You are on page 1of 40

MODULE 3, ASSIGNMENT 5 RomaCorral Foods Ltd.

(RCFL)
March 9, 2011

Marker Assessment Notes and Guide


These notes provide specific details and quantitative analyses pertaining to the RomaCorral Foods case and supplement the Year 1 General Assessment Guide, Markers Version available on the Module 1 Home Page. The assessment and solution notes on the following pages provide examples of relevant analyses that may be seen in responses, but they do not include all the valid points that can be made. There are other possible solutions to the case. Markers must use their judgment to objectively assess creative solutions when evaluating candidate responses.

2011 The Society of Management Accountants of Canada. All rights reserved. / Registered Trade-Marks/Trade-Marks are owned by The Society of Management Accountants of Canada. No part of this document may be reproduced in any form without the permission of the copyright holder.

M3A5 RomaCorral Foods Ltd. (RCFL) Marker Assessment Notes and Guide

Table of Contents
Page Assignment Overview....................................................................................................1 Assessment Rubric By Component ............................................................................1 Assessment Guidelines .................................................................................................7 Overall Assessment ......................................................................................................7 Situational Analysis Component 1.a)..........................................................................9 Application of Quantitative Tools Component 2.a) ...................................................12 Systematic Approach for Issue Analysis Component 4.a) ........................................12 Systematic Approach for Issue Analysis Component 4.b) ........................................13 Application of Quantitative Tools Component 2.b) ...................................................14 Application of Quantitative Tools Component 2.c) ..................................................14 Qualitative Analysis and Strategy Formulation Component 1.b) ..............................15 Recommendations and Conclusions Component 5.a) .............................................17 Qualitative Analysis and Strategy Formulation Component 1.c) ..............................17 Qualitative Functional Concepts Component 3.a) and b) .........................................17 Professionalism and Communication Component 6.a) and b) .................................19 Feedback to Candidates .............................................................................................19 Additional References .................................................................................................20 Appendix 1: Financial Assessment .............................................................................21 Figure 1: Ratio and Performance Analysis .......................................................21 Figure 2: Benchmarks ......................................................................................22 Figure 3: Net Income Shortfall for 2012 ............................................................24 Appendix 2: Analysis of Alternative to Expand Outlets/Roma Only/Corral Only ..........25 Figure 1: Net Present Value Analysis ...............................................................25 Figure 2: Financing Required ...........................................................................26 Figure 3: Impact on Net Income .......................................................................28 Figure 4: Impact on Debt:Equity .......................................................................30 Appendix 3: Analysis of Alternative to Expand Roco Coffee Shops ............................32 Figure 1: Probability Analysis ...........................................................................32 Figure 2: Net Present Value Analysis ...............................................................32 Figure 3: Financing Required ...........................................................................33 Figure 4: Impact on Net Income .......................................................................34 Figure 5: Impact on Debt:Equity .......................................................................34 Appendix 4: Outsourcing .............................................................................................36 Appendix 5: IFRS/ASPE Considerations .....................................................................37 Appendix 6: Dividend Considerations..........................................................................37

M3A5 RomaCorral Foods Ltd. (RCFL) Marker Assessment Notes and Guide

Assignment Overview
For reference, markers should refer to the Assignment Overview as provided to candidates. The RCFL case is based on the August 2009 Case Exam. This case was not published. If you have any questions or suggestions regarding this material, please contact cmamarking@cma-cpp.com.

Assessment Rubric By Component


Please see the Year 1 General Assessment Guide for details on each Component. The difference between ME+ and ME- depends on the quality of the response.
Component 1. Qualitative Analysis and Strategy Formulation Competency: F1: Strategic Management Weight: 15% 1. a) The qualitative analysis of RCFLs current situation: 1. Is appropriate for the strategic alternatives and operational issues being addressed; 2. Is of good quality, depth, breadth, and makes sense; 3. Includes internal and external scans, and other relevant data (e.g. mission, stakeholder preferences, constraints, targets, SWOT points, KSFs/competitive advantages). AE: All three of the above ME: Includes the internal and BE: Only one of the above attributes are present. external scan AND one attributes is present. other of the above attributes is present. ME+ ME ME1. b) The analyses of the strategic alternatives, minor issues and implementation issues use a reasonable scope of the data gathered in the situational analysis (i.e. use all categories of SWOT points, not just the same points repeatedly); and Integration is demonstrated to a reasonable degree (e.g. considering the cause and effect relationships between SWOT items and strategic alternatives; considering the implications of one issue or alternative on another, and/or indicating how the recommended strategy takes advantage of strengths and opportunities while mitigating or worsening weaknesses and avoiding threats while meeting the goals of the organization within its constraints; integration demonstrated is balanced throughout the analyses). AE: Uses a balance of ME: Uses a balance of BE: Does not use a balance of categories from the categories from the categories from the situational analysis; situational analysis; situational analysis and/or provides more than ten provides seven to ten provides less than seven clear integration links clear integration links integration links balanced balanced amongst the balanced amongst the amongst the various various alternatives and various alternatives and alternatives and issues. issues. issues. ME+ ME ME-

CMA Canada

M3A5 RomaCorral Foods Ltd. (RCFL) Marker Assessment Notes and Guide

1. c) The recommended implementation plan: 1. Includes an action plan that identifies tasks, matches the tasks to the appropriate individuals, provides realistic timelines for completing these tasks, and considers the monetary implications (what, who, when, costs/revenues); 2. Aligns the organizations resources and success factors to accomplish the recommended strategy; 3. Resolves problems without causing others (e.g. addresses the minor issues, overcomes cons of recommended strategies); and 4. Considers organizational implications (e.g. change management, organizational structure, pricing, morale, the role of functions such as IT, human resource management, sales, customer relations, etc.). AE: All four attributes above ME: Action plan addressing BE: Addresses fewer than four are included addressing four to six implementation implementation issues and/or more than six issues, PLUS one of the does not provide an action implementation issues. above attributes is plan. included. ME+ ME ME-

Component 2. Application of Quantitative Tools Competencies: F3, F4, F5, F6: Performance Management, Performance Measurement, Financial Management, Financial Reporting Weight: 30% 2. a) The financial analysis of RCFL covers three years, rounded to two decimal places, and includes the following attributes: 1. A balance of relevant ratios (liquidity, coverage, activity, etc.) are calculated and interpreted. 2. Ratio and trend analysis, common sizing or comparative analysis are applied appropriately in evaluating RCFLs performance and risk, and is interpreted. 3. Benchmarks provided are used for comparison and are interpreted. AE: More than four ratios are ME: Three to four ratios are BE: Ratios are calculated, but calculated balanced for calculated balanced for three one or fewer of the three years. All three years; two of the three attributes are present. attributes are addressed attributes are addressed. and calculations are error free. ME+ ME ME-

CMA Canada

M3A5 RomaCorral Foods Ltd. (RCFL) Marker Assessment Notes and Guide

2. b) The quantitative analysis of the strategic alternatives demonstrates a reasonable understanding of relevant decision analysis concepts and tools. Appropriate concepts and tools are chosen and applied appropriately (e.g. free of serious errors, reasonable quality). Any assumptions made are reasonable and relevant for the analysis of the alternative. The following are some relevant decision analysis concepts and tools that could be applied if applicable in the quantitative analyses of the strategic alternatives: 1. Cost and revenue analysis, 2. Capital budgeting, 3. Constraint comparison, and 4. Uncertainty/sensitivity analysis. AE: Appropriate tools are ME: Appropriate tools are applied BE: One or fewer tools/ applied correctly, correctly, two tools/concepts concepts are applied, or assumptions are relevant are used to analyze the only one alternative is and more than two strategic issues identified, at analyzed quantitatively. tools/concepts are used to least two alternatives are analyze the strategic analyzed quantitatively. issues identified; at least two alternatives are analyzed quantitatively. ME+ ME ME2. c) Financing, Financial Forecast, Quantitative Analysis of Minor Issues and Application of Other Quantitative Tools: Financing required and available are calculated and compared, pro forma financial statements are required for at least one year that incorporates the strategic and other recommendations, minor issues are analyzed quantitatively using appropriate tools. AE: Financing required and ME: Financing required and BE: Financing required and available are reasonably available are reasonably available are not calculated and compared calculated and compared for reasonably calculated for the recommended the recommended strategy or and compared for the strategy and a reasonable a reasonable financial recommended strategy, financial forecast is forecast is provided. The a reasonable financial prepared. The analyses analyses may contain forecast is not prepared may contain relatively relatively minor errors. or the analyses contain minor errors. serious errors. ME+ ME ME-

