Quite happy today because I wrote and debriefed two ACC 680 cases today! (Well, like half of each, but it felt like a lot okay.) I also drilled some old ACC 611 seminar scenarios to practice my financial reporting skills.
Cases I Wrote Today
- Tried re-writing the Picture Perfect (PP) case again. To be honest, I pretty much half-assed it because I mostly just wanted to practice the quants. Maybe I’m being overconfident, but I feel like the qualitative bits will come pretty easily as long as I have the numbers down. I don’t have much time left to study, and there’s four more class cases to practice (F4F, RDI, Suregrip, and APF), so I just want to rush through the class cases tonight and devote proper time to writing the two dedicated practice cases tomorrow.
- After PP, I did F4F as well (only the quantitative part because, again I think pros/cons analyses and all that jazz are pretty easily bullshitted in the moment).
- I also did the ACC 611 seminar 2 scenarios for both Week 4 (Financial Instruments) and Week 5 (PPE). The Week 5 scenario was so chill, had me feeling confident, then BAM, Week 4 was so fucking hard. I think I need to practice doing some amortized cost tables and PV bond calculations in Excel. I had some vague memories being triggered while doing the scenario (eg. something something variable equity consideration vs fixed equity consideration are treated differently… hmm is this an embedded derivative… but IFRS 9 was frustratingly difficult to search through. I also totally forgot that IAS 32 existed, oops. At least now I know how to deal with variable vs fixed convertible debt instruments in the future (if the conversion feature calls for delivery of a variable number of equity instruments, it doesn’t meet the equity instrument definition, which requires a fixed number of equity instruments). Also, I guess I’m slightly less confused about what embedded derivatives are now… slightly.
Cases I Debriefed Today
PP Case
Doing the NPV analysis and the CCA tax shield calculation has been intimidating me since the start of the term, but it’s not as hard as I made it out to be in my mind. I definitely need to practice it more, but it’s nothing terrible.
Key learnings:
- Stuff like shipping costs, which PP passes onto the customer, should be included in revenue even though it does get backed out later as a variable cost. Why? Because our other calculations (like the Shopify variable fee, which is based on revenue, and CM ratio) will be impacted by it.
- When doing OCF analysis, if we know we’ll be doing something that involves CM further down (like BEP analysis), we should separate the variable and fixed costs. This way, we can calculate CM as an easy line within our OCF, and avoid having to repeat calculations later on for BEP.
- I completely forgot that depreciation counts as a fixed cost for purposes of BEP analysis.
- My NPV skills have gotten super rusty. For example, I forgot to include a Year 0, accidentally lumping in Year 1 and Year 0 cash flows together which is just totally wrong. I also forgot that the DCF horizon for this case is only 3 years, since that’s how long the useful life of the equipment is. Another thing is that the OCF used for NPV analysis should be after-tax flows (otherwise, it would make no sense for PV of the tax shield to get added back).
- For PV of the CCA tax shield, the (1+1.5k)/(1+k) term is only for accelerated depreciation and thus, if using immediate expensing, it should not be included in the calculation.
- Finally, when adding investing and financing cash flows to the OCF (for determining adequacy of financing), the investing cash flows includes not only the outflow of the initial investment, but also the inflow from the annual CCA tax shield benefit (ie. if immediate expensing applies, it would be 100% of the cost of the capital asset × appropriate tax rate).
F4F Case
The quant analysis for this case was very minimal, in fact, it was just a simple incremental analysis. Took me less than 10 minutes. It was so easy I was doubting myself and wondering if I was missing an entire part of the analysis. But nope, it was really that simple. The only thing though is that the sample solution called it an incremental analysis, not a differential analysis, which I think is more accurate. Instead of thinking about the crib/toddler bed option as another option, I should’ve thought of it as an opportunity cost. It’s mostly semantics I guess, since I got the same numbers as the sample solution, but it seems to be a more accurate way of thinking about it.