Business Management Discussion Questions

Greetings

NOTE NOTE NOTE

You should read through before you bid. i only need someone who is a professional in accounting. I need top quality work no plagiarism no grammar typos. Make sure you follow the instructions below and read through keenly and carefully. Before you start ensure you read the 45 page case study.

ATTACHED FIND

Accounting Case study

sample case responses and appendix of past cases

Also once i assign the paper i will attach sample of the various Deliverable reports submitted in the past. You don’t have to copy the exact format but this is just to guide you.

I met my group Yesterday. I will send you an outline of the various strategic issues we highlighted in the case and our plan of action of how to address them and what to include in the 3 reports. I will also let you know the pasts that my group will tell me to work onINSTRUCTIONS

I will need help regards to the following deliverables for an Accounting Case Study given to us by our professor. The case is 45 pages long and i have to work as part of a group of 5 to solve it. i have attached the case study below

Our job is to work together as consultants or internal advisor to resolve issues and to provide recommendations to a panel of CPA’s acting as Board of Directors or Senior Managers. The case has been designed to allow for many different recommendations and this will result in a situation where there isn’t necessarily a single correct response but you should be able to support your assumptions and provide a logical basis for your approach.

As a group we have 3 different deliverables on this Accounting Case Study over the next 2 months period. After we submit our deliverables, our teacher will review our work and then provide us feedback, she can tell us that the work we did was sufficient and therefore will allow us to move on to the next deliverable while giving her tips, feedback. She may also tell us that the work we submitted was not sufficient and therefore we need to incorporate her feedback and resubmit the deliverable again one more time.

Deliverable 1 (due on May 25th, 2019)

The team is asked to:

-Provide a situational assessment including appropriate internal, external, financial analysis to identify major issues and alternatives

-Demonstrate Due Care and Objectivity

-Display strong communication that addresses the audience needs

The maximum number of words allowed for deliverable 1 is 1500 words excluding appendixes/exhibits. The total number of pages (word and excel combined) permitted will be 10 pages. All submissions will be checked for word count/page limits by the teacher using the print preview function. Print options will be set according to the paper size, margins, scaling, and other specifications. Any content exceeding the maximums will not be marked. If Excel is used to prepare appendixes/exhibits, do not copy the excel content into the Word document. Excel exhibits comprising 50% or more of non-quantitative text must be in 12 point Arial font.

Document and Page Layout rules:

-Letter paper size: 8.5” x 11”

-Margins: 2.54 cm/1”

-Font:

Word: 12 point Arial Font

Excel: 10 point Arial Font

-100% scaling

-All pages should be sequentially numbered

-Financial data may be rounded to the nearest thousand or million if labelled and if rounding does not mislead the reader

Appendixes/Exhibits:

To support your Quantitative or Qualitative information in your report, feel free to use

-Charts or Graphs

-Tables of Data

-Calculations

-Summary of information acquired through Research

Audit Trail

An audit trail with clear referencing must be provided in both Word and Excel, including labeling of amounts, source of data, and calculation details (unless calculations are clearly evident when a hard copy is printed).

