Case Study Questions Flashcards
Say you had a bullet proof vest manufacturer. Given only this information, what are weaknesses you can envision for this company?
Starting with weaknesses, the first major one is the uncompromising need for quality. Lives are on the line if the product fails! Expenses need to accommodate the high cost of testing. Raw materials need to be carefully monitored to be of the appropriate quality, so its supplier chains need to be reliable and/or flexible. The threat of potential liabilities is enormous here; an insurance company will charge a higher premium if it elects to represent this company at all. To some extent, this item is a commodity, but there will definitely be brand differentiation for the players who show consistent quality. R&D will need to be expended to maintain a technological edge for the best vest: maximum usage, lightest, thinnest and weather-resistant. A large portion of the buyers will comprise a few government contracts. This is good, in that contracts are usually long-term, which gives certainty to future revenues and inventory needs. However, governments pick a supplier based on bidding auctions, so there is significant pressure to present the lowest price.
You are giving the following opportunity. A company wants to sell trees in water. In the 1950s, a smelting plant redirected water flow, which flooded a forest used for timberland. A logger, who is also a scuba driver, has discovered this and wants to sell the wood. How would you look at this investment?
This was a real opportunity that this company looked at. It’s easy for interviewers to ask questions about actual investments they’ve looked at because they know all the answers. Ask if the product is actually saleable. It is—being 40 feet under water means the wood is not oxizable and, thus, doesn’t rot. Ask if there is already an industry that does this. There is, and it is profitable. Ask about all the regular factors that comprise a good investment, including the experience of management. The interviewing firm passed on this opportunity because the scuba driver had no industry experience. Management is incredibly important because finance guys need to rely on current management to turn around the company (relying on equity incentives) or else hire industry experts.
Hummus Palace sells gourmet hummus throughout New York City. It distributes its tubs of hummus primarily through two channels: high-end grocery stores and specialty food retailers. Over the past few years, the company has been experiencing a slowdown in its sales. What are three potential growth strategies the company could pursue?
To find out why there’s been a slowdown in sales, start with asking questions about the industry—what is the market size, what are some of the key trends and what does the competitive landscape look like? Then inquire about the company—what is its growth profile and value proposition? Is it a scalable business, and does management have the knowledge and experience to turn the company into a market leader? These questions should provide you with some context to help you come up with growth strategies for the company. Hummus Palace could grow through acquisition or organically. It could expand into new product lines (gourmet falafel), new channels (hummuspalace.com), or new markets (San Francisco).
After debating the merits of each, the interviewer says that the CEO wants to pursue a geographic expansion strategy. Which market should she expand into?
San Francisco could be an interesting market because of its similarity to New York. San Francisco has a young urban population that would likely enjoy ethnic foods and be open to trying new cuisines. The city also would have a large number of high-end grocery stores and specialty food retailers to sell to.
The CEO thinks that San Francisco is a great idea, but this new operation must break even in five years. Should Hummus Palace expand into this new market?
Ask questions about the revenue and cost structure. How much will each tub of hummus cost and how many do they expect to sell? What are the variable and fixed costs? What are the needed capital expenditures, both maintenance and growth? What are the working capital needs?
Your initial investment is $1.5 million and $100,000 of capex/year over the next five years. Each tub of hummus costs $2.75 to produce and will be sold for $4.75. You think you can sell 200,000 plates per year.
Your total fixed costs are $2.0 million ($1.5 million + $100 thousand * 5). The gross margin is $2 which times the volume sold of 200 thousand is $400 thousand of profit per year. $2 million/$400 thousand neatly breaks even in five years, so yes, you can expand in this market.
You own a Christmas tree business. What are your working capital needs throughout the course of the year?
Inventory would likely need to be accumulated starting in November, since many people start hanging up Christmas lights and putting up Christmas trees the weekend after Thanksgiving. The inventory buildup would continue through late December. After Christmas however, demand for Christmas trees disappears. Hopefully by then there is very little inventory left, if managed properly. Since this is a cash business, where customers are paying for the trees in cash, receivables have little effect on the working capital balance and are insignificant relative to the company’s inventory requirements. Payables would likely increase in the fall as the company accumulates inventory in anticipation of the upcoming holiday season and pays for the trees with credit.