CMA Canada

M3A5 RomaCorral Foods Ltd. (RCFL) Marker Assessment Notes and Guide

Component 3. Qualitative Functional Concepts Competencies: F1, F2, F3, F4, F5, F6: Strategic Management, Risk Management and Governance, Performance Management, Performance Measurement, Financial Management and Financial Reporting Weight: 15% 3. a) Strategic Management: The qualitative analyses demonstrate reasonable understanding of relevant concepts pertaining to strategic management. Relevant issues are appropriately used and resolved. Relevant concepts and issues include (but are not limited to) the following: value disciplines, organizational structure, growth strategies, as well as change management, communication and corporate culture (effectively communicating the strategic change to staff to promote smooth implementation, etc.). Risk Management and Governance: The qualitative analyses demonstrate reasonable understanding of relevant concepts pertaining to risk management. Relevant issues are appropriately used and resolved (e.g. recommend procedures for sharing, transferring and/or reducing risk; prepare contingency plans). Relevant concepts and issues include (but are not limited to) the following: Internal risks (e.g. strategic, reporting, etc.), risk associated with strategic alternatives (e.g. likelihood of success), external/environmental risks (e.g. competition, safety, etc.). AE: The response identifies and ME: The response identifies and BE: The response identifies resolves five or more resolves four concepts less than four concepts concepts indicated above. indicated above. indicated above. ME+ ME ME3. b) Performance Management, Performance Measurement, Financial Management and Financial Reporting: The qualitative analyses demonstrate reasonable understanding of relevant concepts pertaining to performance management, financial management and financial accounting. Relevant issues are identified and appropriately used or resolved. Relevant concepts and issues include (but are not limited to) the following: Cost and revenue management, operations management, information technology, financial management, financial reporting. AE: The response identifies and ME: The response identifies and BE: The response identifies resolves five or more resolves four concepts less than four concepts concepts indicated above. indicated above. indicated above. ME+ ME ME-

CMA Canada

M3A5 RomaCorral Foods Ltd. (RCFL) Marker Assessment Notes and Guide

Component 4. Systematic Approach for Issue Analysis Competency: E1: Problem Solving and Decision Making Weight: 15% 4. a) Issue Identification and Prioritization The breadth and prioritization of issues identified in the response are appropriate. The main alternatives and other minor alternatives are identified and prioritized reasonably (e.g. the main alternatives are analyzed first and in the greatest depth; minor alternatives are analyzed next). AE: The response identifies, ME: The response identifies, BE: The response identifies analyzes and adequately analyzes and prioritizes at and/or analyzes fewer prioritizes more than three least three main strategic than two of the main main strategic alternatives alternatives, identifies, strategic alternatives and eight or more important analyzes and prioritizes five and/or analyzes fewer minor issues. to seven important minor than five minor issues. issues, minor prioritization issues are acceptable. ME+ ME ME4. b) The analyses of the individual strategic alternatives include the following attributes: 1. appropriate in depth and breadth, 2. balanced, 3. objective/free of bias, and 4. consider more than one perspective/global view. AE: The response addresses all ME: The response addresses BE: The response four attributes. three of the attributes. addresses less than three attributes. ME+ ME ME4. c) Relevant case facts are applied appropriately in the response. Ambiguous and/or missing information is identified and assumptions are clearly stated. AE: Majority of the case facts are ME: Many case facts are used BE: Case facts are not used used appropriately; any appropriately; any appropriately, ambiguities are clearly ambiguities are identified ambiguities are not identified and dealt with and dealt with appropriately. identified. appropriately. ME+ ME ME-

CMA Canada

M3A5 RomaCorral Foods Ltd. (RCFL) Marker Assessment Notes and Guide

Component 5. Recommendations and Conclusions Competencies: E1, E3: Problem Solving and Decision Making, Professionalism and Ethical Behaviour Weight: 13% 5. a) Strategic alternatives are measured in terms of important decision criteria (targets, constraints, funding, KSFs, mission, etc.). Recommendations and conclusions for the strategic alternatives and minor alternatives are logical, feasible, realistic, consistent, supported (e.g. with a decision matrix), and presented in a convincing manner. AE: The response demonstrates ME: The response BE: The response does not that the recommendation is demonstrates that compare the viable within the constraints recommendation is viable recommendations to the presented, meets the targets, within the constraints decision criteria and the has sufficient funding and is presented, meets the recommendations are not consistent with the mission. targets and has sufficient consistent with the The recommendations are funding. The analyses. logical, supported and recommendations are consistent with the analyses. logical and consistent with the analyses. ME+ ME ME-

Component 6. Professionalism and Communication Competency: E4: Written Communication Weight: 12% 6. a) The format and organization of the report are appropriate: 1. The elements of an effective business report format are present: i) cover page/cover memo, ii) executive summary, iii) introduction, iv) body of the report, v) conclusion, and vi) appendices; 2. The executive summary is concise and highlights or summarizes the strategic alternatives, recommendations and other issues that the recipient can act on; 3. The introduction provides the purpose and scope of the report; 4. The conclusion brings together the findings and draws the report to a close; 5. The appendices contain appropriate content (e.g. SWOT, quantitative analysis); and 6. The content of the report is organized appropriately for a business report (e.g. uses headings and subheadings, is appropriately sequenced, uses lists effectively). AE: All elements are ME: All elements are present but BE: An element is missing, more present and of two are not appropriate, than two elements are not appropriate quality, the some minor errors/ appropriate, some major content is organized problems with organization errors/problems with appropriately, and the are evident and the report organization are evident and report conforms to the conforms to most of the the report does not conform to format specifications. format specifications. many of the format specifications. ME+ ME ME-

CMA Canada

M3A5 RomaCorral Foods Ltd. (RCFL) Marker Assessment Notes and Guide

6. b) The language, style and flow of the response are appropriate: 1. The report reflects appropriate, professional tone and tact, and addresses the appropriate audience. 2. The language used in the narrative is without a distracting number of deviations from business norms, jargon/slang, or unexplained abbreviations, and has few spelling, grammatical, sentence structure, punctuation and typographical errors. 3. The qualitative and quantitative content is expressed clearly, logically and coherently, and flows well. Repetition is not excessive and is used in an effective manner. 4. References, labels and audit trails are provided where appropriate (e.g. the response is easy to follow; provides direction to the reader). AE: Few problems with ME: Some problems, but they BE: Major problems, distracting language use and are not distracting and the errors, response difficult to content expression, the response is easy to follow. follow. response is easy to follow. ME+ ME ME-

Assessment Guidelines
The Assessment Rubric, Marker Assessment Notes and Guide, Marking Worksheet, Candidate Assessment Form and Standard Comments are grouped into six components: Component 1 Qualitative Analysis and Strategy Formulation Component 2 Application of Quantitative Tools Component 3 Qualitative Functional Concepts Component 4 Systematic Approach for Issue Analysis Component 5 Recommendations and Conclusions Component 6 Professionalism and Communication Judgment must be used in assessing the competencies exhibited in the candidates response and assigning an overall assessment: Above Expectations (AE), High Meets Expectations (ME+), Meets Expectations (ME), Low Meets Expectations (ME-), Below Expectations (BE) or Not Attempted (NA). The weights for each component in this assignment are representative of the weights in the Case Exam. Professional judgment must be used in providing the assessments to the candidates.

