Let's consider a family business that has two Business Units A and B$.$

Business unit A was created more than $150$ years ago and has a leading position in its market

and a strong history of operating profitability. Business unit B was created two decades ago and

has a less established position, but the sales performance is considered as good. You have at

the end of this exercise, the income statement of the two Business Units and their Balance Sheet

for the last year considered, i$.$e$.,$ the year $2019.$

The financing power from the family is not extensible and during a review of the future of the

group, the young Chief Strategy Officer $($CSO$),$ makes the following proposal: "Due to our

constraints and given the margins performance review, it would be more interesting to stop

investing in activity $B,$ in order to concentrate all our investments on activity $A,$ which is more

profitable".

The Board decided to submit the proposal of the CSO at the Board meeting which gathered the

representatives of the family. You are working at a consulting company hired by the CFO of

the group in order to help the board member, representing the family, to take a decision on that

proposal.

Question $1$: Operating performance of the two BU

In the first review, you analyze as suggested by the CSO, the operating performance of the two

Business Unit A and B for the year $2020$ using $3$ key margin levels: gross margin, EBITDA

margin and contribution margin $($sales less variable cost$).$ For the computation of the

contribution margin, you should exclude depreciation from your analysis and you know that

fixed costs are general cost and a part of R&D$.$ For $2020$ you estimate that in BU A$,1392K$

of R&D costs are fixed and for BU B $600K.$ All other operating costs are variable.

Then analyze the respective weight of the two BU in the turnover and in each of the three

margins as a $\%$ of the total $($for example, Business A represents $\frac{25056}{25056+23620}=$

$51\mathrm{.}5\%$ of total sales versus $48\mathrm{.}5\%$ for B$).$

Finally at this stage would you recommend to follow the proposal of the CSO?

Question $2$: Taking into account your financial culture acquired at EDHEC during the

various finance modules, what are the limitation of the margin analysis performed in the

first review above?

Question $3$: more operating analysis In the second review you calculate the EBIT margin in $\%$ and the respective contribution of

activity A and B to the total.

Looking at the respective contribution weights of A and B$,$ what information does the

comparison of EBIT versus EBITDA give in terms of business model? Is this intuition

confirmed by looking at the balance sheet? What do you observe?Question $4$: further operating analysis

Calculate the EBT margin in $\%$ and the respective contribution of business A and B to the total.

What do you deduct from the comparison made previously? By studying the respective

contribution weights of A and B$,$ what information does the comparison of EBT versus

EBITDA provide in terms of financing? Calculate the net margin in $\%$ and the respective

contribution of activity A and B to the total.

What do you observe by looking at the Balance Sheet in this analysis of the differences between

EBITDA on one side and EBT and net margin on the other side?

Question $5$: After analyzing the margin, you want to perform a return analysis.

Calculate the ROE of the group and of the two Business Units.

Calculate ROCE as a $\%$ using the two definitions of capital employed $($FA $+$ WCR and

Shareholders equity $+$ Net debt$).$ Of course, you should find the same figure of ROCE. What

information does the comparison of ROCE provide in relation to the margin calculations in the

previous questions? On the basis of the different variables that make up the ROCE, what can

we deduce in terms of business model $($inventories$,$ receivables, debts, etc.$)?$

Calculate the value creation based on a cost of capital of $12\%$ and $10\%$ for activity A and B

respectively.

Question $6$: Free Cash Flow analysis

Knowing that the WCR of business unit A and B of the year $2018$ was respectively $1200$ and

$7500,$ calculate the WCR variation. Knowing that the Fixed Assets of business unit A and B

were $19091$ and $1747$ respectively. Calculate the CAPEX for this year. Deduct the FCF of

business units A and B$.$ What are your conclusions for this analysis?

Question $7$: Recommendation

On the basis of the previous questions, do you think that the CSO proposal is relevant or not?

Write a synthesis to explain your conclusions to the members of the family and thus influence

the vote on strategic choices to be made for the group in the future.Financial Statements