1. Review the information and financial statements included below to gain an understanding of potential investment initiatives that would be supportable by management. Describe the intent of the mission statement from the annual report, and prepare a SWOT analysis (strengths, weaknesses, opportunities, threats). Based on your SWOT analysis, assess and explain in detail if Pear Computer Horizons currently delivering on its mission statement.
2. Conduct financial statement analysis using liquidity ratios, debt ratios, profitability, and asset utilization ratios (at least three for each type of ratio). Comment on each of the ratios and what they say about the companys performance over the last 5 years.
3. Prepare an assessment for each of the investment proposals included below, with a rationale that is aligned with the SWOT analysis and financial statement ratio analysis. Recommend if PCH should go forward with any of the proposed investments based on this analysis.
4. Prepare a basic income statement forecast for the subsequent fiscal year, using a percentage of sales approach and using information included in the materials below to support assumptions that correspond for each revenue and expense. Each line item (e.g., marketing expenses) should have a note and an explanation on how it was calculated.
5. The CEO also needs help understanding the tax consequences of the disposal of some manufacturing equipment. Prepare a CCA schedule for tax depreciation of manufacturing equipment purchased three years ago on January 1, 2015 for $340,000 (assume Class 46 with CCA rate of 30% and half-year rule applying). Calculate the tax consequence if all the equipment were to be sold at the beginning of this year (i.e., end of 2017) for either $120,000 or $160,000. The equipment is the only asset in the class. Utilize the average tax rate that Pear Computer Horizons had in the last five years in your analysis of the tax impact.

Pear Computer Horizons Case Study

Company Background

Pear Computer Horizons (PCH) started out as the brainchild of several engineers in the eighties, with the founding team working out of a garage in Winnipeg, Manitoba. The company originally focused on creating easy-to-assemble hardware (e.g., desktop computers) that the average Canadian could afford. Over time, as computers became the part of everyday life, PCH branched out into several different models and tiers.

In the mid 2000s, the company went on a large acquisition spree, acquiring several software companies and mobile manufacturing start-ups, allowing the once hardware-only company to diversify into phones, software, and gaming (both video game consoles, as well as game development). The business was reorganized into three segments in 2010. The first segment, computers, focuses on manufacturing computer chips, laptops, desktop computers, and computer accessories. The second segment, phones, was once the smallest business division, but has rapidly grown into the number one segment by total sales in 2017. The third major segment, software and gaming, includes games for computers and video game consoles, as well as anti-virus, word-processing, and analytics software.

PCH products are sold across Canada in various retail stores, as well as through their high-traffic e-commerce site. PCH manages shop-in-shops in electronic stores like Best Buy; specialized areas in big department or electronic stores that only sell PCH products. Products have also expanded in recent years into the US, but market share is low. There are future plans to expand into Latin America and India, two developing economies that do not have as much technology penetration as other more mature markets.

The companys mission statement, extracted from their 2017 annual report, is included below:

Pear Computer Horizons strives to be the technological choice for people, businesses, and governments for their innovation, entertainment and security needs.

The company is publicly traded under the ticker PCH.TO on the Toronto Stock Exchange, and has been paying a steady dividend over the last ten years.

Discussion with Chief Executive Officer (CEO)

Ms. Morrison, CEO, has reached out to you to help her assess the current financial and strategic state of Pear Computer Horizons, evaluate some investment proposals, build a financial forecast for 2018, and evaluate tax consequences of an asset disposal.

The last five years have been a wild ride, exclaimed Ms. Morrison, who has risen through the ranks to the top position after 15 years in the company. We have almost tripled our revenue in the last five years, in large part to some big product launches in gaming and phones that were more successful than we ever imagined. We also benefited from the booming tech industry that continues to see large technological advances in a short period of time.

However, now is not the time to get complacent, continued Ms. Morrison. We successfully grew in the past through mergers & acquisitions, and we will continue to be on the lookout to snatch any smaller tech companies making noise with innovative ideas. This growth is especially critical in the phone and gaming & software segments, which have seen increasing competition in Canada.

We are also facing increasing government regulation relating to customer data, its storage, and its use, especially since we have access to confidential information through our security software. Furthermore, because we possess this information, we are facing more cyber-attacks and data security threats. Thankfully, we have not had any significant breaches yet, but the threat remains. Any serious breach could harm our reputation, as well as our stock price.

