Exam (elaborations)

Group Case Summer 2021 questions and answers LATEST 2021/22

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Course
ACCO 320

Institution
ACCO 320

Question 1 Regarding Alternative 1 (sell MRHI) - Are we allowed to make assumptions as long as we state them? (for example, when valuing the business and calculating TAB, we are not given the fair value. Can we assume that it is the same as the book value?) Yes you are expected to make assumpti...

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group case summer 2021 questions and answers 2021 06 12 latest 202122

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Group Case Summer 2021
MRHI
GROUP CASE
Group Questions and Answers
June 12, 2021
Please review this document. My responses to the relevant questions are all in red font.

Question 1

Regarding Alternative 1 (sell MRHI) - Are we allowed to make assumptions as long as we state them?
(for example, when valuing the business and calculating TAB, we are not given the fair value. Can we
assume that it is the same as the book value?)

Yes you are expected to make assumptions in analyzing MRHI. However they need to be
reasonable and linked closely to the case facts.

Question 2

Regarding Alternative 1 (sell MRHI) - Are we allowed to do outside research for the business valuation?
(for example, if using the EBITDA x multiplier approach can we use research to determine the multiplier
for the industry and companies similar to MRHI?)

Yes you are expected to make assumptions and conduct some outside research. The outside
research can help you write-up the external analysis, evaluate the current financial health of MRHI
(key ratio comparisons to the market or other market players in Canada).. Also it can potentially
help you with the business valuation of MRHI. Again the figures used need to be reasonable and
aligned to MRHI. Remember MRHI is in analyzing MRHI. However they need to be reasonable
and linked closely to the case facts.

Question 3

Regarding Alternative 2 - Due to the high unemployment rate in the area, to receive the government
grant, Mr. Trembaly would have to create a minimum number of jobs for the next 5 years. However, to
include this in our cash flow projection, we would need the salary since it is a part of the operating
expenses. Should we do external research to form an estimation?

No need for extensive research on this. You can reference minimum wage in Quebec and add a
boost on this (say 20%). This will be sufficient for your estimates.

, Question 4

Regarding Alternative 2 - Given that Mr. Tremblay would like to cash out and retire in 10 years, should a
10 year projection be made to look for the cash flow and NPV?

Based on Mr. Tremblay’s stated goals and objectives, this is a reasonable approach for MRHI’s
overall financial forecasts. However each strategic alternative needs to be assessed with the
assumptions and time horizon stated in the case facts. For example, Alternative 2 states an average
of 7 to 12 years as the useful life of the project. Applying a time horizon of 10 for the NPV analysis
seems reasonable.

Question 5

Regarding Alternative 2 - To calculate the annual debt service of the loan, should we assume it to be 10
years as well given that the maturity date of the loan is not specified?

Loans taken where a building or plant construction is used as collateral, usually will have a
maximum maturity date equal to the useful life of the asset or less. Therefore assuming the loan
maturity date to equal 7, 8, or 10 years is reasonable. However, state your assumptions.

Question 6

Regarding Alternative 2 - In order to find the NPV, can the rate of return be assumed and validated with
external research?

The minimum rate of return is given in the case facts (page 12 – MRHI’s bank manager wants
MRHI to apply to this project a minimum capitalization rate of 8%). Applying the concept of a
company’s capital structure, we can also perform a buildup approach and start with the debt level
and estimate the cost of equity and the risk level of the project. This is up to each group to
determine. Please state your assumptions.

Question 7

Regarding Alternative 2 - We tried to look for the tax rate in the income statement, however, each year
has a different rate. Would you suggest us to take the most recent tax rate in 2018 or the average of all 3
years?

Both approached are reasonable. This is up to each group to determine. Please state your
assumptions.

Question 8

For the external analysis if we are supposed to use information outside of the case? When we did
research of the Hardwood Floor industry externally, such as sources on IBIS, it says it is a declining
industry while in the case it appears to be a rapidly growing industry. Are we supposed to do external
research, find facts to support the case of Mont Royal hardware, or should we contradict the case facts
with sources we found externally?

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Exam (elaborations)

Group Case Summer 2021 questions and answers LATEST 2021/22

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