Appendix III: Vertical and Horizontal Analysis
DRAFT
2016
$
AUDITED
2015
$
AUDITED
2014
$
YoY Change
2016
2015
2016
% of Sales
2015
2014
Revenue
Box office revenue
Concession revenue
Other income — arcade games
Other income — party room rentals
Total revenue
41,057
23,445
660
344
65,506
46,511
24,224
651
341
71,727
45,117
22,481
648
350
68,596
-11.7%
-3.2%
1.4%
0.9%
-8.7%
3.1%
7.8%
0.5%
-2.6%
4.6%
62.7%
35.8%
1.0%
0.5%
100.0%
64.8%
33.8%
0.9%
0.5%
100.0%
65.8%
32.8%
0.9%
0.5%
100.0%
Expenses
Film costs
Concession costs
Advertising and promotion
Amortization
Employee wages and benefits
Employee bonuses
Rent
Theatre operating costs
General and administrative
Total expenses
24,142
5,887
718
4,691
11,868
1,250
3,926
7,972
1,536
61,990
25,953
5,261
703
4,640
13,075
3,975
4,020
8,607
2,078
68,312
23,362
5,176
695
4,628
13,292
1,850
3,978
9,550
2,080
64,611
-7.0%
11.9%
2.1%
1.1%
-9.2%
-68.6%
-2.3%
-7.4%
-26.1%
-9.3%
11.1%
1.6%
1.2%
0.3%
-1.6%
114.9%
1.1%
-9.9%
-0.1%
5.7%
36.9%
9.0%
1.1%
7.2%
18.1%
1.9%
6.0%
12.2%
2.3%
94.6%
36.2%
7.3%
1.0%
6.5%
18.2%
5.5%
5.6%
12.0%
2.9%
95.2%
34.1%
7.5%
1.0%
6.7%
19.4%
2.7%
5.8%
13.9%
3.0%
94.2%
Operating income (loss)
3,516
3,415
3,985
3.0%
-14.3%
5.4%
4.8%
5.8%
Interest income
Interest expense
Foreign exchange gain (loss)
Income before taxes
Income taxes (25%)
22
(792)
(93)
2,653
663
23
(851)
(172)
2,415
604
15
(910)
(55)
3,035
759
-4.3%
-6.9%
-45.9%
9.9%
9.8%
53.3%
-6.5%
212.7%
-20.4%
-20.4%
0.0%
-1.2%
-0.1%
4.1%
1.0%
0.0%
-1.2%
-0.2%
3.4%
0.8%
0.0%
-1.3%
-0.1%
4.4%
1.1%
Net earnings
1,990
1,811
2,276
9.9%
-20.4%
3.0%
2.5%
3.3%
Appendix IV: Financial Statement Ratios
Comparable ratios
Box office revenue per attendee
Concession revenue per attendee
Box office revenue per theatre (in
$thousands)
Liquidity ratios
Current ratio
Quick ratio
Solvency ratios
Long-term debt to equity
Total debt to equity
Total debt to assets
Activity ratios
Days in concession inventory (ending
inventory only, and not average)
Days in payable
Days in film costs payable
Profitability
Film costs to box office revenue
Concession costs to revenues
Advertising as % of revenues
Employee wages / benefits as % of
revenues
Theatre costs as % of total revenues
G&A as % of total revenues
Operating margin
Net profit margin
Return on assets
ROA adj for after-tax bonuses
Return on equity
Debt Covenants
Long term Debt to EBITDA
Pro Forma Statements
Benchmarks
2019
2018
2017
$9.10 $
9.44 $
9.10 $
8.85
$5.25 $
5.54 $
5.27 $
5.07
$
4,453
$
3,825
First View Theatres Inc.
2016
2015
2014
$
8.67 $
8.89 $
8.75
$
4.95 $
4.63 $
4.36
$
3,732
$
4,228
$
Cinéma LaRoche
2016
2015
$
9.25 $
9.11
$
5.34 $
5.27
$3,948 $
4,635
4,102
0.67
0.64
1.66
1.60
1.32
1.27
0.95
0.90
0.30
0.22
0.29
0.23
0.25
0.18
0.50
0.36
0.52
0.36
0.47
1.2
0.54
0.49
0.59
0.30
0.74
0.86
0.37
0.97
1.11
0.42
1.24
1.69
0.63
1.56
2.24
0.69
1.95
2.55
0.72
4.61
7.16
5.57
3.20
5.59
4.50
21
32
35
23
39
28
22
40
31
26
41
32
23
44
33
27
39
34
26
36
36
25
44
40
28
42
40
52%
23%
2%
59%
25%
1%
59%
25%
1%
59%
25%
1%
59%
25%
1%
56%
22%
1%
52%
23%
1%
53%
25%
5%
53%
24%
6%
19%
15%
16%
18%
18%
18%
19%
18%
18%
12%
6%
9%
6%
4.7%
4.7%
10.4%
11%
2%
9.8%
7.5%
10.6%
10.6%
20.8%
11%
2%
4.6%
3.5%
5.1%
5.1%
11.8%
12%
2%
4.3%
3.3%
4.1%
4.1%
10.7%
12%
2%
5.4%
3.0%
4.0%
4.0%
10.8%
12%
3%
4.8%
2.5%
3.4%
3.4%
11.1%
14%
3%
5.8%
3.3%
4.4%
4.4%
15.6%
14%
91%
8.6%
6.6%
146.9%
14%
93%
6.9%
5.4%
114.6%
188.7%
142.4%
0.98
1.64
2.02
2.02
2.22
2.22
Appendix V: Income Based Valuation
Valuation of Cinema LaRoche
Capitalized Cash Flow (in thousands of $)
Step 1 – Estimated maintainable operating cash flow (normalized EBITDA)
Notes
Income before interest and taxes
Add/deduct:
Building Rental Income
Manager Salary and Benefit
Savings in General and Admin Costs
Lease Savings due to Favorable Rates
Income from Marketable Securities
Add:
Amortization Per Income Statement
$
(1)
(2)
Estimated maintainable operating cash flow (normalized EBITDA)
$
2016
4,587
$
2016
4,587
(250)
(425)
300
(117)
(178)
(250)
(425)
300
(117)
(178)
2,013
2,013
5,930
$
5,930
Step 2 – Capitalized cash flow
Estimated maintainable operating cash flow (EBITDA)
Income taxes
Annual maintainable cash flow from operations after tax
$
Sustaining capital expenditures
Maintainable discretionary cash flows
Capitalization rate
Capitalized discretionary cash flows
Average Capitalized discretionary cash flows
PV of CCA tax shield of equipment
PV of CCA tax shield of Leasehold improvement
Capitalized value of operations
Add-back: Redundant marketable securities
Enterprise value
Interest bearing debt
Estimated fair market value of equity
(3)
(3)
5,930 $
(1,483)
4,448
5,930
(1,483)
4,448
(2,300)
2,148
14%
15,339
12,768
(2,300)
2,148
16%
13,422
13,422
1,849
123
14,739
1,690
16,429
(8,623)
7,806
1,746
140
15,308
1690
16,998
(8,623)
8,375
Conclusion:
The value of Cinema LaRoche shares as calculated using the capitalized cash flow approach is approximately
Notes
(1) Salary and benefits of the two managers replacing Marcel: $170,000 x 2 x 1.25 = 425,000
(2) Lease adj due to favourable market rates for Pierre, Laurent and Sharone theatres =
116,880
The favourable market rate is temporary and rate may change in the future, therefore the saving is not
maintainable and should be subtract from operating income
14%
16%
(3) PV of CCA tax shield for equipment
1,848,529
1,745,833
PV of CCA tax shield for leasehold improvement
122,500
140,000
Hidden below are case facts
Appendix VI: Asset Based Valuation
Cinéma LaRoche
Balance sheet (As at November 30)
(Under ASPE)
(In thousands of C$)
2016
Assets
Current assets
Cash and cash equivalents
Marketable securities
Concession inventories
Latent taxes and selling costs
Total current assets
Property, plant and equipment
Forgone Tax Shield
Latent taxes and selling costs
Total assets
Liabilities
Current liabilities
Trade payables and accrued liabilities
Film costs payable
Deferred subscriber fees
Total current liabilities
Shareholder’s loan
Total liabilities
Total Value
Book Value
FMV
Adjustment
20
1,690
315
Adjusted Net
Asset Value
(79)
20
1,690
315
(79)
1,946
(1,845)
(637)
(1,283)
19,450
(637)
(1,283)
19,476
1,923
1,860
985
4,768
–
1,923
1,860
985
4,768
8,623
13,391
–
8,623
13,391
2,403
21,295
23,698
10,307
Low (-14%)
High (+16%)
6,085
5,233
7,058
Notes:
Note 1: Forgone tax shield
Equipment – Class 8 (20%) FMV > Tax Value
(17030*20%*25%)/(15%+20%)-(12570*20%*25%)/(15%+20%)
Note 2:
Original Cost
Fair Market Value
Selling Costs (3% of proceeds)
Net Proceed for Tax Purposes
Lower of Cost or Proceeds
UCC / ACB
Recapture (Terminal Loss)
Taxabale Capital Gain – 50%
Taxes @ 25%
Latent Taxes and Selling Costs
Hidden below are case facts
637
Equipment
16,940,000
17,030,000
(510,900)
16,519,100
16,519,100
12,570,000
3,949,100
Leasehold
4,355,000
2,420,000
(72,600)
2,347,400
2,347,400
3,500,000
(1,152,600)
987,275
1,498,175
(288,150)
(215,550)
Securities
1,409,000
1,690,000
(50,700)
1,639,300
1,409,000
115,150
28,788
79,488
Notes
2
1
2
Apendix VII: Connery’s Bar and Grill NPV Analysis & Forecasted Income Statement
Investment
2017
Revenue
Cost of Food and Beverages
Labour
Annual Insurance
Permits and Licences
Menus and advertising