Qualitative & Quantitative Analysis

To help with your assessment of PCHs current state and the investment proposals, Ms. Morrison recommends that you develop a SWOT analysis and also perform financial statement analysis.

SWOT stands for strengths, weaknesses, opportunities, and threats, explained Ms. Morrison. It is a standard tool used in internal and external assessment, with a focus on qualitative factors. Strengths are things that a company does well, while weaknesses are areas of improvement. Strengths and weaknesses are internal to the firm, meaning that PCH can have substantial control over them. Opportunities and threats are external to PCH, meaning that these are environmental changes that are outside of our control, but could be working for or against our favour. Government regulation is an example of an externality that could be an opportunity or a threat, depending on your business or point of view.

Financial statement analysis involves the use of ratios to evaluate the performance, financial health, and efficiency of a company, among other things, continued Ms. Morrison. I would like you to analyze the liquidity, profitability, efficiency (asset utilization), and solvency (debt ratios) of PCH, and to fully explain what the trend in these ratios are indicating about my companys historical performance. Ratios can be used to tell a storywhat story do you see coming from the numbers?

SWOT Analysis		Marks
	At least three reasonable strengths	3
	At least three reasonable weaknesses	3
	At least three reasonable threats	3
	At least three reasonable opportunities	3
	Mission Statement Intent	2
	Mission Statement alignment	2

Financial Statement Analysis		Marks
	Three solvency (debt) ratios calculated correctly	3
	Three liquidity ratios calculated correctly	3
	Three activity ratios calculated correctly	3
	Three profitability ratios calculated correctly	3
	Interpretation for each ratio (1 mark for each)	12

Investment Proposal		marks
	Evaluation of Camera Company Purchase	4
	Evaluation of New Product Launch	4
	Recommendation Reasoning	4