Overall Assessment
Candidates should follow the Steps for Approaching Business Strategy in answering the case (found in the Reference Material section of the Professional Programs website). Because this is a time-constrained assignment (4 hours) and a high-level SWOT analysis is provided in the Backgrounder (Appendix 1), candidates are not required to repeat these points in the situational analysis presented in the response. As well, some of the steps may not be fully addressed. For example, it may be

CMA Canada

M3A5 RomaCorral Foods Ltd. (RCFL) Marker Assessment Notes and Guide

unreasonable to expect candidates to provide a financial forecast that takes into consideration all the candidates recommendations (step 7). The analyses provided in these assessment notes are far more complete and extensive than what can be expected from a candidate during a four-hour examination. In answering the case in an examination setting, candidates are expected to use their judgment in assessing which issues are the most relevant and to what extent these issues should be analyzed. Normally, a response that provides the following would deserve an assessment of at least ME: 1. Sufficient depth and breadth of situational analysis (count only new points not in given Backgrounder SWOT). 2. The two main strategic alternatives (expand restaurant chain and diversify by establishing a coffee shop chain) are analyzed, both quantitatively and qualitatively. 3. After-tax net income for 2011 is calculated for the recommended strategy and compared against the target of $42,901,583. 4. Recommendation viable within constraints, meets targets, sufficient funding, logical and consistent with analysis. 5. Implementation plan addresses 4-6 implementation issues for the recommended alternatives. 6. Adequate financial forecast that takes into account some of the recommendations. 7. Adequate communication skills are demonstrated. 8. No fatal errors. In applying the assessment rubric, markers should keep in mind that the quality of responses usually follows a normal curve. It is reasonable to expect the majority of responses to meet expectations and a minority to be below or above expectations. Some candidates will not limit their response time to four hours. An adequate response will likely be 10-18 pages long, including appendices. Some exceptional candidates who think and type quickly will be able to provide 18-25 pages in their response. Do not allow longer responses submitted by either exceptional candidates, or those who spend much more than four hours on the response, to bias your judgment against those that are only 10-18 pages long. For responses that are exceptionally long, assess them as though they were done in four hours. Some of the candidates who limit their response time to four hours will submit incomplete reports. These candidates did not properly allocate their time. The assessment guide should be applied as normal.

CMA Canada

M3A5 RomaCorral Foods Ltd. (RCFL) Marker Assessment Notes and Guide

Situational Analysis Component 1.a)


The following tables list the points candidates are expected to present. [Note: The current financial assessment, including the interpretation of the results, is assessed in component 2a).] Mission: RomaCorral Foods Ltd. provides Canadian consumers with excellent food and refreshments at good value and in comfortable, relaxing surroundings while providing its investors with above-average returns through operational efficiency and selective aggressive growth. RomaCorral restaurants are the preferred choice of North American consumers seeking high-quality food and refreshments at affordable prices. Achieve an after-tax net income growth rate target of 5% over the next two years (i.e. net income of $42,901,583 in fiscal 2012). Pay a dividend of $2 per share annually. Obtain an average return on investment of 10%.

Vision:

Strategic Goals:

Stakeholders Preferences: Singh Plante Browne Buckner Belli Key success factors

Indicated that options on 12 parcels of land would be suitable for opening Roma and Corral outlets. Questioned the feasibility of opening new restaurants without any financing from EFL. Suggested opening a chain of coffee shops in addition to, or instead of, new restaurants. Suggested outsourcing their bread products. Did not like relying on an external supplier for bread. Location Menu Food and service quality Capitalization Supply chain management Scheduling of labour The bank is willing to refinance the existing mortgages for up to 75% of fair value of land and buildings of existing restaurants, provided that the ratio of longterm debt to equity does not exceed 2 to 1.

Constraints

CMA Canada

M3A5 RomaCorral Foods Ltd. (RCFL) Marker Assessment Notes and Guide

Environmental Scan/SWOT Analysis: The following are some additional SWOT points that candidates may provide in their responses. On the assessment worksheet, and below, the SWOT points as provided to candidates in the Backgrounder SWOT are in italics. Strengths Overall profits increased for RCFL and all restaurants met the sales target and most met the net profit margin target. RCFL holds options on 12 parcels of land. Diners at Roma find the smell of bread appealing. EFL would be willing to provide staff support to set up a coffee chain. Bank will refinance the existing mortgages for up to 75% of the fair value of the land and buildings. Many full-service restaurants with prime costs (direct materials and labour) greater than 65% of sales recorded losses. RCFL prime costs are less than 65%. Other. Experience and expertise of parent company and management. Good reputation for quality food at reasonable prices. Growth of brand. Consistency in outlet appearance and menu pricing throughout Canada. Good locations close to target markets. Adequate parking and easy accessibility via public transit. Reliable supply chain that delivers goodquality food. Available baking capacity at Roma outlets to supply fresh bread to Corral outlets. Preferred client status with bank. Good base of long-term customers. Weaknesses EFL would not be able to provide financing for three years. Transfer price of 60% resulting in Roma not meeting profit margin targets. Baird recommended contractor although not lowest bid and received loan of $100,000. High turnover of quality servers is related to reporting of gratuities as income on T4 slips. Corral outlets experience a higher turnover of servers than Roma. Expenses related to breakage vary significantly from store to store. Servers are not charged but may be fired if excessive. Expenses related to cash register and alcohol inventory shortages vary significantly from store to store. Expenses related to customers leaving without paying their bills vary significantly from store to store. RCFL higher than industry. Time delay mechanism on safes is rarely activated during day since it is customary to pay local expenses from the cash on hand. Increase in the number of attempted robberies. Head office costs are allocated evenly to the individual outlets. RCFL experienced a 1.5% decrease in average annual sales per restaurant. Annual management bonuses are based on achieving the target average sales per seat and the target net profit margin; weakness is that there are no qualitative measures for performance evaluation.
10

CMA Canada

M3A5 RomaCorral Foods Ltd. (RCFL) Marker Assessment Notes and Guide

RCFL outlets tend to be quiet on Mondays. Other. Inconsistencies in customer service among restaurants. High turnover of the better servers. High debt load. Room for improvement in operating volume (as a percentage of practical maximum capacity). Recent reduction in sales per outlet. Opportunities Sales at coffee shop chains increased in the first half of 2010 and are predicted to have an average increase in sales of 2% per year. Some steak houses went out of business which would reduce the competition for Corral. Plante indicated that she expects the economy to stabilize soon. There is room in the market for specialty coffee shops similar to EFLs. Other. Increasing consumer spending in Canadian food service industry. Shifting demand from fine-dining restaurants to mid-level and fast-food restaurants. Expected decrease in some food prices (produce, beef, veal) over next nine years. Threats Restaurant revenues will drop by 2.5% in 2011. Sales at full-service restaurants are expected to show the largest decline (3%). Cost conscious consumers are expected to switch to limited-service restaurants. Sales at limited-service restaurants are only expected to decline 1.5%. Some steak houses went out of business. The coffee shop market is currently dominated by a few large chains. Approximately 60% of new restaurants service past their second year. Other.

High competition in all food service markets. High staff turnover in food service industry. Economic downturn. High price of wheat. Decreasing consumption of beef per capita in Canada.

CMA Canada

11

M3A5 RomaCorral Foods Ltd. (RCFL) Marker Assessment Notes and Guide

Application of Quantitative Tools Component 2.a)


Financial Assessment: The following are some points that may be made in discussing the current financial situation of the company (either in the SWOT analysis or in a separate financial assessment section or in the analysis of the issues). Ratio Analysis See Appendix 1: Liquidity is low (although not completely unexpected given that the majority of restaurant sales would be cash/credit card leaving the receivables lower than in a traditional business which impacts the current assets). Coverage appears to be adequate, below the banks benchmark of 2:1. Inventory turnover has been declining which is a concern in the restaurant industry where good-quality food is of importance. Accounts receivable turnover is low, staying steady at just over 3.32 days which is expected due to the cash nature of the business. Revenues are growing, and profitability ratios remain steady.

Benchmarks See Appendix 1: Food and beverage cost of sales, restaurant salaries, wages and benefits, facilities expenses, general and administrative expenses and operating expenses are all well in line with the industry benchmarks. Income before interest, depreciation and tax, and net margin are both well above the industry benchmarks. Prime costs are lower than the benchmark. Net income and revenue growth both exceed the benchmarks.

Overall, RCFL appears very efficient operationally as compared to industry benchmarks and is growing faster and more profitably than its peers. Net income shortfall calculation See Appendix 1 RCFL will need to overcome a $6,106K shortfall to meet its goal of $42,902K net income in 2012.

