Financial Analysis, Forecasting, and Modeling - Case Study Example

Executive Summary

In the past three decades, the entry of the social media and the internet has reduced the overall returns of Cengage learning. Research indicates that students understand the content more easily when it’s acted or in a practical way. Therefore, plays have become a critical method of teaching the student. In order to tap on this opportunity, Cengage will sponsor the plays and sell them to institutions and individual students rather than just selling books directly or through electronic means. Through the use of the net present value, this report was able to conclude that the project is viable and by the end of 6 years, the company will have made profit. In order to achieve this objective, the company will expand its operations to different markets. On the other hand, the company has to use the online platform in order to reach the clients.

Introduction

With the increasing levels of globalization, the competition level in the local and international market has increased tremendously. The reason is that multinational firms have been able to diversify their operations to different markets across the world. This has enabled them to accumulate huge amounts of resources which they use to create a barrier of entry for other interested investors. Furthermore, they have used their rich resource base to position their products strategically in the market, attract the loyalty of the customers, and segment the market. This has made it very hard for other companies to expand their market base and increase their profit margin. However, all strategies by the business should be geared towards increasing stakeholder’s wealth. The financial management goal of maximizing the wealth of the shareholder can be achieved through increasing the dividends paid or causing the market value to increase. The changes in the global market mean that shareholders have various options to select from in regards to investing their money. On the other hand, in order for a business to retain its competitive advantage in the market, it requires resources from shareholders which will support the expansion program and sustain the operations of the firm in the market. Over the past two decades, the printing industry has recorded a dip in returns due to the entry of the modern technology, an aspect that has reduced the use of paperwork. For instance, the entry of computers, mobile phones, and social media has an impact on the overall sales of the company. Therefore, there is need to analyze ways in which the company can redeem itself in order to remain relevant despite stiff competition from new entrants.

Project Description

Cengage Learning is interested in developing a new product line with the aim of diversifying its source of income. This is after the company continues to struggle with debts after an increased level of competition from other international companies. Furthermore, the reduced reading culture especially among the young people has affected the overall returns by the company. The company will sponsor the acting of its published books and sell the recordings in form of CDs and other portable devices. This will play a significant role in improving the position of the business in the global market. Furthermore, the company will develop the new idea in a way that it can send the videos to clients through emails, or download in its websites at a fee. In developing the new product line, investment appraisal which will use a series of techniques will be required in order to understand the benefits to be accrued from the project. Furthermore, the appraisal will look at the possible outcomes of the project and the risks and uncertainties that might face the project. This will offer the decision makers with an ideal opportunity to look at the best solutions to avert any risks that might affect the success of the project. On the other hand, the company will use an agent to distribute the products in the market. These are logistical companies that have specialized in distribution of the products in the market. However, a contract between the two parties will have to be signed. The reason is that with the current competition levels, distributors can be manipulated by the competitors to create an artificial demand, an aspect that will force the clients to shift their attention towards the competitors’ products.

Use of the Online Platform

Cengage Learning should aim at increasing its presence in the online platform. The main market segment for the company is made of the young generation. These are people who mainly use the online platform to get information regarding the products and services being offered in the market. Therefore, shifting towards the use of the online platform will play a significant role in reducing the overall costs of operation. The reason is that with the increasing levels of competition in the global market, many advertising platforms have increased the fees charged to companies that are willing to advertise on their platforms. However, the entry of social media and the internet offers the company with an opportunity to reach new customers who are located in different parts of the world. Furthermore, the new promotion strategy will enable the company to conduct an in-depth research regarding the tastes and preferences of the target market. Initially, research has been taking a large amount of the company’s overall return (Shim & Siegel, 2008). Therefore, the move will play a significant role in lowering the operational costs of the business. Moreover, customer relationship management has become an important concept towards the success of any business in the market. Therefore, the use of social media will offer the firm with an opportunity to communicate directly with its customers. This will be c critical in addressing any grievances that might be affecting the consumer behavior of the target market. The following calculations represent the net present value of investing in the project;

Year

Cash flow ($)

0

2,400,000

1

800,000

2

1,200,000

3

700,000

4

400,000

5

200,000

6

10,000

The firm’s cost of capital will be 9%.