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Pear Computer Horizons Statement of Financial Position (Balance Sheet) At Dec 31, 2017 In millions of dollars Assets Cash Accounts Receivable Inventory Total Current Assets 2013 $60.00 $60.00 $100.00 $220.00 2014 $13.40 $70.00 $90.00 $173.40 2015 $4.03 $70.00 $80.00 $154.03 2016 $33.58 $100.00 $70.00 $203.58 2017 $85.97 $130.00 $60.00 $275.97 Gross Property Plant & Equipment Less: Accumulated Depreciation Net Property, Plant, & Equipment Intangible Assets Total Long-Term Assets $250.00 -$50.00 $200.00 $100.00 $300.00 $350.00 -$75.00 $275.00 $120.00 $395.00 $450.00 -$100.00 $350.00 $140.00 $490.00 $500.00 -$125.00 $375.00 $140.00 $515.00 $600.00 -$150.00 $450.00 $150.00 $600.00 Total Assets $520.00 $568.40 $644.03 $718.58 $875.97 Liabilities Account Payable Accrued Liabilities Current Liabilities Long-term Debt $50.00 $20.00 $70.00 $150.00 $70.00 $30.00 $100.00 $150.00 $90.00 $40.00 $130.00 $150.00 $80.00 $40.00 $120.00 $150.00 $100.00 $20.00 $120.00 $150.00 $220.00 Total Liabilities $250.00 $280.00 $270.00 $270.00 Shareholder's Equity Common Shares Preferred Shares Retained Earnings Total Equity $175.00 $25.00 $100.00 $300.00 $175.00 $25.00 $118.40 $318.40 $175.00 $25.00 $164.03 $364.03 $175.00 $25.00 $248.58 $448.58 $175.00 $25.00 $405.97 $605.97 $520.00 $568.40 Total Liabilities & Equity $644.03 $718.58 $875.97 Pear Computer Horizons Statement of Earnings (Income Statement) For the Year Ended Dec 31, 2017 In millions of dollars 2013 2014 2015 2016 2017 Revenue Computers Phones Software & Gaming Total Revenue $150.00 $75.00 $50.00 $275.00 $172.50 $150.00 $62.50 $385.00 $198.38 $210.00 $78.13 $486.50 $228.13 $294.00 $97.66 $619.79 $262.35 $411.60 $122.07 $796.02 $96.25 $178.75 $134.75 $250.25 $165.41 $321.09 $204.53 $415.26 $238.81 $557.21 Cost of Goods Sold (COGS) Gross Profit Operating Expenses Advertising & Marketing General & Administrative Research, IT, & Development Depreciation & Amortization Total Operating Expenses $27.50 $41.25 $30.00 $25.00 $123.75 $38.50 $57.75 $34.50 $25.00 $155.75 $48.65 $72.98 $39.68 $25.00 $186.30 $61.98 $92.97 $45.63 $25.00 $225.57 $79.60 $119.40 $52.47 $25.00 $276.48 Operating Income Interest Expense Pre-tax Income Income Taxes Net Income (Loss) $55.00 $9.00 $46.00 $9.20 $36.80 $94.50 $9.00 $85.50 $17.10 $68.40 $134.79 $9.00 $125.79 $25.16 $100.63 $189.68 $9.00 $180.68 $36.14 $144.55 $280.74 $9.00 $271.74 $54.35 $217.39 Pear Computer Horizons Statement of Financial Position (Balance Sheet) At Dec 31, 2017 In millions of dollars Assets Cash Accounts Receivable Inventory Total Current Assets 2013 $60.00 $60.00 $100.00 $220.00 2014 $13.40 $70.00 $90.00 $173.40 2015 $4.03 $70.00 $80.00 $154.03 2016 $33.58 $100.00 $70.00 $203.58 2017 $85.97 $130.00 $60.00 $275.97 Gross Property Plant & Equipment Less: Accumulated Depreciation Net Property, Plant, & Equipment Intangible Assets Total Long-Term Assets $250.00 -$50.00 $200.00 $100.00 $300.00 $350.00 -$75.00 $275.00 $120.00 $395.00 $450.00 -$100.00 $350.00 $140.00 $490.00 $500.00 -$125.00 $375.00 $140.00 $515.00 $600.00 -$150.00 $450.00 $150.00 $600.00 Total Assets $520.00 $568.40 $644.03 $718.58 $875.97 Liabilities Account Payable Accrued Liabilities Current Liabilities Long-term Debt $50.00 $20.00 $70.00 $150.00 $70.00 $30.00 $100.00 $150.00 $90.00 $40.00 $130.00 $150.00 $80.00 $40.00 $120.00 $150.00 $100.00 $20.00 $120.00 $150.00 $220.00 Total Liabilities $250.00 $280.00 $270.00 $270.00 Shareholder's Equity Common Shares Preferred Shares Retained Earnings Total Equity $175.00 $25.00 $100.00 $300.00 $175.00 $25.00 $118.40 $318.40 $175.00 $25.00 $164.03 $364.03 $175.00 $25.00 $248.58 $448.58 $175.00 $25.00 $405.97 $605.97 $520.00 $568.40 Total Liabilities & Equity $644.03 $718.58 $875.97 Pear Computer Horizons Statement of Earnings (Income Statement) For the Year Ended Dec 31, 2017 In millions of dollars 2013 2014 2015 2016 2017 Revenue Computers Phones Software & Gaming Total Revenue $150.00 $75.00 $50.00 $275.00 $172.50 $150.00 $62.50 $385.00 $198.38 $210.00 $78.13 $486.50 $228.13 $294.00 $97.66 $619.79 $262.35 $411.60 $122.07 $796.02 $96.25 $178.75 $134.75 $250.25 $165.41 $321.09 $204.53 $415.26 $238.81 $557.21 Cost of Goods Sold (COGS) Gross Profit Operating Expenses Advertising & Marketing General & Administrative Research, IT, & Development Depreciation & Amortization Total Operating Expenses $27.50 $41.25 $30.00 $25.00 $123.75 $38.50 $57.75 $34.50 $25.00 $155.75 $48.65 $72.98 $39.68 $25.00 $186.30 $61.98 $92.97 $45.63 $25.00 $225.57 $79.60 $119.40 $52.47 $25.00 $276.48 Operating Income Interest Expense Pre-tax Income Income Taxes Net Income (Loss) $55.00 $9.00 $46.00 $9.20 $36.80 $94.50 $9.00 $85.50 $17.10 $68.40 $134.79 $9.00 $125.79 $25.16 $100.63 $189.68 $9.00 $180.68 $36.14 $144.55 $280.74 $9.00 $271.74 $54.35 $217.39