Systematic Approach for Issue Analysis Component 4.a)


Identification and Prioritization of Issues and Alternatives The identification and prioritization of the major issues and strategic alternatives (at the business and functional strategic level) are assessed in attribute 4a). For this case, the expectation to analyze three main alternatives would include the analysis of the first two main alternatives along with the outsourcing alternative. For this case, the most
CMA Canada 12

M3A5 RomaCorral Foods Ltd. (RCFL) Marker Assessment Notes and Guide

important issue is to develop a plan for increasing income and cash flows to meet the requirements of the parent, EFL. The following indicates alternatives and other important issues: 1. Strategic alternatives: a) Expand restaurant chain. i) Open 7 more Roma outlets ii) Open 5 more Corral outlets iii) Open 7 more Roma and 5 more Corral outlets b) Diversify by establishing a Roco Coffee Shop chain. [Note: These alternatives are not mutually exclusive and can be combined (e.g. RCFL can open more Roma outlets and establish a coffee shop chain.] 2. Major operational and implementation issues: a) Outsource bread products versus continue baking in-house and the related transfer pricing and performance evaluation issues. [Note: Some candidates will categorize this as a major strategic alternative. This is acceptable as long as the issue is analyzed in accordance with its importance to the outcomes for RCFL]. b) Financing issues (requirements and sources, bank constraints). [Note: Financing may be analyzed in the analyses of the individual alternatives or after the strategic recommendations are made.] 3. Other important issues/areas of concern requiring attention: a) Bairds relationship with a building contractor; potential conflict of interest situation. b) Shortages in alcohol inventory and cash; use of safes time delay mechanism . c) High percentage of customers leaving without paying; not charging servers for unpaid bills and breakage. d) Risk of bank deposit robberies (timing of bank deposits). e) Operational, human resource and reporting issues (e.g. inconsistent service, reporting of tips, bonus system, performance measures, training, turnover, excess capacity, head office allocation to profit centres). f) Risk management and environmental issues (e.g. increasing/decreasing food costs; shift in consumer spending; decrease in beef consumption). g) Marketing and promotion issues.

Systematic Approach for Issue Analysis Component 4.b)


ANALYSIS OF ALTERNATIVES See Appendices 2 to 5 for some examples of relevant quantitative and qualitative analyses of some of the alternatives and issues.

CMA Canada

13

M3A5 RomaCorral Foods Ltd. (RCFL) Marker Assessment Notes and Guide

Application of Quantitative Tools Component 2.b)


Quantitative Analysis The following are some relevant decision analysis concepts and tools that could be applied in the quantitative analyses of the strategic alternatives: 1. Cost and revenue analysis: Relevant revenues, costs, contribution margins, opportunity costs, cash flows, break even, and/or net income are appropriately calculated and interpreted for the alternatives or for the recommended strategy. Assumptions are clearly indicated and are reasonable. 2. After-tax net income for 2011: The incremental or total after-tax net income is calculated for the alternatives or for the recommended strategy and compared to the target (i.e. $41,863,800 for RCFL overall). The increase in head office costs is included in the calculation of the required incremental income for 2011 or in the calculation of total 2011 net income for each alternative or for the recommended strategy. 3. Capital budgeting / discounted cash flow analysis: Appropriate capital budgeting or discounted cash flow analysis methods (e.g. net present value, internal rate of return, capital rationing) are applied correctly in analyzing the alternatives. For example, the following are included in the analysis: i) appropriate operating cash inflows and outflows for each year, capital costs and other one-time cash flows (non-cash items and interest are not included); ii) consideration of the time value of money using the 10% after-tax rate over 20 years; iii) after-tax cash flows; and iv) calculation of CCA tax shields on capital cost using a reasonable CCA rate (e.g. 4% for buildings and 20% for furniture and equipment). 4. Uncertainty/sensitivity analysis: The effects of uncertainty are considered in the quantitative analyses (e.g. calculating expected annual sales per outlet for the Roco alternative using probabilities; calculating high, midpoint and/or low annual sales/net income/cash flows per Roco outlet). Assumptions are clearly indicated and are reasonable. Note that candidates quantitative analyses will be very different, given the different assumptions they will likely make in preparing them (e.g. assumptions regarding prices, sales volumes, etc.). Their assumptions should be clearly stated and generally consistent with the case information.

Application of Quantitative Tools Component 2.c)


Other quantitative tools are applied appropriately in the response, such as the following: 1. Financing required and available The financing required for the strategic alternatives [expand the number of restaurants (Roma, Corral, or both); open a

CMA Canada

14

M3A5 RomaCorral Foods Ltd. (RCFL) Marker Assessment Notes and Guide

chain of Roco coffee shops], dividends ($16M) and other financial needs (e.g. install security cameras at outlets), and the financing available [e.g. remortgage current properties (75% x current value current mortgage outstanding), mortgage of new properties (75% x building and land costs for new outlets), line of credit (50% of accounts receivable and inventory), proceeds from sale of bread-making equipment if recommend outsourcing ($1.3M), cash flows generated from future operations] are calculated and compared for each alternative and/or for the recommended strategy. 2. Financial forecast A financial forecast for one or more years that incorporates the expected effects of the major recommendations is prepared. This can be in the form of a pro forma income or cash flow statement, or a pro forma balance sheet. 3. Other quantitative tools and quantitative analysis of minor issues Quantitative analysis of minor issues (e.g. outsourcing of bread products, loss from breakages/shortages/unpaid customer bills, etc.) and any quantitative tools used in the response that are not assessed elsewhere are assessed as part of this attribute.

Qualitative Analysis and Strategy Formulation Component 1.b)


Under simulated Case Examination conditions, providing 3-4 significant pros and 3-4 significant cons for each major alternative would be considered balanced and would meet expectations. More extensive analysis might be above expectations, depending on the quality of the points. Providing 6 pros and 1 con for an alternative may have enough depth, but would not be balanced and could be evidence of bias. INTEGRATION The following are some guidelines for awarding a link: Situational Analysis Point Mission/Vision Goals Stakeholder Needs/Preferences

Description Consistent with the mission/vision? Meets goals? Stating if an alternative does or does not meet a specific stakeholders need or preference is sufficient for a link.

No. of Links Allowed* 1 to Mission/Vision 1 to Goals Maximum three links

CMA Canada

15

M3A5 RomaCorral Foods Ltd. (RCFL) Marker Assessment Notes and Guide

Situational Analysis Point Constraint

KSFs

Strengths

Weaknesses

Opportunities

Threats

Financial No link allowed Assessment * Using the same SWOT point in the analysis of multiple issues should be given credit for only one link, but will be considered when assessing the depth of the response. In Appendices 2 to 5, some of the relevant points that can be made in the analyses of the main alternatives are provided. An indication of possible links (integrative points) is provided.

Description Calculating the debt:equity and comparing it to the banks constraint of 2:1 is considered a link (maximum of one link). Using the 10% required return as a discount rate in a net present value calculation and clearly indicating whether or not the required rate of return has been achieved is also considered a link. In order to link to a KSF, it must be valid and considered in the analyses of the alternatives. Option/issue strengthens or uses a strength. As well, indicating as a con that an alternative will weaken or destroy a strength is a link. Not using a strength is not a link. Option/issue must: 1. address how the alternative/ action will solve the weakness, or 2. use the weakness for justification of not doing something, or 3. discuss how the alternative/option will worsen an existing weakness. Must indicate how alternative/option takes advantage of the opportunity. Not exploiting an opportunity is NOT a link. Must use the threat as a justification for not doing something or must indicate how the option/action would address a threat. Assessed in Component 2.

No. of Links Allowed* 1

No limit

No limit

No limit

No limit

CMA Canada

16

M3A5 RomaCorral Foods Ltd. (RCFL) Marker Assessment Notes and Guide

Recommendations and Conclusions Component 5.a)


For this case, support should include quantitative analysis that proves that the recommended actions would provide the following: 1. EFLs target of a 5% growth in after-tax net income over the next two years (i.e. $42,901,583 in fiscal 2012) will be met. 2. The banks constraint that the long-term debt (including the current portion) to equity ratio does not exceed 2 to 1 will be met. 3. RCFL will be able to acquire the financing required to implement the recommended strategy. 4. A 10% after-tax rate of return over 20 years will be achieved for the recommended capital investments. 5. Sufficient cash flows will be generated to enable an annual dividend payout of $2 per share (i.e. $16 million).

Qualitative Analysis and Strategy Formulation Component 1.c)


IMPLEMENTATION PLAN This subcomponent is addressed in detail in the Year 1 General Assessment Guide.

Qualitative Functional Concepts Component 3.a) and b)


Below are some examples of issues that could be addressed in the analysis of the alternatives or in the implementation plan. Note that the issues are sorted in the order in which the functional competencies appear in component 3 of the assessment guide and not in the order of importance for the case. Component 3.a): Strategic Management: 1. Analysis of the mission/vision and revisiting them in light of the recommended strategy. 2. Alignment of activities to goals/objectives. 3. Assessing the target customers/target market. 4. Value chain analysis. 5. Corporate social responsibility issues. 6. Strategic aspects of the analyses of the issues and alternatives (e.g. impact of alternatives on quality of product and/or services). 7. Recommendation of reasonable business and functional strategies. 8. Consideration of competitive business strategies (cost leadership, differentiation). 9. Consideration of value disciplines (operational excellence, customer intimacy, product leadership). 10. Matching organizational structure/design to strategy.