Ongoing costs
Opening event
Fred’s salary
Operating costs
Remove lease improvements
Amortization
Operating income
Tax (at 25%)
Net Income
2018
1,820,000
655,200
473,200
10,000
6,000
25,000
15,000
25,000
150,000
175,000
5 Year Projection
2019
2020
2021
2,300,000 2,800,000 2,856,000
805,000
980,000
999,600
598,000
728,000
742,560
11,000
12,000
12,240
6,200
6,200
6,324
12,000
13,000
13,260
15,000
15,000
15,300
2022
2,913,120
1,019,592
757,411
12,485
6,450
13,525
15,606
200,000
176,000
250,000
177,000
255,000
180,540
227,750
57,850
14,463
43,388
239,063
237,738
59,434
178,303
189,063
429,737
107,434
322,303
183,366
447,810
111,952
335,857
260,100
184,151
45,000
179,845
418,954
104,739
314,216
Add back amortization
Operating Cash Flows
FVTs Share of Cash Flows (40%)
Current Concessions Cost
New Concessions Cost
Cost savings
After Tax savings
227,750
271,138
108,455
700,000
550,000
150,000
112,500
239,063
417,366
166,946
700,000
550,000
150,000
112,500
189,063
511,366
204,546
700,000
550,000
150,000
112,500
183,366
519,224
207,689
700,000
550,000
150,000
112,500
179,845
494,061
197,624
700,000
550,000
150,000
112,500
Total Cash Flows
PV Factor
Net Cash Flows
NPV
220,955
0.85
188,850
279,446
0.73
204,139
IRR
317,046
0.62
197,954
13%
320,189
0.53
170,869
310,124
0.46
141,451
% Ownership Required at 17% Rate of Return
FVTs Share of Cash Flows (47.12%)
127,764
Total Cash Flows
240,264
Net Cash Flows
(1,000,000)
205,354
NPV
0
47.12%
196,669
309,169
225,852
240,964
353,464
220,692
244,666
357,166
190,602
232,809
345,309
157,499
Recommended Ownership Share
FVTs Share of Cash Flows (50%)
Total Cash Flows
Net Cash Flows
(1,000,000)
NPV
39,099
50.00%
208,683
321,183
234,628
255,683
368,183
229,883
259,612
372,112
198,577
247,030
359,530
163,986
CBG CCA Calculation
Asset
CCA
Leasehold
SL
Chairs
20%
Equipment
100%
IT system
55%
Total
(1,000,000)
1.00
(1,000,000)
(96,736)
Cost
850,000
95,000
80,000
30,000
1,055,000
135,569
248,069
212,025
2018
170,000
9,500
40,000
8,250
227,750
2019
170,000
17,100
40,000
11,963
239,063
CCA Claim
2020
170,000
13,680
2021
170,000
10,944
2022
170,000
8,755
5,383
189,063
2,422
183,366
1,090
179,845
Appendix VIII: PPV NPV Analysis
Premium Plus Viewing – $8.50 Premium
Incremental box office CM
Incremental concession CM
Other incremental costs
Net incremental cash flows before tax
FVT’s average corporate tax rate
Net incremental cash flows after tax
Capital cost of auditoriums
Tax shield on capital additions
Net cash flow
Discount factor
Discounted cash flows
NPV of discounted cash flows
Premium Plus Viewing – $10.00 Premium
Incremental box office CM
Incremental concession CM
Other incremental costs
Net incremental cash flows before tax
FVT’s average corporate tax rate
Net incremental cash flows after tax
Capital cost of auditoriums
Tax shield on capital additions
Net cash flow
Discount factor
Discounted cash flows
NPV of discounted cash flows
Note 3
Note 4
Note 5
25%
Note 1
Note 2
15%
Note 3
Note 4
Note 5
25%
Note 1
Note 2
15%
Year 0
(6,368,949)
850,512
(5,518,438)
1.0000
(5,518,438)
(3,271)
Year 0
(6,368,949)
850,512
(5,518,438)
1.0000
(5,518,438)
354,133
2017
(12,909)
37,218
(81,500)
(57,191)
14,298
(42,893)
(47,956)
1.0000
(47,956)
2017
(19,659)
37,218
(81,500)
(63,941)
15,985
(47,956)
575,464
0.8696
500,403
2018
265,982
629,304
(128,000)
767,285
(191,821)
575,464
536,989
0.8696
466,947
2018
214,682
629,304
(128,000)
715,985
(178,996)
536,989
1,182,127
0.7561
893,858
2019
633,724
1,246,536
(304,090)
1,576,170
(394,042)
1,182,127
1,116,315
0.7561
844,094
2019
545,974
1,246,536
(304,090)
1,488,420
(372,105)
1,116,315
1,396,795
0.6575
918,415
2020
654,814
1,444,807
(237,228)
1,862,393
(465,598)
1,396,795
1,312,757
0.6575
863,159
2020
542,764
1,444,807
(237,228)
1,750,343
(437,586)
1,312,757
1,442,905
0.5718
824,986
2021
2022 – 2026
681,139
3,449,569
1,484,707
7,490,035
(241,973)
(1,284,420)
1,923,873
9,655,184
(480,968)
(2,413,796)
1,442,905
7,241,388
1,357,349
0.5718
776,068
2021
2022 – 2026
567,064
2,875,819
1,484,707
7,490,035
(241,973)
(1,284,420)
1,809,798
9,081,434
(452,450)
(2,270,358)
1,357,349
6,811,075
7,241,388
0.3836
2,777,801
6,811,075
0.3836
2,612,854
(42,893)
1.0000
(42,893)
Note 1: Capital costs of auditoriums
Cost of reclining and D-BOX seats
Cost of screens and surround sound
Total
London #1 Leamington
3,534,000
2,834,949
25%
25%
20%
20%
15%
15%
471,932
378,580
Hidden cells are case facts
2017
Discounted
London #1 Leamington
(2,034,000)
(1,631,660)
(1,500,000)
(1,203,289)
(3,534,000)
(2,834,949)
Notes to Appendix VIII – PPV NPV Analysis
Note 2: Tax shield on auditorium costs
Capital investment
Tax rate
CCA rate (Class 8)
Discount
PV of tax shield benefits
Total
(3,665,660)
(2,703,289)
(6,368,949)
542,764
1,036,463
308,138
(801,836)
681,139
1,140,750
342,225
(801,836)
567,064
1,055,194
313,706
(801,836)
3,449,569
5,737,500
1,721,250
(4,009,181)
2,875,819
5,307,188
1,577,813
(4,009,181)
2022 – 2026
1,120,500
336,150
(801,836)
2021
2022 – 2026
2,247,700
11,305,000
(762,993)
(3,814,965)
2021
654,814
7,490,035
2020
2020
2,207,800
(762,993)
1,484,707
2019
877,500
263,250
(468,024)
(39,002)
633,724
1,444,807
2018
214,682
513,000
153,900
(400,918)
265,982
2019
1,729,000
(445,352)
(37,113)
1,246,536
2021
241,973
2017
67,500
20,250
(67,106)
(33,553)
(12,909)
2018
1,010,800
(381,497)
629,304
2020
237,228
2022 – 2026
1,284,420
1,284,420
2019
284,090
20,000
304,090
241,973
474,525
141,075
(400,918)
Note 3: Incremental box office contribution margin
$8.50 Premium
Box office CM per adult
75%
Box office CM per senior
25%
Lost box office CM per status quo
Lost box office CM during renovation
Incremental box office contribution margin
$10.00 Premium
Box office CM per adult
75%
Box office CM per senior
25%
Lost box office CM per status quo
Lost box office CM during renovation
Incremental box office contribution margin
2017
133,000
(63,855)
(31,928)
37,218
2018
128,000
128,000
237,228
811,688
241,313
(468,024)
(39,002)
545,974
Note 4: Incremental concession contribution margin
Concession CM per attendee
Lost concession CM per status quo
Lost concession CM during renovation
Incremental concession CM
2017
61,500
20,000
81,500
62,438
18,563
(67,106)
(33,553)
(19,659)
Note 5: Other incremental costs for auditoriums
Additional costs per case facts
Additional bar inventory
Total
Appendix IX: PPV Contribution Margin Analysis
Status Quo
2,168
1,192
975
45.00%
$8.50
Premium
3,150
1,733
1,418
45.00%
$10.00
Premium
3,413
1,877
1,536
45.00%
Concession revenue
Concession costs
Concession contribution margin
Concession CM %
1,238
309
928
75.00%
3,325
998
2,328
70.00%
3,325
998
2,328
70.00%
Total revenue
Total variable costs
Total contribution margin
Total CM %
3,405
1,502
1,904
55.90%
6,475
2,730
3,745
57.84%
6,738
2,874
3,863
57.34%
Status Quo
13.62
6.01
7.61
55.90%
$8.50
Premium
37.00
15.60
21.40
57.84%
$10.00
Premium
38.50
16.43
22.08
57.34%
Contribution Margin by Auditorium
Box office revenue
Film costs
Box office contribution margin
Box office CM %
Contribution Margin by Attendee
Total revenue
Total variable costs
Total contribution margin
Total CM %
Appendix X: TGP NPV Analysis
Fiscal Year
Year – #
Revenue
