKGROUND Cindy was a senior analyst in the research department specializing in retail industries including food retailing. She has a B.S. degree in accounting from the University of Texas at Austin. Upon graduation, she spent two years in public accounting with Peat Marwick, during which time she earned the CPA designa- tion. She then completed her MBA at the Wharton School of the University of Pennsylvania at which time she joined her current employer, Dillon Sutton and Company. During her three years with the firm, she completed her Certified Financial Analyst (CFA) designation and received her first promotion from financial analyst to senior financial analyst. Last year, she was named to the second team of a prestigious national magazine's All-Star Analyst Team. Her current position required her to write research reports on retail compa- nies which have ties to Dillon Sutton and/or retail firms which are especially important players in the Texas marketplace. She loved her work, and she was QUESTIONS 1. How important do you think Cindy's information and rating would be for institutional investors? What would be its impact on stock price? 2. Who are the stakeholders of Cindy's information? 3. What obligation should Cindy feel toward the institutional investors? Retail customers? 4. Should Cindy write her report to reflect the wishes of her boss and the other executives in Dillon Sutton? 5. How would you handle this situation if you were Cindy? EXHIBIT 1 Pro Forma Income Statement: 1994 and 1995 (Millions) Actual 1993 (1994: est.) (1995: est.) $82.4 57.0 25.4 2.1 $93.0 63.1 30.1 Revenues Expenses Income from operations Interest expense Income before taxes Taxes Net income EPS Analyst consensus 23.3 $107.4 71.3 36.1 1.2 34.9 (14.5) 20.4 $.91 S.94 29.0 (13.1) 15.9 $.71 9.74 (10.3) 13.0 $.58 CASE 4 2 LA POSTA MEXICAN RESTAURANTS, INC. FINANCIAL ANALYSIS AND BUSINESS ETHICS Cindy Garcia was putting the finishing touches on her financial analysis for La Posta Mexican Restaurants for the 1994 Annual Institutional Investment Conference at the Four Seasons Hotel in Dallas. The conference was sponsored by her employer, Dillon Sutton and Company, a Dallas-based regional invest- ment banking firm. Cindy was not entirely satisfied with the outcome of her analysis, and she knew that her boss, Lazar Freed, the director of institutional research, was even less satisfied with the results of her analysis. He told her that the people on the corporate finance side of the firm would be furious about her analysis and proposed recommendation. CINDY GARCIA'S BACKGROUND Cindy was a senior analyst in the research department specializing in retail industries including food retailing. She has a B.S. degree in accounting from the University of Texas at Austin. Upon graduation, she spent two years in public accounting with Peat Marwick, during which time she earned the CPA designa- tion. She then completed her MBA at the Wharton School of the University of Pennsylvania at which time she joined her current employer, Dillon Sutton and Company. During her three years with the firm, she completed her Certified Financial Analyst (CFA) designation and received her first promotion from financial analyst to senior financial analyst. Last year, she was named to the second team of a prestigious national magazine's All-Star Analyst Team. Her current position required her to write research reports on retail compa- nies which have ties to Dillon Sutton and/or retail firms which are especially important players in the Texas marketplace. She loved her work, and she was QUESTIONS 1. How important do you think Cindy's information and rating would be for institutional investors? What would be its impact on stock price? 2. Who are the stakeholders of Cindy's information? 3. What obligation should Cindy feel toward the institutional investors? Retail customers? 4. Should Cindy write her report to reflect the wishes of her boss and the other executives in Dillon Sutton? 5. How would you handle this situation if you were Cindy? EXHIBIT 1 Pro Forma Income Statement: 1994 and 1995 (Millions) Actual 1993 (1994: est.) (1995: est.) $82.4 57.0 25.4 2.1 $93.0 63.1 30.1 Revenues Expenses Income from operations Interest expense Income before taxes Taxes Net income EPS Analyst consensus 23.3 $107.4 71.3 36.1 1.2 34.9 (14.5) 20.4 $.91 S.94 29.0 (13.1) 15.9 $.71 9.74 (10.3) 13.0 $.58