CMA Canada

17

M3A5 RomaCorral Foods Ltd. (RCFL) Marker Assessment Notes and Guide

11. Alignment of implementation plan to RCFLs available resources and success factors. 12. Change management issues (effectively communicating changes to staff to promote smooth implementation, corporate culture, EFL support for opening Roco, etc.). 13. The role of various functions on the successful implementation of the recommended strategies. Risk Management and Governance: 1. Enterprise risks and risks associated with the various strategic alternatives (e.g. economic considerations, pricing/revenue assessments, etc.). 2. External risks and environmental issues (effect of recession on EFL and Canadian market, shift in demand from fine food to mid-level and from full service to limited service, risk of steak houses going out of business (beef consumption decreasing), compliance with CRA rules regarding reporting of tips on T4s, etc.). 3. Internal control (Bairds relationship with a particular contractor, cash and alcohol inventory shortages, breakage, customers leaving without paying bills (higher percentage than for comparable restaurant chains), infrequent use of safe timedelay mechanism during the day, increase in attempted robberies of employees making bank deposits, etc.). Component 3.b): Performance Management: 1. Management of revenues and costs (managing costs for labour, marketing, inventory, equipment, breakage, unpaid bills, facilities, security systems, marketing (e.g. adapt promotion to changes in market and consumer spending, use of coupons, discounts, television advertising and other media), extend Sunday hours of operation, pricing, menu changes, etc.). 2. Operations management (inconsistent service quality, supply chain management, outsource bread products versus in-house production, head office administration, turnover of better servers, etc.). Performance Measurement: 1. Human resource issues related to incentives and compensation systems (e.g. remuneration, motivation, marketplace advantages/disadvantages, ethical issues related to compensation system, bonuses, tips, etc.). 2. Organizational performance measurement considerations (allocation of head office costs to profit centres, transfer price is causing conflict and goal incongruence (not aligned with performance measurement and incentive systems), performance measures, etc.).

CMA Canada

18

M3A5 RomaCorral Foods Ltd. (RCFL) Marker Assessment Notes and Guide

Financial Management: 1. Short- and long-term financing (e.g. determine sources of financing, consider/discuss bank line of credit and bank loans, consider investment in inventory, debt load). 2. Dividend payout. 3. Financial forecasting considerations. 4. Financial and operating risks. 5. Tax consequences of decisions (no discussion of tax implications is expected from candidates other than in the capital budgeting calculations). Financial Reporting: 1. IFRS/ASPE issues (loyalty points). 2. Other financial accounting issues.

Professionalism and Communication Component 6.a) and b)


Note that, because this is a time-constrained assignment, no penalties are to be assessed for infractions of the standard format specifications (e.g. font size, spacing, margins, etc.). Also note that the Securexam software automatically numbers the pages in particular, each Excel spreadsheet is automatically numbered as page 1. Therefore, markers should not comment on the page numbering in the feedback to candidates.

Feedback to Candidates
Using the standard comments provided in the document M3A5 RomaCorral Foods Ltd. (RCFL) Standard Comments, provide developmental feedback directly on the candidates response. After completing the Candidate Assessment Form and the marked candidates response, markers are reminded to proofread all feedback comments to ensure that they are grammatically correct and that any highlighting from the standard comments has been removed. Upload a PDF version of the Candidate Assessment Form and the candidates marked copy to the CMA Professional Programs website.

CMA Canada

19

M3A5 RomaCorral Foods Ltd. (RCFL) Marker Assessment Notes and Guide

Additional References
1. Business Report Guidelines, located in the Reference Material section of the Professional Programs site. 2. Discussion Board. 3. Steps for Approaching Business Strategy, located in the Reference Material section of the Professional Programs site. 4. Year 1 General Assessment Guide, Markers Version, located on the Module 1 Marker Home Page, under Marker Material. SAMPLE ANALYSES The following appendices provide sample analyses to assist the markers in recognizing valid points and calculations made by candidates.

CMA Canada

20

M3A5 RomaCorral Foods Ltd. (RCFL) Marker Assessment Notes and Guide

Appendix 1: Financial Assessment Figure 1: Ratio and Performance Analysis


Ratios Current ratio (liquidity) Quick ratio (liquidity) Formula 2010 IFRS 2009 IFRS 2009 C-GAAP 2008 C-GAAP 2007 C-GAAP

current assets / $21,988/ $19,008/ $19,008/ $14,954/ $11,413/ current liabilities $34,324 = 0.64 $48,883 = 0.39 $48,883 = 0.39 $45,455 = 0.33 $36,389 = 0.31 (cash + accounts receivable) / current liabilities OR (current assets inventory) / current liabilities ($3,027+ $3,095)/ $34,324 = $6,121/ $34,324 = 0.18 OR ($21,988$14,487)/ $34,324 = $7,501/ $34,324 = 0.22 ($274,579+ 8,562)/ $175,300 = $283,141/ $175,300 = 1.62 $318,085/ $175,300 = 1.81 $318,085/ $493,385 = 0.64 ($2,692+ $2,778)/ $48,883 = $5,470/ $48,883 = 0.11 OR ($19,008$12,479)/ $48,883 = $6,529/ $48,883 = 0.13 ($258,616+ 6,904)/ $159,587 = $265,520/ $159,587 = 1.66 $320,211/ $159,587 = 2.01 $320,211/ $479,798 = 0.67 ($2,692+ $2,778)/ $48,883 = $5,470/ $48,883 = 0.11 OR ($19,008$12,479)/ $48,883 = $6,529/ $48,883 = 0.13 ($258,616+ 6,904)/ $142,797 = $265,520/ $142,797 = 1.86 $309,011/ $142,797 = 2.16 $309,011/ $451,808 = 0.68 ($2,415+ $2,051)/ $45,455 = $4,466/ $45,455 = 0.10 OR ($14,954$9,682)/ $45,455 = $5,272/ $45,455 = 0.12 ($213,845+ 6,045)/ $120,641 = $219,890/ $120,641 = 1.82 $260,000/ $120,641 = 2.16 $260,000/ $380,641 = 0.68 ($1,663+ $1,543)/ $36,389 = $3,206/ $36,389 = 0.09 OR ($11,413$7,533)/ $36,389 = $3,880/ $36,389 = 0.11 ($169,678+ 4,711)/ $102,949 = $174,389/ $102,949 = 1.69 $206,567/ $102,949 = 2.01 $206,567/ $309,516 = 0.67

LT debt-toequity (coverage)

LT debt / equity

Total debt-toequity (coverage) Total debt-tototal assets (coverage) Times Interest Earned (coverage)

total debt / equity

total debt / total assets Earnings Before Interest and Taxes / Interest

($64,855+ ($59,917+ ($56,927+ ($42,820+ ($30,095+ 17,129)/ 14,641)/ 17,631)/ 14,774)/ 11,424)/ $17,129 $14,641 $17,631 $14,774 $11,424 = $81,984/ = $74,558/ = $74,558/ = $57,594/ = $41,519/ $17,129 = 4.79 $14,641 = 5.09 $17,631 = 4.23 $14,774 = 3.90 $11,424 = 3.63 $103,475/ $14,487 = 7.14 times (51.12 days) $93,825/ $12,479 = 7.52 times (48.54 days) $93,825/ $12,479 = 7.52 times (48.54 days) $75,640/ $9,682 = 7.81 times (46.73 days) $57,948/ $7,533 = 7.69 times (47.46 days)

Inventory turnover (activity) Inventory turnover (activity) Asset turnover (activity)

Food and beverage cost of sales / inventory cost of sales / inventory

$207,424/ $188,457/ $188,457/ $152,866/ $118,237/ $14,487 $12,479 $12,479 $9,682 $7,533 = 14.32 times = 15.10 times = 15.10 times = 15.79 times = 15.70 times (25.49 days) (24.17 days) (24.17 days) (23.12 days) (23.25 days) $340,095/ $493,385 = 0.69 $308,675/ $479,798 = 0.64 $308,675/ $451,808 = 0.68 $250,067/ $380,641 = 0.66 $192,833/ $309,516 = 0.62

total revenue / total assets*

CMA Canada

21

M3A5 RomaCorral Foods Ltd. (RCFL) Marker Assessment Notes and Guide

Ratios Receivables turnover (activity) Net margin or return on sales (profitability) EPS (profitability)