Food
Beverages
Amusement
Special Events
Total
1,250,000
525,000
2,590,000
250,000
4,615,000
1,696,000
768,000
3,856,000
630,000
6,950,000
1,805,000
975,000
4,150,000
850,000
7,780,000
1,950,000
1,160,000
4,505,000
880,000
8,495,000
1,989,000
1,183,200
4,595,100
897,600
8,664,900
2,028,780
1,206,864
4,687,002
915,552
8,838,198
2,069,356
1,231,001
4,780,742
933,863
9,014,962
2,110,743
1,255,621
4,876,357
952,540
9,195,261
Costs
Food
Beverages
Amusement
Wages
Marketing, Other Opex and G&A
Total
325,000
120,750
388,500
1,107,600
2,087,000
4,028,850
440,960
176,640
578,400
1,668,000
2,062,190
4,926,190
469,300
224,250
622,500
1,867,200
2,105,957
5,289,207
507,000
266,800
675,750
2,038,800
2,150,676
5,639,026
517,140
272,136
689,265
2,079,576
2,196,366
5,754,483
527,483
277,579
703,050
2,121,168
2,243,051
5,872,331
538,032
283,130
717,111
2,163,591
2,290,752
5,992,617
548,793
288,793
731,454
2,206,863
2,339,493
6,115,395
586,150
(146,538)
439,613
2,023,810
(505,953)
1,517,858
2,490,793
(622,698)
1,868,095
2,855,974
(713,994)
2,141,981
2,910,417
(727,604)
2,182,812
(860,000)
2,965,867
(741,467)
2,224,401
(860,000)
3,022,345
(755,586)
2,266,758
(860,000)
3,079,866
(769,967)
2,309,900
138,427
138,427
138,427
652,427
571,060
499,707
Net Income
Tax – 25%
AT Cash Flow
Expenditures – Games
Salvage – Furnture and Games
PV of CCA Tax Shield
Asset Retirement Obligation
NPV (Year 1 – 8)
Total Net Cash Flows
Year 0 Expenditures
PV of Salvage Tax Shield Loss
PV of CCA Tax Shield
Total NPV
2018
1
2019
2
2020
3
2021
4
2022
5
2023
6
2024
7
2025
8
1,070,000
374,138
6,312,827
(6,315,000)
(44,292)
708,136
661,670
1,099,399
1,151,556
1,123,735
(325,000)
840,803
Appendix XI – TGP Forecast Balance Sheet
At December 31
Asset
Cash – Note 1
Leasehold
Furniture
Games
Computer Hardware
Inventory – Note 2
Asset Retirement Cost
Total
2018
2019
2020
2021
2022
2023
2024
2025
439,613
1,786,950
1,604,550
2,214,000
37,500
220,000
12,270
6,314,883
1,957,470
1,598,850
1,435,650
1,722,000
32,500
220,000
11,624
6,978,094
3,825,565
1,410,750
1,266,750
1,230,000
27,500
220,000
10,979
7,991,543
5,967,545
1,222,650
1,097,850
738,000
22,500
220,000
10,333
9,278,878
7,290,358
1,034,550
928,950
1,020,000
17,500
220,000
9,687
10,521,045
8,654,758
846,450
760,050
1,376,000
12,500
220,000
9,041
11,878,800
10,061,517
658,350
591,150
1,806,000
7,500
220,000
8,395
13,352,912
12,371,416
470,250
422,250
1,290,000
2,500
220,000
7,750
14,784,166
Liability
Deferred Revenue
ARO – Note 3
Prize Liability
SH & RE
Total
111,370
15,176
77,700
6,110,636
6,314,883
165,808
17,832
115,680
6,678,774
6,978,094
178,450
20,953
124,500
7,667,640
7,991,543
193,715
24,619
135,150
8,925,394
9,278,878
197,589
28,928
137,853
10,156,675
10,521,045
201,541
33,990
140,610
11,502,658
11,878,800
205,572
39,938
143,422
12,963,980
13,352,912
209,683
46,928
146,291
14,381,264
14,784,166
Note 1 – Cash
Upfront Costs in Year 0 – Assumption: Covered 100% by FTV Financing. No impact to B/S Cash
Games Purchase (Year 5-7) – Decrease Cash $860,000
Net Earnings – Increase in Cash equal to After Tax Net Income (Assume Cash received)
Note 2 – Inventory
Inventory is assume to be constant at $220,000 required.
Note 3 – ARO Calculation
ARO
325000 Assumption – This is the FV of the Cost
Cost of Capital
17.50% Calculated from WACC on Appendix XI
Years
20 Lease term
PV of ARO
$12,916
Accretion expense
17.5% on the 12,916 cumulatively
Accumulated Asset Retirement Cost Depreciation – Straight Line
Appendix XII TGP Forecast Income Statement
Fiscal Year
Year – #
Revenue
Food
Beverages
Amusement
Special Events
Total
2018
1
2019
2
2020
3
2021
4
2022
5
2023
6
2024
7
2025
8
1,250,000
525,000
2,590,000
250,000
4,615,000
1,696,000
768,000
3,856,000
630,000
6,950,000
1,805,000
975,000
4,150,000
850,000
7,780,000
1,950,000
1,160,000
4,505,000
880,000
8,495,000
1,989,000
1,183,200
4,595,100
897,600
8,664,900
2,028,780
1,206,864
4,687,002
915,552
8,838,198
2,069,356
1,231,001
4,780,742
933,863
9,014,962
2,110,743
1,255,621
4,876,357
952,540
9,195,261
Cost of Sales
Food
Beverages
Amusement
Wages
Total
325,000
120,750
388,500
1,107,600
1,941,850
440,960
176,640
578,400
1,668,000
2,864,000
469,300
224,250
622,500
1,867,200
3,183,250
507,000
266,800
675,750
2,038,800
3,488,350
517,140
272,136
689,265
2,079,576
3,558,117
527,483
277,579
703,050
2,121,168
3,629,279
538,032
283,130
717,111
2,163,591
3,701,865
548,793
288,793
731,454
2,206,863
3,775,902
Operating Expense
Marketing, Other Opex and G&A
Depreciation – PPE
Depreciation – ARO
Total
2,087,000
427,000
2,260
2,516,260
2,062,190
854,000
2,656
2,918,846
2,105,957
854,000
3,121
2,963,078
2,150,676
854,000
3,667
3,008,342
2,196,366
940,000
4,308
3,140,675
2,243,051
866,000
5,062
3,114,114
2,290,752
792,000
5,948
3,088,701
2,339,493
878,000
6,989
3,224,482
156,890
0
156,890
1,167,154
(291,789)
875,366
1,633,672
(408,418)
1,225,254
1,998,308
(499,577)
1,498,731
1,966,108
(491,527)
1,474,581
2,094,805
(523,701)
1,571,104
2,224,396
(556,099)
1,668,297
2,194,877
(548,719)
1,646,158
Net Income
Tax – 25%
Income After Tax
Appendix XIII: Financing Options
Option 1: Sale and Leaseback Proposal
Original Cost
400,000
8,750,000
9,150,000
Land
Building
Total Price Offer
Book Value
Deferred Gain
Deferred Gain/5 Years
Year
0
1
2
3
4
5
Book Value
400,000
5,370,000
5,770,000
10,120,000
(5,770,000)
4,350,000
870,000 Deferred revenue recognized each year
Payment
870,000
870,000
870,000
870,000
870,000
Interest
219,885
180,879
139,531
95,703
49,245
Principal
650,115
689,121
730,469
774,297
820,755
Balance
3,664,756
3,014,642
2,325,520
1,595,052
820,755
0
Option 2: Preferred Shares Redemption
Retractable Shares authorized
Issued & Outstanding
10,000
6,000
Scenario 1: Assuming redemption price increase has not been waived
10% increase
Year 1
Year 2
Year 3
Year 4
Year 5
Mandatory Redemption
1,000
1,000
1,000
1,000
1,000
Redemption Price
$
1,500 $
1,650 $
1,815 $
1,997 $
2,196
1,500,000
1,650,000
1,815,000
1,996,500
2,196,150
Total Deferred Payment
Scenario 2: Assuming redemption price increase has been waived
Year 1
Year 2
Year 3
Mandatory Redemption
1,000
1,000
1,000
Redemption Price
$
1,500 $
1,500 $
1,500
1,500,000
1,500,000
1,500,000
Total Deferred Payment
Scenario 1
Scenario 2
Total saved if redemption penalty increase is waived off
PV of lease payments
RATE: 6%
NPER: 5
PMT: 72,500*12=870,000
FV: 0
TYPE: 0
$
Year 4
1,000
$
1,500
1,500,000
$
$
9,157,650
Year 5
1,000
1,500
1,500,000
7,500,000
9,157,650
7,500,000
1,657,650
Appendix XIV: Balanced Scorecard
Objective
Increase revenue
Decrease concession costs
Improve overall profitability
Measure
Target
Financial Perspective
BORPA
$9.10
Concession costs as a %
23%
of concession revenue
Net earnings
Growth of 5%
Improve the concession
experience
Improve customer
satisfaction
ROA, Box office revenue 4.7%, $3,948 per
per theatre
theatre
Customer Perspective
# of unique food items
5 unique food items
developed
by 2018
90% customer
% satisfaction
satisfaction
Improve customer’s online
experience
% satisfaction of new
website
Improve use of assets
90% customers
satisfied
Improve movie experience
# of theatres remodeled 2 theatres by 2017
Internal Perspective