Say you have a phone book business. If you increase your price by 10 percent but lose 10 percent of your advertisers, what’s your revenue change?
1 percent. If ads are $1 and you have 100 advertisers, then you raise to $1.1 but go down to 90 advertisers, which is $99 in revenue. Originally, you had $100 in revenue, so you dropped $1. Mathematically speaking, originally you had 1.0# x 1.0$ = 1.0R. Now you have .9# x 1.1$ =.99R so it went down 1 percent.
Say there is City 1 and City 2. City 1 has 10,000 businesses, 50,000 people and $5,000 cost per ad. City 2 has 2,000 businesses, 4,000 people and $600 cost per ad. Which city do you want to advertise in?
Make this apples to apples. Set City 2 equal to $5,000 per ads, so multiply everything by 8.3 or approximately 8 for easier mental math. City 2 has 16,000 businesses with 32,000 people. Thus you are paying the same for more competition and fewer target consumers. City 1 is the obvious choice now.
What do you think about the paper phone book business?
It’s a maturing business, so future growth rate is likely to be negative. It is an increasingly outdated form of advertising, especially in comparison to the internet. Also, the growth rate in the U.S. is slowing down due to the aging population, which further decreases the future growth rate in comparison to the historical growth rate. The key age demographic to focus on is the elderly, who may not use other prevalent forms of advertising. The main advantage of a phone book that it appeals to a niche audience—the local city population who refers to the phone book to look for local businesses. But the industry continues to mature rapidly because this niche information is increasingly being uploaded to the internet. Paper phone books need to take advantage of the internet channel, which enjoys lower distribution costs, and focus on ways to make online advertising profitable or to have businesses pay to be included on the site. However, competition is fierce; Google already provides a similar function. A good company that has created a value-added twist on the business is Yelp, a website that posts user-generated reviews of businesses. Businesses can pay to advertise in designated spots of the site based on what the user is searching for.
If a company has $100 in revenue and $20 in EBITDA, what happens if management decreases prices by 10%? (KKR)
Depends on what happens to volume, but revenue would go down by 10% and EBITDA would go down by $10
If a company has $100 in revenue, $20 in EBITDA and management decreases prices by 10%, what increase in volume would be necessary to make the change in price EBITDA neutral? (KKR)
Depends on your fixed and variable cost structure
Company A buys Company B. Both have revenues of $1,000. Company A has EBITDA of $40. Company B has EBITDA of $20. Company A decides that it does not want to buy Company B because it would be dilutive to shareholders due to the lower margins. Is this a valid argument or not? (Warburg)
What is the value of Company B to Company A from a NPV standpoint? If you pay $100 (5x EBITDA) for a company that is worth $200 (10x EBITDA), then you have value creation.
We have a portfolio company in this particular industry. How would you think about the key industry drivers? Given revenue and margin, would this be a viable investment? (Warburg)
First, utilize porter’s five forces in order to determine the attractiveness of the industry. Also, determine what the macroeconomic trends are currently. Second, construct a paper LBO. You must ask for the information that you need to know.
How much pizza is sold in New York City every year?
This is a strict consulting case question; you’ll encounter fewer of these in your interviews. HF/PE consulting questions focus more on business scenarios, but you can get asked this type of question as a brainteaser. These “guestimations” can be solved either “top down” or “bottom up.” Top down approach: Assume that 10 million people live in New York City and that 80 percent of them, or eight million people, eat pizza. Let’s say that the average New Yorker eats pizza twice a month, and will eat two slices each time. If a slice of pizza costs $2, then that’s $4 spent at each sitting and $8 spent each month. That equates to $96 (round to $100 for simplicity) every year. Multiply that by eight million pizza eaters, and the market size for pizza in New York is approximately $800 million. Bottom-up approach: A slice of pizza in New York costs approximately $2 per slice. If the average person has two slices with his meal, then the average ticket (not including drinks) is $4. If the average person eats pizza twice a month, then that’s $8 a month or $96 a year (round to $100 for simplicity). Let’s assume that 80 percent of the 10 million people in New York City eat pizza. That means that the eight million pizza eaters in New York spend approximately $100 each every year on pizza, for a total of $800 million.