Formula total revenue / acct. receivable*

2010 IFRS

2009 IFRS

2009 C-GAAP 2008 C-GAAP 2007 C-GAAP

$340,095/ $308,675/ $308,675/ $250,067/ $192,833/ $3,095 $2,778 $2,778 $2,051 $1,543 = 109.89 times = 111.11 times = 111.11 times = 121.92 times = 124.97 times (3.32 days) (3.29 days) (3.29 days) (2.99 days) (2.92 days) $38,913/ $340,095 = 11.44% $35,946/ $308,675 = 11.65% ($35,946$1,500)/7,000 = $34,446/ 7,000 = $4.92 $120,218/ $308,675 = 38.95% $35,946/ $159,587 = 22.52% $35,946/ $479,798 = 7.49% $34,156/ $308,675 = 11.07% ($34,156$1,500)/7,000 = $32,656/ 7,000 = $4.67 $120,218/ $308,675 = 38.95% $34,156/ $142,797 = 23.92% $34,156/ $451,808 = 7.56% ($34,156$25,692)/ $25,692 = $8,464/ $25,692 = 32.94% ($308,675$250,067)/ $250,067 = $58,608/ $250,067 = 23.44% $25,692/ $250,067 = 10.27% ($25,692$1,000)/7,000 = $24,692/ 7,000 = $3.53 $97,201/ $250,067 = 38.87% $25,692/ $120,641 = 21.30% $25,692/ $380,641 = 6.75% ($25,692$18,057)/ $18,057 = $7,635/ $18,057 = 42.28% ($250,067$192,833)/ $192,833 = $57,234/ $192,833 = 29.68% $18,057/ $192,833 = 9.36% ($18,057$1,000)/7,000 = $17,057/ 7,000 = $2.44 $74,596/ $192,833 = 38.68% $18,057/ $102,949 = 17.54% $18,057/ $309,516 = 5.83%

net income / sales

net income ($38,913preferred $2,000)/7,000 dividends / = $36,913/ common shares 7,000 = $5.27 contribution margin / sales net income / equity net income / total assets (net income current year net income prior year) / (net income prior year) (revenue current year - revenue prior year) / (revenue prior year) $132,671/ $340,095 = 39.00% $38,913/ $175,300 = 22.20% $38,913/ $493,385 = 7.89% ($38,913$35,946)/ $35,946 = $2,967/ $35,946 = 8.25% ($340,095$308,675)/ $308,675 = $31,420/ $308,675 = 10.18%

Contribution margin % (profitability) Return on equity (ROE) (profitability) Return on assets (ROA) (profitability) Net income growth

Revenue growth

* Can also be calculated using average of beginning and ending balances.

Figure 2: Benchmarks
Formula Food and beverage % of sales Food and beverage cost of sales / sales 2010 IFRS $103,475/ $340,095 = 30.43% $95,390/ $340,095 = 28.05% $13,618/ $340,095 = 4.00% 2009 IFRS $83,825/ $308,675 = 27.16% $87,098/ $308,675 = 28.22% $12,107/ $308,675 = 3.92% 2009 C-GAAP $83,825/ $308,675 = 27.16% $87,098/ $308,675 = 28.22% $12,107/ $308,675 = 3.92% 2008 C-GAAP $75,640/ $250,067 = 30.25% $70,935/ $250,067 = 28.37% $10,233/ $250,067 = 4.09% 2007 C-GAAP $57,948/ $192,833 = 30.05% $55,279/ $192,833 = 28.67% $8,314/ $192,833 = 4.31% Benchmark 25.00%40.00% 25.00%40.00%

Restaurant Restaurant salaries, wages salaries, wages and benefits / and benefits sales % of sales Facilities % of sales Facilities (excl. amort.) / sales

4.00%14.00%

CMA Canada

22

M3A5 RomaCorral Foods Ltd. (RCFL) Marker Assessment Notes and Guide

General and administration % of sales Operating expenses % of sales

Formula General and admin. / sales

2010 IFRS $11,115/ $340,095 = 3.27%

2009 IFRS $10,356/ $308,675 = 3.35% ($60,30127,456)/ $308,675 = $32,845/ $308,675 = 10.64% ($59,917 +$14,641 +$7,622 +$9,565)/ $308,675 = $91,745/ $308,675 = 29.72% ($93,825 +$87,098)/ $308,675 = $180,923/ $308,675 = 58.61% $35,946/ $308,675 = 11.65%

2009 C-GAAP $10,356/ $308,675 = 3.35%

2008 C-GAAP $9,407/ $250,067 = 3.76%

2007 C-GAAP $8,259/ $192,833 = 4.28%

Benchmark 1.00%5.00% 7.00%14.00%

Total expenses ($67,816- head office $29,071)/ expenses / $340,095 = $38,745/ sales $340,095 = 11.39% Income before (Income before ($64,855 tax + interest + +$17,129 interest, depreciation) / +$8,808 depreciation +$10,735)/ sales and tax $340,095 = % of sales $101,527/ $340,095 = 29.85% (Food and ($103,475 Prime costs beverage cost +$95,390)/ % of sales of sales + $340,095 = restaurant $198,864/ salaries, wages $340,095 and benefits) / = 58.47% sales net income / $38,913/ Net margin or $340,095 sales return on sales = 11.44% (net income ($38,913Net income current year $35,946)/ growth net income $35,946 prior year) / = $2,967/ (net income $35,946 = 8.25% prior year) (revenue ($340,095Revenue current year - $308,675)/ growth revenue $308,675 prior year) / = $31,420/ (revenue $308,675 = 10.18% prior year)

($56,927 +$17,631 +$7,622 +$9,565)/ $308,675 = $91,745/ $308,675 = 29.72% ($93,825 +$87,098)/ $308,675 = $180,923/ $308,675 = 58.61%

($42,820 +$14,774 +$6,143 +$8,053)/ $250,067 = $71,790/ $250,067 = 28.71% ($75,640 +$70,935)/ $250,067 = $146,575/ $250,067 = 58.61%

($30,095 +$11,424 +$4,639 +$6,534)/ $192,833 = $52,692/ $192,833 = 27.33% ($57,948 +$55,279)/ $192,833 = $113,227/ $192,833 = 58.72% $18,057/ $192,833 = 9.36%

(1.50%)19.00%

65.00%

$34,156/ $25,692/ $308,675 $250,067 = 11.07% = 10.27% ($34,156($25,692$25,692)/ $18,057)/ $25,692 $18,057 = $8,464/ = $7,635/ $25,692 $18,057 = 32.94% = 42.28% ($308,675- ($250,067$250,067)/ $192,833)/ $250,067 $192,833 = $58,608/$2 = $57,234/ 50,067 $192,833 = 23.44% = 29.68%

3.20-4.50%

20.00%

(3.00%)

CMA Canada

23

M3A5 RomaCorral Foods Ltd. (RCFL) Marker Assessment Notes and Guide

Figure 3: Net Income Shortfall for 2012


Net Income for 2011 No Expansion: 2010 income before taxes Increase in head office costs1 2011 income before taxes Income taxes (40%) 2011 net income 2010 net income Incremental net income (2011 2010) Net Income for 2012 No Expansion: 2010 income before taxes Increase in head office costs1 2012 income before taxes Income taxes (40%) 2012 net income 2010 net income Incremental net income (2012 2010) Target 2012 net income Shortage in 2012 net income (need from expansion) Target 2012 net income 2010 net income Formula/Source $31,200-$29,071 Roma $656 21 635 254 $381 394 $(13) Corral $799 21 778 311 $467 479 $(12) Total $64,855 2,129 65,726 26,290 $39,436 38,913 $523

$32,600-$29,071

$656 35 621 248 $373 394 $(21)

$799 35 764 306 $458 479 $(21)

A1

$64,855 3,529 61,326 24,530 $36,796 38,913 $(2,117) $42,902

A2 $42,902-$36,796 Case Case A3 A2 A4

$6,106 $42,902 $38,913

Assumes continued equal distribution of head office costs among 100 outlets.