Increase manager
% of annual goals
80% success rate
engagement
achieved
Increase efficiency of
Concession inventory
Increase by 10%
concession inventory
turnover
Increase local content shown % of locally produced
30% of films shown
at theatres
films
are locally produced
Improve relationship with film
# of exclusive titles
4 per year
distributors
Increase customer loyalty
Offer cross training for
current employees to
increase motivation
Increase employee
engagement by investing in a
fun culture
Introduce new viewing
technology into theatres
Retain talented employees
# of repeat customers
Increase by 10%
Learning and Growth Perspective
70% of eligible
% of eligible employees
emlpoyees cross
cross trained
trained
# of employee fun days
Once per quarter
# of new technologies
implemented
2 per year
Employee turnover
10% improvement
from prior year
Initiative
PPV
CBG
Investment in PPV, Connery’s
Bar and Grill, Flix Rewards
PPV, increase local content,
targeted advertising
CBG
Customer surveys at each
theatre
Website redesign and survey
customers who use the new
website
PPV
Balanced Scorecard, new
bonus structure
Consult Fred to identify food
trends and inventory levels
Partner with local film schools
for their content
Offer a fund to help market the
exclusive titles
Tailored movie offerings per
customer, Flix Rewards
Training programs for
employees, possibly partner
with CBG
Organize events for employees
to attend
PPV, conduct reasearch on
upcoming technology
Retirement plan, bonus
scheme, organize events for
employees to attend
Appendix XV: Flix Rewards
Loyal Customers
Sign up Rate
Expected Customers
Extra Tickets sold
Total Extra Tickets
Canbalization Rate
Net Tickets Sold
Average Box Office Revenue
Average Concession Revenue
Total Additional Revenue
Total Additional Concession Revenue
Cost of Sales – Revenue
Cost of Sales – Concession
Upfront Cost
600,000
70%
420,000
2
840,000
35%
546,000
$8.77 Average from 2014-2016
$4.65 Average from 2014-2016
4,788,420
2,537,080
(2,815,647) 59% 2016 Income Statement
(637,057) 25% 2016 Income Statement
(3,500,000)
Cost per Point
Additional Revenue
Total Cost per Point
$0.02
50,715,000
-1,014,300
Marketing Allowance (Year 1)
Marketing Expenses (Year 2-4)
Points Earned
Value
Unredeemed Liability
Net Total at Year 1
Net Total Year 2-4
Payback Period
150,000 Marketing covered by Allowance
(150,000) Marketing paid out of own budget
50,715,000 $1 = 1 point
8,452,500
1,690,500 Recorded as a liability on the B/S
-491,504
2,708,496
1.3 years
Appendix XVI – Impairment of Goodwill
2015
2016
2017
2018
Location 1 Location 2 Location 1 Location 2 Location 1 Location 2 Location 1 Location 2
578,973
291,027
467,920
235,205
376000
189000
376000
189000
$
8.50 $
8.25 $
8.50 $
8.25 $
8.50 $
8.25 $
8.50 $
8.25
4,921,274
2,400,969
3,977,323
1,940,438
3,196,000
1,559,250
3,196,000
1,559,250
$
4.50 $
4.60 $
4.50 $
4.60 $
4.50 $
4.60 $
4.50 $
4.60
2,605,381
1,338,722
2,105,642
1,081,941
1,692,000
869,400
1,692,000
869,400
12,000
8,000
12,000
8,000
12,000
8,000
12,000
8,000
(2,706,701) (1,320,533) (2,187,528) (1,067,241) (1,757,800)
(857,588) (1,757,800)
(857,588)
(651,345)
(334,681)
(526,410)
(270,485)
(423,000)
(217,350)
(423,000)
(217,350)
(30,000)
(25,000)
(30,000)
(25,000)
(30,000)
(25,000)
(30,000)
(25,000)
(233,000)
(116,500)
(233,000)
(116,500)
(233,000)
(116,500)
(233,000)
(116,500)
(1,056,000)
(377,400) (1,056,000)
(377,400) (1,056,000)
(377,400) (1,056,000)
(377,400)
(424,000)
(285,000)
(424,000)
(285,000)
(424,000)
(285,000)
(424,000)
(285,000)
(875,000)
(390,000)
(875,000)
(390,000)
(875,000)
(390,000)
(875,000)
(390,000)
1,562,609
898,578
763,027
498,753
101,200
167,813
101,200
167,813
1,795,609
1,015,078
996,027
615,253
334,200
284,313
334,200
284,313
618,513
3,092,563 Greater of Fair Value or Value in Use
Attendence
Box Office Revenue/Attendee
Box Office Revenue
Concession Revenue/Attendee
Concesssion Revenue
Other Revenue
Films Costs
Concession Costs
Advertising
Amortization
Employee Wages
Rent
Theatre Operating Costs
Net Income
EBITDA
EBITDA
Market Value (Fair Value)
2,152,100
2,277,438
Carrying Value
39,000
1,290,000
2,210,000
2,423,000
(265,000)
(327,000)
5,370,000
Value in Use – 8 more years
Inventories
Leasehold Improvements
Equipment
Goodwill
Trades Payable
Film Costs
Total Value
Possible Impairment
Appendix XVII: Financing for Recommended Projects
Available Financing Funds
Total cash on hand
Cash from Sales and Leaseback
Total Available Financing Funds
1,859,000
10,120,000
11,979,000
Financing Required for Investments
PPV Initial Renovation Cost
Connery’s Bar & Grill
Mobile Strategy
Flix Rewards
Total Required for Investments
3,500,000
1,000,000
125,000
3,500,000
8,125,000
Total Remaining Available Financing
3,854,000
Appendix XVIII: Hedging Foreign Exchange Risk
Expected Dec 2017 Rate
Film Cost (25% of 2016 cost)
Recommended Hedged Amount
0.77
4,245,500
4,246,000
Forward Contract
USD ($30k minimum)
1% administration fee (max $650)
Total Hedged
Forward Rate
Expected Dec 2017 Rate
Foreign Exchange Gain/(Loss)
4,246,000
650
4,246,650
0.7704
0.77
1,699 CDN
Future Contract
Contract Required (4.3 million/100k)
Total price for contracts
Total amount to hedge Film Costs
Total Amount to Hedge Film Costs
43
$430 $10 per contract
4,300,000 USD (rounded to nearest ‘000)
4,300,430 USD
If settled in September 2017
Contract Rate
Expected Dec 2017 Rate
Foreign Exchange Gain/(Loss)
0.7731
0.77
13,331 CDN
If settled in December 2017
Contract Rate
Expected Dec 2017 Rate
Foreign Exchange Gain/(Loss)
0.7766
0.77
28,383 CDN
Difference
15,052
Appendix XIX: Pro Forma Income Statement Notes
Inflation + Web redesign + Hedge + Lease
2017
2018
2019
2020
2021
4,982
2,640
5,082
2,692
Flix Rewards Contribution
2018
2019
2020
2021
4,884
2,588
2017
4,788
2,537
–
7,774
45,330
25,885
729
380
72,324
7,621
44,441
25,378
714
372
70,906
7,472
43,570
24,880
700
365
69,515
7,326
42,716
24,392
687
358
68,152
2,988
676
156
41,878
23,914
673
351
66,816
2,929
663
153
Revenue
Box office revenue
Concession revenue
Other income — arcade games
Other income — party room rentals
Total revenue
2,872
650
150
26,655
6,500
1,411
4,010
13,103
1,380
5,276
8,802
1,696
2,816
637
26,132
6,372
1,236
4,168
12,846
1,353
5,173
8,629
1,663
1,076
25,620
6,247
1,065
4,333
12,594
1,327
5,071
8,460
1,630
1,055
1,076
25,117
6,125
897
4,506
12,347
1,301
4,972
8,294
1,598
1,035
1,055
24,625
6,005
732
4,595
12,105
1,275
4,875
8,131
1,567
125
1,035
67,572
1,014
3,500
4,514
66,347
–
65,157
68,833
64,035
6,697
Expenses
Film costs
Concession costs
Advertising and promotion
Amortization
Employee wages and benefits
Employee bonuses
Rent (include sales leaseback)
Theatre operating costs
General and administrative
Website Redesign
Flixrewards Points Cost
Flix Rewards Upfront Costs
Total expenses
6,566
3,333
24
6,437
3,168
24
2,811
2,995
23
–
2,781
23
3,491
Operating income (loss)
22
870
(874)
(72)
3,439
860
2,579
6,697
870
(857)
(71)
3,299
825
2,474
6,566
870
(840)
(69)
3,152
788
2,364
6,437
870
(824)
(68)
2,997
749
2,248
2,811
870
(808)
(66)
2,799
700
2,099
–
Interest income
Investment Income (50% CBG)
Gain from sales leaseback
Interest expense
