CASE QUESTIONS:

1. REASONING

1-1. Clearly state a position or proposition (0.3 points)

The case presents the student with financial ratios for eight pairs of companies. According to the financial ratio analysis, we can make a proposition: "different industries account for significant variations in financial ratios."

Could you re-state the position or proposition in a different way?

1-2. Consider possible biases (0.3 points)

"Different industries account for significant variations in financial ratios." Is there any possible bias in this statement?

1-3. Avoid unsupported assumptions (0.3 points)

What is the assumption behind the statement "Different industries account for significant variations in financial ratios?"

1-4. Make appropriate inferences (0.3 points)

Dell seeks to sell a relatively high volume of lower-margin products, while Apple attempts to sell an adequate volume of higher-margin products. How can you tell this by examining their financial ratios?

2. ASSESSMENT

2-1. Expand on and clarify position (0.3 points)

"Different industries account for significant variations in financial ratios."

Could you make a similar claim for different companies in the same industry? What accounts for the variations in financial ratios for those companies?

2-2. Analyze key points (0.3 points)

For health products, are there any differences between J&J and Pfizer (address only the point of Intangibles Percentage).

2-3. Consider possible implications (0.3 points)

What are the implications of last question (question 2-2)?

2-4. Make needed comparisons (0.3 points)

Which industry is comparable to the health products industry and why?

3. DATA USE

3-1. Provide relevant specific examples to support position (0.3 points)

A most significant strategic difference between two firms in an industry in Exhibit TN1 lie in their product mix and their customer focus: One sells many of its products directly to consumers while the other sells almost exclusively to institutions. Could you find examples from the Exhibit in the case?

3-2. Present needed supporting data (0.3 points)

Provide one ratio data to support your answer to last question (question 3-1). Show the data only; no need to explain yet, which is your task in next question.

3-3. Examine applicable data (0.3 points)

Explain why you choose the ratio? Are there other ratios applicable?

3-4. Cite sources of data properly (0.3 points)

Could you cite the sources of data?

4. CREATIVITY

4-1. Make appropriate analogy or illustration (0.3 points)

Could you provide appropriate analogy or illustration to other industries which is comparable to the health products? Name your own financial ratios for comparison.

4-2. Consider multiple contexts (0.3 points)

Compare health products industry to other industries in Exhibit TN1 and come up with at least one characteristics to describe the health products industry.

4-3. Evaluate relevant options (0.3 points)

Could you provide an opposite analogy or illustration from the other 7 industries, which is very different from the health products industry? Name your own financial ratios for comparison.

4-4. Provide support for a conclusion (0.5 points)

An overall conclusion we can draw is that financial performance is largely determined by managerial choice, as opposed to luck or the dictates of the environment. Based on the case and your background knowledge, list at least two decisions that managers make and that have different financial implications.

CASE 5 The Financial Detective, 2005 Financial characteristics of companies vary for many reasons. The two most promi- nent drivers are industry economics and firm strategy. Each industry has a financial norm around which companies within the industry tend to operate. An airline, for example, would naturally be expected to have a high proportion of fixed assets (airplanes), while a consulting firm would not. A steel man- ufacturer would be expected to have a lower gross margin than a pharmaceutical manufacturer because commodities such as steel are subject to strong price competi- tion, while highly differentiated products like patented drugs enjoy much more pric- ing freedom. Because of unique economic features of each industry, average financial statements will vary from one industry to the next. Similarly, companies within industries have different financial characteristics, in part, because of the diverse strategies that can be employed. Executives choose strate- gies that will position their company favorably in the competitive jockeying within an industry. Strategies typically entail making important choices in how a product is made (e.g., capital intensive versus labor intensive), how it is marketed (e.g., direct sales versus the use of distributors), and how the company is financed (e.g., the use of debt or equity). Strategies among companies in the same industry can differ dra- matically. Different strategies can produce striking differences in financial results for firms in the same industry. Exhibit TN1 below presents common-sized financial statements and operating data of companies in a number of different industries.Exhibit TN1 THE FINANCIAL DETECTIVE, 2005 Case Exhibit 1, with the Names of the Companies Revealed INTL WAL- LEE J&J PAPER NYT BEER 54.8 16.2 10.6 1.1 24.2 16.1 55.6 42.2 18.9 23.7 9.9 Receivables 13.0 nmf 14.4 16.7 0.8 0.8 7.0 3.0 7.2 78.2 27.2 32.6 32.0 Current assets-total 51.2 72.8 54.7 24.4 13.7 57.0 34.6 16.0 50.8 7.2 Assets-other 0.6 76.8 37.1 22.2 0.0 18.6 0.0 Assets-total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 LIABILITIES & EQUITY 8.5 Accounts payable 9.8 14.9 0.5 0.0 0.3 nmf 0.0 58 Case 5 The Financial Decetive. 2005 Current liabilities-other Current liabilities-total 12.2 49.9 40.2 25.5 Deferred taxes 0.0 0.0 10.9 Liabilities-other 11.0 40.3 44.8 107.0 64.7 75.9 58.9 59.7 27.9 63.1 (7.0) 35.3 41.1 59.7 55.2 Total liabilities & equity 100.0 100.0 100.0 100.0 100.0 100. 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 00.0 100.0 100.0 Sales-net 100.0 100.0 100.0 100.0 100.0 100.0 00.0 67.1 40.5 23.9 Gross profit 19.0 Depreciation 9.7 32.5 0.7 0.0 0.0 0.5 0.0 0.0 0.0 (1.0) 0.0 (0.1) 27.1 26.7 11.2 19.7 0.8 3.0 2.0 Net income (loss) 21.6 3.3 2.9 (0.1) 3.6 MARKET DATA 0.60 1.20 1.05 0.85 0.85 0.90 22.29 22.32 16.85 19.73 27.32 30.97 3.78 13.64 23.01 18.97 24.19 20.54 13.29 5.93 13.99 2.36 1.9 1.8 4.65 1.85 3.64 2.07 3.09 0.00 0.00 ).00 0.00 86.16 15.30 70.62 21.56 14.85 37.53 30.81 3.35 1.20 2.63 1.57 1.49 1.91 1.94 0.90 1.69 0.88 1.42 1.13 0.47 2.77 1.01 2.43 nmf 0.46 1.15 Inventory turnover 3.08 21.87 12.23 8.28 5.82 192.73 10.98 2.86 1.72 12.67 30.68 12.03 29.42 6.54 1.43 1.86 7.63 7.50 4.50 2.77 3.43 2.59 DEBT MANAGEMENT 7.42 42.78 18.36 25.21 14.45 26.16 29.54 15.22 26.81 10.66 0.00 7.79 0.00 nmf 21.01 45.32 1.56 77.03 18.29 9.52 23.04 27.34 32.57 6.25 nmf 191.19 93.00 8.62 4.55 8.86 4.92 Net profit margin 17.97 21.58 5.76 1.87 0.93 2.56 1.43 1.20 12.65 28.30 2.54 0.48 26.75 15.95 46.92 5.79 1.09 16.64 83.97 20.79 14.47 9.86 20.89