CMA Canada

24

M3A5 RomaCorral Foods Ltd. (RCFL) Marker Assessment Notes and Guide

Appendix 2: Analysis of Alternative to Expand Outlets/Roma Only/ Corral Only Quantitative Analysis Figure 1: Net Present Value Analysis
Incremental Cash Flow from Operations (One Outlet): Net income (assume same as 2010) Add back tax Add back depreciation building Add back depreciation F&E Add back HO allocation Less tax @ 40% Cash flows (not including increase in HO costs*) PV factor (10%, 20 years) Present value of cash from operations 1 outlet Roma initial promotion ($50K x (1-0.4) x 0.909) CCA tax shield (Note 1) Less investment for capital assets Net present value 1 outlet NPV Total New Outlets: NPV one outlet Number of outlets Total NPV B5*B7; B6*B8 Formula/ Source Roma Only $ 394 262 81 98 291 B1 1,126 450 676 8.51356 $ 5,755 (27) 746 (6,050) $ 424 Corral Only $ 479 320 113 129 291 B2 1,332 533 799 8.51356 $ 6,802 952 (7,150) $ 604 Both

B3&B4

B5 B7 B9

$ 424 7

B6 B8

$ 604 5 $3,020 $5,988

$2,968 B10

*Increase in head office costs will be incurred whether or not there is any expansion.

CMA Canada

25

M3A5 RomaCorral Foods Ltd. (RCFL) Marker Assessment Notes and Guide

Note 1: CCA Tax Shield2 per Outlet: Building (4%) Furniture and equipment (20%) Total CCA tax shield per outlet

$4913 2555 $746

$5454 4076 $952

Figure 2: Financing Required


Financing Required (One Outlet): Land Building Furniture and equipment Total Sunk cost Cash investment required for capital assets Total Financing Required: One outlet Number of outlets Total financing required Financing available: Land Building Base for mortgage 75% mortgage available from bank Cash investment required for one outlet 75% mortgage available from bank Required to be financed from other sources Number of outlets Total required to be financed from other sources
2 3

Formula/ Source

Roma Only $ 600 4,500 1,000 6,100 (50) B3 $6,050

Corral Only $ 600 5,000 1,600 7,200 (50) B4 $7,150

Both

B3&B4 B7&B8

$ 6,050 7 $42,350

$ 7,150 5 $35,750

$78,100

B11

$ 600 4,500 $5,100 $3,825 B12

$ 600 5,000 $5,600 $4,200

B3&B4 B11&B12 B13 B15 B13*B15; B14*B16

$ 6,050 (3,825) 2,225 B14 7 B16 $15,575

$ 7,150 (4,200) 2,950 5 $14,750 $30,325

[(CdT)/(d+k)]*(2+k)/[2*(1+k)] [($4,500*0.04*0.40)/(0.1+0.04)]*(2+0.1)/[2*(1+0.1)] 4 [($5,000*0.04*0.40)/(0.1+0.04)]*(2+0.1)/[2*(1+0.1)] 5 [($1,000*0.2*0.40)/(0.1+0.2)]*(2+0.1)/[2*(1+0.1)] 6 [($1,600*0.2*0.40)/(0.1+0.2)]*(2+0.1)/[2*(1+0.1)]

CMA Canada

26

M3A5 RomaCorral Foods Ltd. (RCFL) Marker Assessment Notes and Guide

Total financing available from remortgaging (Note 1) Total financing available from line of credit (Note 2) Surplus (shortage)

B17 f

$20,609 6,691 $11,725

$20,609 6,691 $12,550

$20,609 6,691 $(3,025)

Note 1: Financing Available from Remortgaging Existing Outlets: Current value of land and buildings Max total mortgages $405,000 x 75% Mortgage owing end of 2010 $274,579+$8,562 Max available from bank from remortgaging Note 2: Financing Available from Line of Credit: Accounts Receivable Inventory Total a+b Max available from bank @ 50% c*50% Less: current balance Financing available from line of credit d+e

B17 a b c d e f

$405,000 303,750 283,141 $ 20,609 $ 3,095 14,487 17,582 $ 8,791 $(2,100) $ 6,691

CMA Canada

27

M3A5 RomaCorral Foods Ltd. (RCFL) Marker Assessment Notes and Guide

Figure 3: Impact on Net Income


Net Income for 2011: Cash flow from operations before tax 1 outlet Depreciation building (Note 1) Depreciation F&E (Note 1) Income before tax and HO allocation Number of outlets Total income before taxes from new outlets Income taxes (40%) Net income from new outlets 2012 Target Net Income Shortage Formula/ Source B1&B2 c&d j&k Roma Only $1,126 112.5 100 913.5 7 B18 B21 6,395 B19 2,558 $3,837 B22 Corral Only $1,332 125 160 1,047 5 5,235 B20 2,094 $3,141 B23 $11,630 4,652 $ 6,978 Both

Surplus (shortage) Alternative Calculation: Total income before taxes from new outlets Incremental head office costs Incremental income before taxes Income taxes (40%) Incremental net income 2010 net income Estimated net income for 2012 Target 2012 net income

A3 B21-A3; B22-A3; B23-A3

$ 6,106

$ 6,106

$6,106

$(2,269)

$(2,965)

$ 872

B18 A1

$ 6,395 B19 3,529 2,866 1,146 1,720 B25 38,913

$ 5,235 B20 3,529 1,706 682 1,024 B26 38,913

$11,630 3,529 8,101 3,240 4,861 38,913

B24 A4 B24+A4; B25+A4; B26+A4 A2 B27-A2; B28-A2; B29-A2

B27

$40,633 B28 42,902

$39,937 B29 42,902

$43,774 42,902

Surplus (shortage)

$(2,269)

$(2,965)

872

CMA Canada

28

M3A5 RomaCorral Foods Ltd. (RCFL) Marker Assessment Notes and Guide

Note 1 Depreciation per New Outlet: Building Useful life (years) Amortization per year per outlet straight line ab Number of outlets Total incremental c*e; d*e amortization building Furniture and equipment Useful life (years) Amortization per year per outlet straight line Number of outlets Total incremental amortization building

a b c e f h i

$4,500 40 112.5 7 $787.5 $1,000 10 100 7 $700.0

a b d e g h i k l n

$5,000 40 125 5 $625.0 $1,600 10 160 5 $800.0

hi

j l m

j*l; k*l

CMA Canada

29

M3A5 RomaCorral Foods Ltd. (RCFL) Marker Assessment Notes and Guide

Figure 4: Impact on Debt:Equity


Financing Required: Cash investment required for capital assets per outlet Number of outlets Total financing required Financing available: 75% mortgage available from bank Number of outlets Mortgage financing Required to be financed from other sources Current equity as at June 30, 2010 Current long-term debt as at June 30, 2010 (includes current portion) Additional debt New long-term debt New debt:equity Formula/ Source B3 B7&B8 B3*B7; B4*B8 B11&B12 B7&B8 B11*B7; B12*B8 B30-B32; B31-B33 Roma $ 6,050 7 B4 Corral $ 7,150 5 $35,750 $78,100 $ 4,200 5 $21,000 $14,750 $30,325 $175,300 $283,141 $ 14,750 $297,891 1.70:1 Total

B30

$42,350 B31 $ 3,825 7

B32 B34 B36 B37

$26,775 B33 $15,575 B35 $175,300 B36 $283,141 B37 $ 15,575 $298,716 B39 1.70:1

B34&B35 B34+B37; B35+B37 B38B36; B39B36

B38

CMA Canada

30

M3A5 RomaCorral Foods Ltd. (RCFL) Marker Assessment Notes and Guide

Qualitative Analysis
Pros This would let RCFL exercise its options on 12 parcels of land in suitable locations (S). This would let RCFL spread its growing head office overhead over more locations (W). Unsuccessful steak houses have closed, reducing competition in the market place for Corral outlets (O for Corral). Has a positive net present value over the next twenty years (see Appendix 2, Figure 1) the expected NPV is $5,988K. Additional net profit exceeds net income goal by $872K (see Appendix 2, Figure 3) (G). 1.70:1 D:E would not exceed requirement from the bank (Appendix 2, Figure 4) (C). RCFL has strength in experience and expertise in management and operation of Roma and Corral outlets (S). Expanding outlets would build upon a recognized strength for a good reputation for quality food at reasonable prices (S/KSF/M). Expansion could also take advantage of increasing consumer away from finedining (O). Cons High wheat prices increase the cost of pasta, which squeezes margins at Roma outlets (T for Roma). Sales at full-service restaurants are expected to show the largest decline (3%) which would impact success (T). There is a continuing threat of high competition in all food service markets, which is exacerbated by the overall decrease in sales at Canadian restaurants in first half of 2010 and forecast decline in sales at full-service restaurants (T). Expanding Corral outlets would conflict with a threat that some steak houses in Canada went out of business in 2010 (T). Seven locations proposed for Roma outlets would not be suitable for steakhouses, indicating that Roma outlets would need to be established independently and could have significant excess capacity in baking. Beef consumption is declining overall, suggesting that there might be continuing long-term pressure on Corral outlets for diners (T). RCFL would not be able to immediately undertake a full expansion (12 stores), owing to financing constraints (see Appendix 2, Figure 2).