Foreign exchange gain (loss)
Income before taxes
Income taxes (25%)
Net earnings
107
57
385
195
190
2017
442
815
433
2,926
1,482
1,444
598
1,394
741
5,005
2,535
2,470
817
1,780
946
6,391
3,237
3,154
PPV Contribution
2018
2019
2020
817
1,813
963
6,507
3,296
3,211
2021
(75)
–
(150)
–
(150)
–
(150)
–
CBG Contribution
2018 2019 2020
(150)
–
2021
2017
74
242
–
237
–
304
–
128
–
163
82
–
165
163
–
125
165
–
55
125
–
11
55
–
11
–
6,507
6,507
6,391
6,391
5,005
5,005
2,926
2,926
385
385
Appendix XIX: Pro Forma Income Statement Notes
Revenue
Box office revenue
Concession revenue
Other income — arcade games
Other income — party room rentals
Total revenue
Expenses
Film costs
Concession costs
Advertising and promotion
Amortization
Employee wages and benefits
Employee bonuses
Rent (include sales leaseback)
Theatre operating costs
General and administrative
Website Redesign
Flixrewards Points Cost
Flix Rewards Upfront Costs
Total expenses
Operating income (loss)
Interest income
Investment Income (50% CBG)
Gain from sales leaseback
Interest expense
Foreign exchange gain (loss)
Income before taxes
Income taxes (25%)
Net earnings
Operating income (loss)
Expenses
Film costs
Concession costs
Advertising and promotion
Amortization
Employee wages and benefits
Employee bonuses
Rent (include sales leaseback)
Theatre operating costs
General and administrative
Website Redesign
Flixrewards Points Cost
Flix Rewards Upfront Costs
Total expenses
Revenue
Box office revenue
Concession revenue
Other income — arcade games
Other income — party room rentals
Total revenue
22
11
870
(808)
(66)
2,951
738
2,213
2,922
24,732
5,987
732
4,669
12,105
1,275
4,875
8,213
1,567
125
64,279
42,073
24,104
673
351
67,201
2017
23
55
870
(824)
(68)
3,668
917
2,751
3,612
28,748
7,045
897
4,947
12,347
1,301
4,972
8,422
1,598
1,014
3,500
74,792
48,986
28,373
687
358
78,404
2018
23
125
870
(840)
(69)
8,161
2,040
6,121
8,052
29,886
7,488
1,215
4,931
12,594
1,327
5,071
8,764
1,630
1,035
73,941
50,989
29,938
700
365
81,993
2019
24
165
870
(857)
(71)
9,046
2,261
6,785
8,915
30,842
7,831
1,389
4,984
12,846
1,353
5,173
8,866
1,663
1,055
76,003
52,660
31,171
714
372
84,918
2020
24
163
870
(874)
(72)
9,301
2,325
6,976
9,190
31,455
7,989
1,567
4,827
13,103
1,380
5,276
9,044
1,696
1,076
77,414
53,707
31,789
729
380
86,604
2021
Appendix XIX: Pro Forma Income Statement
First View Theatres Inc.
Statement of earnings (For the years ending December 31)
(Under ASPE)
(In thousands of C$)
Interest income
Investment Income (50% CBG)
Gain from sales leaseback
Interest expense
Foreign exchange gain (loss)
Income before taxes
Income taxes (25%)
Net earnings
Assumptions:
Inflation set at 2%
Not enough data to estimate impact from additional
ticket/concession sales from CBG
$10 premium from PPV
Futures contract settled December each year at 2%
inflation
CGB has a June year end, so investment income is @
50%
Appendix XX: Pro Forma Balance Sheet
First View Theatres Inc.
Balance sheet (As at December 31)
(Under ASPE)
(In thousands of C$)
Assets
Current assets
Cash and cash equivalents
Concession inventories
Prepaid expenses
Total current assets
Property, plant and equipment — net
Intangible assets
Goodwill
Investment in Connery’s Bar and Grill
Total assets
2017
2018
2019
2020
2021
12,509
418
281
13,208
34,066
3,818
2,423
1,000
54,515
16,832
427
286
17,545
29,559
3,378
2,423
1,000
53,905
21,879
475
292
22,646
28,602
2,938
2,423
1,000
57,610
30,317
485
298
31,100
24,058
2,498
2,423
1,000
61,078
38,634
495
304
39,432
19,671
2,058
2,423
1,000
64,584
Liabilities
Current liabilities
Trade payables and accrued liabilities
Film costs payable
Income taxes payable
Employee bonuses payable
Current portion of long-term debt
Current portion of redeemable preferred shares
Deferred profit from sales leaseback
Liability for rewards points
Total current liabilities
Long-term debt — term loan
Redeemable preferred shares
Total liabilities
1,726
2,203
738
1,275
1,275
1,500
3,480
1,691
13,888
14,036
6,000
33,924
1,760
2,247
917
1,301
1,275
1,500
2,610
1,691
13,301
12,761
4,500
30,562
1,796
2,292
2,040
1,327
1,275
1,500
1,740
1,691
13,660
11,486
3,000
28,146
1,831
2,338
2,261
1,353
1,275
1,500
870
1,691
13,119
10,211
1,500
24,830
1,868
2,385
2,325
1,380
1,275
1,500
1,691
12,424
8,936
21,360
Shareholders’ equity
Share capital
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders’ equity
4,000
16,592
20,592
54,515
4,000
19,343
23,343
53,905
4,000
25,464
29,464
57,610
4,000
32,248
36,248
61,078
4,000
39,224
43,224
64,584
Property, plant and equipment
Opening balance
Capital additions
Dispositions
Amortization
Closing balance
Amortization of intangible assets
Total amortization
2017
40,406
3,659
(5,770)
(4,229)
34,066
440
4,669
2018
34,066
2019
29,559
3,534
2020
28,602
2021
24,058
(4,507)
29,559
440
4,947
(4,491)
28,602
440
4,931
(4,544)
24,058
440
4,984
(4,387)
19,671
440
4,827
Assumptions:
Cash used to balance total assets with liabilities and shareholders equity
Cost method used to account for CBG, $40,000 added to inventory in 2017/2019 for PPV
CPA Capstone 1
First View Theatres Inc. Analysis
To:
Board of Directors
From: Renker and Curtis Co.
Date: March 30, 2017
Re:
Assessment of Current Situation
Executive Summary
First View Theatres (FVT) is a privately owned company currently operating theatres in
southwest Ontario. The company differentiates themselves from large national players
since they understand their local patrons and choose films that cater to the local
community. Despite the decrease in revenue in 2016, the company is still profitable
overall. Executive management have different opinions as to where they see FVT in the
future. Therefore, as consultants at Renker and Curtis Co. (RCC), we must assess the
situation, analyze the available strategic opportunities, and recommend what is the best
direction FVT should take given the current constraints.
The success of the industry is highly dependent on the films released in the year. In
order to remain competitive, smaller competitors need to negotiate favorable rights to
blockbuster films and continuously upgrade their facilities to improve the overall
experience. FVT must decide whether to expand geographically, invest in premier
experience upgrades, or diversify their services by investing in a game place and/or
restaurant in order to assist with remaining competitive in the film industry.
After an assessment of our current situation, we recommend the following options to be
implemented:
1. Renovate FVT auditorium and update theatre technologies aiming to provide
premium plus viewing experience to customers (2017)
2. Partnership with Connery’s Bar and Grill (CBG) and open CBG adjacent to FVT.
(2017)
3. Implement customer reward programs – Flix Rewards (2018)
4. Update company current website and develop mobile application (2017)
These options will help FVT achieve their objective of achieving an increase in box
office revenues, improving margins for concession, and increase overall net earnings as
well as staying aligned with their mission, vision, and core values.
1
Table of Contents
Introduction ………………………………………………………………………………………………………. 3