Year

Cash flow

Discounted Flow at 9%

PV

0

24000000

1.000

2,400,0000

1

800,0000

0.917

733,6000

2

1,200,0000

0.842

1,010,4000

3

700,0000

0.772

540,04000

4

400,0000

0.708

283,2000

5

200,0000

0.650

130,0000

6

100,0000

0.530

53,0000

Net Present Value

+350,6000

The present value of cash inflows surpasses the present value of the outflows by $350,760. This means that the project will earn a discounted cash flow of 9%, i.e. it will earn a surplus of $350,600 after paying the overall costs of financing. This indicates that the project is viable and the business should go ahead and invest in it because it will have major benefits to the company and the shareholders at large. Therefore, the results obtained through calculating the net present value are significant in enabling the managers of the new product line to make well informed decisions that are geared towards achieving the set objectives. With the current figures, they will be in a better position to avoid any risks that might affect the feasibility of the project.

Assumptions

• It is assumed that the amount generated from the project are reinvested immediately in order to generate more money that is equal to the discount rate that is applied in the analysis of the present value
• It is assumed that both the inflow and outflow of cash rather than initial investment happens at the end of each stipulated period
• It is assumed that all cash flows that are related to the project are known with absolute certainty
• The method assumes a perfect capital market

Critics of the Net Present Value Method

• Those who oppose this method argue that it fails to acknowledge that it is almost impossible for the business to spend some of its returns in running other operations of the business. Therefore, the assumptions that all money is reinvested are vague and cannot stand out in the current economic conditions. On the contrary, only a fraction of the money is reinvested back in the business. The reason is that the market has become dynamic with new challenges arising each day.
• The net present value is hard to estimate accurately because it does not take into account the opportunity cost, thereby, failing to give a full picture of the investment’s gains or losses. As a result, other estimation methods such as the internal rates of returns are needed in order to determine the feasibility of the project. This is important in ensuring that the decisions made are based on facts rather than assumptions.
• The net present value ignores the value and impact of the real options. For instance, in a span of 6 years, new and more effective technologies could have arisen. The company could be forced to invest in this technology in order to remain relevant. However, this method does not offer an opportunity for such adjustments. Furthermore, the investment will not have the same level of risks through the timeline given.

Expanding to new markets

Globalization has resulted to the liberalization of markets, improved flow of information across borders, and the integration of economies across the world. As a result, one of the strategies that the printing company can increase their shareholder’s wealth is through investing in new but high potential markets. Currently, there has arisen some opportunities in the Asian market. India and China has become an ideal destination for companies that are aiming at increasing their profit margins. The two countries act as a gateway to the Asian market. Therefore, penetrating the two markets will play a significant role in enabling the company to reach other Asian market. Furthermore, it will reduce the risks and uncertainties that are associated with focusing on few markets. The move will play a significant role in expanding the revenue base for the business. This will result to more profits, an aspect that will make it possible for the company to increase the amount of divided being paid to its shareholders (Shim & Siegel, 2008). In penetrating new markets, the company should consider acquiring an already existing firm in the market. The reason is that research indicates that Asian clients prefer to be associated with a local company. Therefore, the move will play a critical role in giving the firm a local outlook, an aspect that will attract the interests of the customers towards the products and services.

Retain Assets that Maximize Value

Value-oriented companies monitor whether there are buyers that are willing to pay a good amount of money over the anticipated cash flow value to the company for its units, brands, real estate, and any other detachable assets that can earn extra amounts for the company. In the past two decades, the printing companies have been undergoing intense pressure to reform in order to retain their positions in the market. In 2013, Cengage filed for Chapter 11 bankruptcy protection. The reason is that the company could not handle its increasing debt which accrued to more than 5.8 billion USD. This enabled it to inter into a restructuring agreement which removed approximately 4 billion USD. Although the company has recorded a rise in its earnings, it is still struggling with the remaining debt. However, with the company being in the market for a long time, it has accumulated a lot of assets, some of which are bringing only few returns. On the other hand, in some cases, the company is using its returns to maintain some of the assets. In this structuring strategy, the firm should discard some of these properties. This will play a critical role in increasing the financial base. The money collected will be used to increase the amount paid to the shareholders through divided. This will be critical in increasing their confidence towards the company. Furthermore, the remaining amounts will be used to purchase the modern technologies that will increase the level of efficiency.