M: Mission C: Constraint W: Weakness A1: Alternative 1 SP: Stakeholders preference

V: Vision K: Key success factor O: Opportunity A2: Alternative 2

G: Goals S: Strength T: Threat TG: Target

CMA Canada

31

M3A5 RomaCorral Foods Ltd. (RCFL) Marker Assessment Notes and Guide

Appendix 3: Analysis of Alternative to Expand Roco Coffee Shops Quantitative Analysis Figure 1: Probability Analysis
Expected Sales per Outlet Analysis (000s): Range Mid-point $800 - $950 $875 $950 - $1,050 $1,000 $1,050 - $1,200 $1,125 Expected annual sales per Roco outlet Probability 30% 50% 20% Expected Sales $263 $500 $225 $988

Figure 2: Net Present Value Analysis


Approach 1 $1 Million in % of Annual Sales Sales $ 1,000 430 296 20 75 26 50 897 103 41 $ 62 8.51356 $ 528 30 $ 15,840 $(10,000) $ 2,909 $ 8,749 43.0% 29.6% Approach 2 $988K in Expected Annual Sales $ 988 425 292 20 75 26 50 888 100 40 $ 60 8.51356 $ 511 30 $ 15,330 $(10,000) $ 2,909 $ 8,239

Net Present Value Analysis: Sales Direct materials Salaries, wages and benefits Local advertising and promotion Facilities (excl. amortization) Amortization General and administration Head office costs Before-tax cash flows from operations Income taxes (40%) Annual cash from operations/shop Present value factor (10%, 20 yrs) Present value Number of outlets in a year Total present value cash from operations Total investment in 2011 (Note 1) Total tax shield on investment (Note 1) Net present value opening 30 outlets in 2011

Formula/ Source

C1

C2

C3 C5 C3*C6; C4*C6 e f C7+e+f; C8+e+f C7

C4 C6 C8

CMA Canada

32

M3A5 RomaCorral Foods Ltd. (RCFL) Marker Assessment Notes and Guide

Tax Shield/ Note 1 Investment Analysis Investment Savings After Tax 7 Investment in F&E per outlet a $ 250 $ 64 $ 186 8 Investment in F&E for 30 outlets a*C6 b $ 7,500 $1,909 $5,591 9 Investment in HO systems set-up c 2,000 800* 1,200 10 Initial promotion and advertising d 500 200 300 Total investment in 2011 b+c+d e $10,000 f $2,909 $7,091 *Assumes HO systems set-up and initial promo are expensed in 2011

Figure 3: Financing Required


Financing Required: Furniture and equipment per store Total for 30 stores Investment in HO systems set-up Initial promotion and advertising Total Financing Required: Total financing available from remortgaging Surplus (shortage)* Formula/ Source 30 Roco Stores $ 250 7,500 2,000 500 C9 $10,000 $20,609 $10,609

B17

* Assumes line of credit is not used as remortgaging is sufficient to cover the financing required and the mortgage rate is less expensive thereby making it the better option.

7 8

[($250*0.2*0.40)/(0.1+0.2)]*(2+0.1)/[2*(1+0.1)] [($7,500*0.2*0.40)/(0.1+0.2)]*(2+0.1)/[2*(1+0.1)] 9 $2,000*40% 10 $500*40%

CMA Canada

33

M3A5 RomaCorral Foods Ltd. (RCFL) Marker Assessment Notes and Guide

Figure 4: Impact on Net Income


Net Income for 2012: Approach 1 $1 Million in Annual Sales Open 30 outlets in 2011 Open 30 outlets in and no more in 2012 2011 and 30 in 2012 C9 $ 47 C9 $ 47 C10 30 C11 60 C9*C10; C9*C11 A3 C12-A3; C13-A3 C12 1,410 6,106 $(4,696) C13 2,820 6,106 $(3,286)

Net income per outlet Number of outlets Total net income from new Roco outlets Compare to required incremental income target Surplus (shortage)

Figure 5: Impact on Debt:Equity


Financing Required: Total financing required Financing available: Total financing available from remortgaging Surplus (shortage) Current equity as at June 30, 2010 Current long-term debt as at June 30, 2010 (includes current portion) Additional debt New long-term debt New debt:equity Formula/ Source C9 Roco 2011 $ 10,000

B17 B17-C9 B36 B37 C9 B37+C9 C10B36

$ 20,609 $ 10,609 $175,300 $283,141 $ 10,000 $293,141 1.67:1

C10

CMA Canada

34

M3A5 RomaCorral Foods Ltd. (RCFL) Marker Assessment Notes and Guide

Qualitative Analysis
Pros It is consistent with Brownes suggestion (KSP). EFL would be willing to provide staff support to help RCFL set up a coffee shop chain and establish the necessary training and support systems (S). Singhs research shows that there is room for specialty coffee shops of a style similar to that of EFLs European chain (O). Would take advantage of an opportunity given that sales at coffee shop chains increased in the first half of 2009 and are predicted to remain relatively strong (2% forecast growth per year over the next two years) (O). Would be able to take advantage of existing strength of supply chain that delivers good-quality food (S). The outlets provide a positive NPV over a 20-year horizon and are almost immediately cash-flow positive. 1.67:1 D:E would not exceed the D:E requirement from the bank (Appendix 3, Figure 3) (C). Cons The Canadian coffee shop market is currently dominated by a few large chains (T). No experience running coffee shops. 30% chance targets will not be met with this strategy alone. Unlike Roma and Corral restaurants, RCFL does not have an established brand in the Canadian market for coffee. There will be a challenge arising from the threat of high turnover in the food service industry (W). There is a threat of high competition in food service markets, particularly the established coffee chains (T). The target net income cannot be met by opening Roco outlets only. Some more Roma or Corral outlets must also be opened (G).

CMA Canada

35

M3A5 RomaCorral Foods Ltd. (RCFL) Marker Assessment Notes and Guide

Appendix 4: Outsourcing
Outsourcing Bread Products (60% of Market Price) Current Annual Cost per Outlet: Direct materials Direct labour Variable overhead Formula/ Source

Roma Only D1 $ 8,000 D2 9,000 D3 3,000 D7 D9 D11 20,000

Corral D4 $ 6,000 D5 6,750 D6 2,250 D8 15,000 28 $420,000

Total

D1+D2+D3; D4+D5+D6 No. of outlets Total cost D7*D9; D8*D10

72 D10 $1,440,000 D12

$1,860,000

If outsourced: Market price No. of outlets Total cost

D13*D9; D14*D10 D15-D11; D16*D12

D13 D9 D15

30,000 D14 72 D10 $2,160,000 D16

$ 22,500 28 $630,000

$2,790,000

Incremental annual cost Sale of breadmaking equipment

$720,000

$210,000

$930,000

$1,300,000

In the long term, it is less expensive to bake bread products internally. Because the divisions are treated as profit centres, the transfer price should be negotiated. Each division is required to meet a target sales per seat and a target profit margin. Since Roma outlets have excess baking capacity, any sales price would increase the total sales of a Roma outlet and the total profits of RCFL overall. However, receiving a price that reflects less than the regular profit margin will decrease Roma's total profit margin, which is a performance measure. The current transfer pricing policy is unfairly favouring the Corral outlets (increases their profit margin). The Corral outlets should be willing to pay any price to Roma that is less than the market price.

CMA Canada

36

M3A5 RomaCorral Foods Ltd. (RCFL) Marker Assessment Notes and Guide

Appendix 5: IFRS/ASPE Considerations


Loyalty Points New IFRS Issue for 2010 Loyalty Points To record the provision for loyalty points: The sales must be reduced by $1 million and the liability recorded. Dr. Sales Cr. Loyalty points provision Taxes will also change as follows: Dr. Deferred taxes Cr. Income tax expense 400 400 1,000 1,000

Appendix 6: Dividend Considerations


Candidates should also consider the payment of the dividend in their recommended strategy. A basic calculation showing the cash flow/income generated and comparing it to the $16M dividend required is sufficient. If pro formas are prepared, this dividend payment may/should also be reflected here for reference.

CMA Canada

37