Assessment of FVT ……………………………………………………………………………………………. 3

Vision Statement ……………………………………………………………………………………………. 3

Mission Statement ………………………………………………………………………………………….. 4

Key Success Factors ………………………………………………………………………………………. 4

Goals and Stakeholder Preferences ………………………………………………………………….. 5

Current Competitive Strategy …………………………………………………………………………… 6

Constraints to Decision Making ………………………………………………………………………… 6

Financial Analysis …………………………………………………………………………………………… 7

Analysis of Strategic Options …………………………………………………………………………….. 10

Option 1: Cinema LaRoche (CLR) …………………………………………………………………… 10

Option 2: Connery’s Bar and Grill (CBG) ………………………………………………………….. 14

Option 3: Premium Plus Viewing (PPV) …………………………………………………………… 16

Option 4: The Games Place (TGP) …………………………………………………………………. 18

Recommendation of Strategic Option …………………………………………………………………. 20

Decision Criteria …………………………………………………………………………………………… 21

Comparison of Strategic Options …………………………………………………………………….. 21

Recommendation …………………………………………………………………………………………. 24

Analysis of Secondary Options ………………………………………………………………………….. 24

Flix Rewards ………………………………………………………………………………………………… 24

The Mobile Strategy ……………………………………………………………………………………… 26

Implementation Plan ………………………………………………………………………………………… 27

Financial Forecast and Financing ……………………………………………………………………. 28

Key Performance Indicators …………………………………………………………………………… 28

Financing Recommendation …………………………………………………………………………… 30

Analysis of Operational Issues …………………………………………………………………………… 30

General Operational Issues ……………………………………………………………………………. 30

Governance Issues ……………………………………………………………………………………….. 31

Performance Management Issues …………………………………………………………………… 33

Audit Issues …………………………………………………………………………………………………. 36

1
Tax Issues …………………………………………………………………………………………………… 37

Finance Issues …………………………………………………………………………………………….. 38

Conclusion ……………………………………………………………………………………………………… 39

Appendices …………………………………………………………………………………………………….. 40

2
Introduction
The purpose of this report is to analyze First View Theatre Incorporated’s (FVT)
business strategy. The report will use external and internal analysis to provide insight
into the company’s performance. Financial analysis over key ratios in comparison
against industry benchmarks will be performed, and alignment between the company’s
vision and mission statement versus its current and future competitive strategies will be
considered.
Assessment of FVT
Vision Statement
The vision statement paints a picture of what an organization wants to achieve over
time, stating the organization’s long term focus. It should discuss the following:
● Future for the company
● Clear and concise timeline for goals
● Vision that both customers and employees find valuable
FVT’s Board of Directors approved the following vision statement:
“Our vision is to ensure every guest enjoys a premier entertainment experience each
and every time they visit our theatres.”
FVT’s vision is in line with the shareholders’ aspirations for the business, and provides
an excellent long term aspiration that the organization can continually strive towards.
3
Mission Statement
The mission statement states the organization’s purpose, defining its service, customer
value proposition and target market.
FVT’s Mission is “to provide a premier entertainment experience tailored to the local
community. We accomplish this by hiring and training employees to be respectful,
attentive and friendly; selecting the best films to appeal to the local community; ensuring
clean and safe venues for employees and attendees; and supporting entertainment and
arts in the local community.”
The mission statement clearly identifies the purpose of the company and defines the
target market. It also identifies how the company will bring value to its customers and
remain competitive in the industry.
Key Success Factors
Below are key factors that have led to FVT’s success:
● Remodeled auditoriums (digital capabilities)
● Diverse choice of concession goods
● Use of promotions to gain a competitive edge
● Located within local communities that need an entertainment sector
● Support to local communities – Workforce and Non-Profit events
4
Goals and Stakeholder Preferences
FVT has the following goals for 2017:
● Increase box office revenue per attendee by 5% to $9.10
● Improve concession margins by reducing costs as a percentage of concession
revenues to 23%
● Increase net earnings by 5%
The first two goals will bring FVT on par with industry benchmarks. In addition, the
majority of the stakeholders would like to see growth for FVT, but have different
preferences in achieving growth:
Stephanie Lightfoot – Chief Executive Officer (CEO)
● Continue to build reputation and grow within industry
● Expand geographically
Lanny Lightfoot – Chief Financial Officer (CFO)
● Achieve economies of scale
● Increase overall profits while maintaining controlled growth
Viktor Pablo- Chief Technology Officer (CTO)
● Explore options to diversify company
● Expansion through Synergy
5
Kent Lightfoot – Chair Member
● Grow through mergers and acquisitions of new theatres in local communities
● Protect the FVT Brand
Sheila Lightfoot – Chair Member
● Diversify film selections
● Protect the FVT Brand
Current Competitive Strategy
FVT intends to differentiate from other movie exhibitors by providing the local
community with a premier entertainment experience. By presenting indie films that cater
to local tastes and supporting local non-profit organizations in the entertainment and
arts industry, FVT hopes to provide an experience to moviegoers that other exhibitors
cannot replicate. However, FVT currently attracts customers by offering lower prices
than its competitors. The company’s current strategy does not align with its vision and
mission.
The report has used two analyses (Appendix I, II) to gain an understanding over the
internal and external factors that can influence the direction of the company.
Constraints to Decision Making
● Stagnated growth in the supply of moviegoers, limiting revenue growth
● Debt covenant based on long term Debt-to-EBITDA
6
● Limited cash on hand to support multiple strategic initiatives
Financial Analysis
Profitability Ratios
Operating and Net Margins
FVT’s operating and net profit margins are 5.4% and 3.0% respectively, both well below
industry averages of 9% and 6%. This suggests that the company is not operating as
efficiently as its peers, earning less on each dollar of sales. A few factors contribute to
the low profit margins:
● Box office revenue per attendee (BORPA) – Currently at $8.67, $0.43 less than
the industry benchmark of $9.10 and $0.22 less than the previous year. By
charging less than competitors, FVT would need to lower costs in order to
achieve profit margins that are at par with the industry.
● Concession revenue per attendee (CRPA) – This is at $4.95, which is $0.30 less
than the industry benchmark but $0.32 higher than the previous year. In the past
three years, CRPA has steadily grown. The fact that box office attendance has
declined while CRPA has grown signals that patrons are willing to spend more on
concession items.
Return on Assets (ROA)
FVT has a ROA of 4%, lower than the industry benchmark of 4.7%. The company is not
utilizing its assets as efficiently to generate revenue compared to its peers. There could
be opportunities to identify underutilized assets and use them to generate revenue more
7
effectively. Although higher than previous year’s return by 0.6% points, overall ROA has
been trending downwards by 0.4% points since 2014.
Return on Equity (ROE)
FVT has a ROE of 10.8%, higher than the industry benchmark of 10.4%. However, it
has declined 4.6% points over the past 3 years, signaling that FVT has struggled with
declining profitability over that time frame.
Liquidity Ratios
Current Ratio
FVT’s current ratio of 0.3 is below the industry average of 0.67, suggesting that the
company may have difficulty in paying off its debts with its assets in the short-term. In
order to compensate, FVT has been delaying payment on its payables. However, their
current ratio has been trending upwards over the past 3 years, as FVT has been
reducing their balance of short term liabilities.
Quick Ratio
FVT’s quick ratio is 0.22, a 27% decrease compared to the current ratio while the
industry average is a 5% decrease compared to the current ratio. FVT could be taking
on too much risk by not maintaining a reasonable buffer of cash and cash equivalents
compared to the industry.
Days in Payables
8
The average number of days it takes for FVT to pay off its payables is 44 days, which
has increased by 5 days year over year. It is also 12 days above the industry average of
32 days. The company may not receive favourable credit terms from its suppliers, and
costs may be higher due to avoidable interest on the outstanding payables.
Days in Film Costs Payables
FVT pays off its film costs payables in 33 days, which is 2 days earlier than the industry