Theoretical approach and Analysis

With the company targeting to penetrate new markets in order to expand their revenue base, it will require to hire subordinates who understand the tastes and preferences of the target market. Unlike while handling a uniform market, the company will be required to conduct a research regarding the new market. Furthermore, it will be important for the business to understand the cultural values and believes of the target market. The reason is that these are elements that affect the consumption behavior of the customers. Therefore, with a variety of options to select from, the company should put more effort to retain its loyal customers. This is through developing an effective communication channel which will enable the clients to raise any grievances regarding the new product line. This will offer the top managers with an opportunity to make the necessary changes before losing the customers. On the other hand, the other hand, the firm should introduce changes in the hiring policy. Attracting talented subordinates has become a critical element towards the success of any business. Currently, employees are only willing to work in an organization that they are free to express themselves and try a new thing. Therefore, in order to attract innovative employees, the company should enter into a partnership with institution of higher learning in order to tap into young and talented people. It should sponsor them before integrating them into the workforce. This will be critical in enabling the business to develop new and more innovative products in order to retain the attention of the customers towards the business (Lee, Lee, & Lee, 2009). Moreover, the employees will be able to pinpoint areas that need some changes in order for the business to achieve maximum efficacy, thereby, reducing the costs of operations. As a result, the firm will be able to produce new but high products at a cheaper price.

Besides focusing on the customers, the company should also shift its attention towards its employees. Initially, businesses were mainly profit oriented. However, with the increasing levels of competition in the market, it has become critical to ensure that the interests of the employees are addressed before they affect their performances. The reason is that employees are the ones that interact with the customers. As a result, they are a critical source of information to the top-level managers. Therefore, its important to keep them happy, an aspect that will enhance their level of interaction with the clients. Putting these measures is important in making it possible for them to identify any changes in the purchasing behavior of the customers. The proposed rates of returns can change significantly if the customers shift their attention to the existing substitutes in the market (Shim & Siegel, 2008). Therefore, its important for the managers of the new product line to implement an open office policy. This will enable the employees to report any issue that might affect their performances to them without the use of the intermediaries. The move will motivate the employees while at the same time enhancing the relationship between the two parties.

Outsourcing Strategy

Cengage should decentralize the operations of the new product lines in order to get maximum benefits. Different countries have varying taxation systems. Many administrations are trying to attract investors in their country with the aim of creating employment for the young people. Furthermore, they are aiming at increases their source of revenues in order to supports its projects. Therefore, Cengage Learning should take advantage of this opportunity to establish the new plant in a different market. For example, Apple Inc has outsourced its operations to China. The reason is that the country has a highly qualified workforce and it has invested heavily in technical education. Furthermore, modern technology and raw materials are easily accessible. This aspect has enabled the firm to produce high-quality products, an aspect that explain the reason why the company has continued to retain its position despite the increasing level of competition from other global giants such as Google Inc, Samsung, and Microsoft. Therefore, the move to establish a subsidiary will expand the company’s market while at the same time enabling it to produce cheap but quality products that meet the interests of the customers. However, in order to achieve this objective, the company should employ a diversified workforce in its new line. The reason is that the global market has become more diversified (Ereaut, 2002). As a result, people can move across the borders with ease. A diverse workforce will act as a representation of the population. The move will play a critical role in ensuring that the company understands the needs of the target market and it customizes the products according to the interests of the clients. This will be critical in retaining the loyal customers and offer the firm with an opportunity to attract new clients through referrals.

Marketing Strategy

Cengage should combine the use of modern and traditional media. The traditional media will target the older generation which is yet to uphold the modern technologies. This strategy should involve the audio, visual, and print media. On the other hand, the social media and the internet should target the young generation. This will be significant in ensuring that the message regarding the new product line reaches all potential clients irrespective of their geographical location.

The Risk Budget

The risk budget is a percentage of the risk of an equity portfolio that is diversified. Cengage will have to tie the risk budget to its Equity Baseline Portfolio (EBP). The Equity Baseline Portfolio will act as a benchmark to be used to measure the performance of the portfolio against the performance of other firms in the global market. However, the evaluation will be conducted and compared with only the companies that are represented by the Russell 3000 Index.

Conclusion

Cengage should go ahead and invest its money in the new product line. The reason is that the net present value indicates that it will have good returns at the end of 6 years. However, during this period, the business should focus more on minimizing the costs of operation. This can be achieved through establishing a subsidiary in a different part of the world. Furthermore, it must ensure that it employs talented employees who will spearhead the growth and development of the company.