average of 35 days, and has decreased by 3 days since 2014. It is possible that FVT
may not be taking advantage of the opportunity to hold onto a higher cash balance and
stretching their payables to film suppliers. This is not optimal if there is no early payment
discount with their suppliers.
Solvency Ratios
Debt-to-Equity (D/E)
FVT’s D/E is 1.69, which is higher than the benchmark of 1.2. The company is more
leveraged than its competitors, financing its growth with more debt than equity. Both
solvency ratios have decreased since 2014, signaling that FVT has been reducing their
overall debt obligation over time.
However, high financial leverage plays a role in the poor profitability of the company, as
a significant portion of its operating income (23%) goes towards interest payments.
Furthermore, obtaining further financing through debt is more difficult and costly, given
FVT’s debt position.
9
Long-Term Debt-to-EBITDA
FVT has a debt covenant where its long-term debt (including current portion of longterm debt and excluding the retractable preferred shares) to EBITDA cannot exceed
2.5. It is currently at 2.02, suggesting the company has the ability to seek additional
debt financing to pursue strategic initiatives. However, the company is already highly
leveraged compared to its competitors, as mentioned above.
Analysis of Strategic Options
Option 1: Cinema LaRoche (CLR)
An option for FVT is to acquire CLR, a theatre company currently operating in Quebec.
Qualitative Analysis
Advantages
● CLR has a loyal customer base and operates in Quebec
● Opportunity to expand geographically into another province.
● Theatre size is similar to FVT’s; management can utilize their current expertise.
● Marcel can stay for two years to assist the transition.
● Opportunity for FVT to access alternative film distributors.
Disadvantages
● FVT has no experience/knowledge about Quebec market.
● Marcel more willing to sell shares of CLR to take advantage of CGE.
10
● CLR is a flat organization with all decisions reporting to Marcel.
● Transition from Marcel to new management may propose challenges due to a
heavy workload.
● Marcel’s replacement may lack of familiarity in CLR’s operation.
Strategic Fit
● Vision – Aligned. CLR offers after-film parties with guest-speakers and 3D screen
capabilities, which contributes to a premier experience.
● Mission – Aligned. CLR shares similar core values to FVT and selects films that
appeal to the local communities.
Valuation of CLR
Income Based Valuation – Capitalized Cash Flow Approach (Appendix V)
The value of CLR shares as calculated using the capitalized cash flow approach is
approximately $7.8 million using 14% capitalization rate and $8.4 million using 16%
capitalization rate.
Asset Based Valuation – Net Asset Approach (Appendix VI)
After fair value adjustments, the net asset value has decreased from $10.3 million to
$6.1 million. By using a range of 14% to 16%, CLR is valued between $5.2 to 7 million.
Conclusion
11
FVT should base their valuation on capitalized cash flow approach since it is typically
used when the historical records of a company is reflective of anticipated future
operating results. The recommended maximum purchase price is 8.4 million.
Financing Needs
The cost of purchasing CLR shares is $14 million. Marcel will consider a $6 million
payable on closing and take back a note payable of $6 million and earn-out of $2 million
payable in two-years, if revenue and operating margins are maintained.
Ratio Analysis (Appendix IV)
Solvency Ratios
The solvency ratios suggest that CLR is highly leveraged compared to the industry and
FVT. As a result, CLR is vulnerable to the risk of defaulting. It is risky since FVT has
bank covenants to consider and acquiring CLR would increase their total debt.
Profitability Ratios
ROE (188.7%) is significantly higher than FVT (10.8%) in 2016 since CLR has no
retained earnings, which artificially boost ROE. ROA (146.9%) is also significantly
higher than FVT (4%) since Marcel owns the head office building. No value is recorded
for PPE on the Balance Sheet, inflating ROA.
Efficiency Ratios
12
CLR has 44 days in payables, which is the same as FVT. Days in film costs payable (40
days) is higher than FVT (33 days). This indicates that credit is not being utilized to take
advantage of discounts and paying for avoidable interest costs.
Financial Reporting Issues
CLR would be considered subsidiary of FVT if shares were to be acquired and FVT has
three option to account for the purchase of CLR:
1. Consolidation method: Consolidated financial statements would be prepared. All
assets, revenues, expenses and revenues would be aggregated on a line-by-line
basis; intercompany transactions and balances are eliminated and noncontrolling interest in subsidiary is recognized.
2. Equity method: The purchase is initially recorded at cost and the carrying value is
adjusted thereafter to include FVT’s share of earning of CLR. Profit received from
subsidiary reduces the carrying value of the investment.
3. Cost method: The investment is initially recorded at cost and earnings such as
dividends are recognized only to the extent received or receivable.
Tax Issues
Acquiring CLR’s shares will allow Marcel to take advantage of the capital gains
exemption. In addition, both FLL, FVT and CLR would share the $500K SBD limit. From
FVT’s perspective, acquisition of control rules (AOC) will apply from the share purchase:
● AOC will trigger a deemed year-end for CLR.
● All accrued losses must be recognized at the deemed year-end.
13
● Any net capital losses will expire on the AOC, which is a disadvantage to FVT.
● Non-capital losses may be carried forward to be used after AOC subject to
certain conditions.
FVT can continue to use current UCC pool for assets depreciation for tax purposes.
Option 2: Connery’s Bar and Grill (CBG)
The investment with Fred Connery will open CGB at a location adjacent to FVT’s
London theatre. Under the partnership, FVT will own 40% of the business. Decisions
will be made jointly and both parties will share in the net assets and net earnings of the
business.
Qualitative analysis
Advantages
● There can be cross promotion with the restaurant and theatre
● Customized orders and new concession items.
● Good location
● Fred has 15 years of experience in the restaurant industry.
● Allows for diversification of non-theatre related revenue.
Disadvantages
● FVT is not used to operating under joint decision making.
● Fred has not been successful in securing financing from 3 banks, which may
signal issues with his forecasts
● Fred does not seem to have any experience in managing a restaurant.
14
● The restaurant might not be a premier experience.
● The restaurant industry has intense competition
Strategic Fit
●
Vision – Aligned. The investment improves the entertainment experience at
theatres through differentiated concession items.
●
Mission – Aligned. The investment will allow FVT to tailor food items to the local
community and improves the entertainment experience through differentiated
concession items.
Financial Analysis (Appendix VII)
Cash flows are positive in all years of operation, totaling $447K for FVT’s share in
earnings over 5 years. It will also create $112.5K in concession savings each year.
However, based on a five-year lease, the investment has a NPV of -$97K with an IRR of
13%.
Financial Reporting Issues
FVT will have joint control and an equal share in the net assets and earnings. Thus, the
venture is considered a jointly controlled enterprise under ASPE 3066. FVT can choose
either the cost or equity method for financial reporting.
Cost Method
15
The investment is recorded at cost, where any earnings received are recognized in
income when received.
Equity Method
The investment is initially recorded at cost and is subsequently adjusted to reflect the
investor’s share of the net profit or loss. Any dividends will reduce the carrying amount
of the investment.
Financing Needs
The investment will require $1 million immediately.
Option 3: Premium Plus Viewing (PPV)
FVT hopes to renovate two auditoriums in the London #1 theatre in 2017 and two more
in the Leamington theatre in 2019 with recliner seating and wall-to-wall screens. If
successful, FVT would implement this “Premium Plus Viewing” experience at other
theatres.
Qualitative Analysis
Advantages
● Enhanced theatre experience will improve FVT’s brand in London, Ontario.
● New bar service and adult-only area would increase concession revenue and
attract a new customer base.
● Improved technology would help FVT remain competitive moving forward.
16
● FVT reduces business risks by pilot testing at select theatres.
● FVT can charge premium prices and raise admission revenues for the future.
Disadvantages
● The PPV experience is only open to adults and not all age groups.
● PPV only improves the experience for customers at select theatres.
● Does not align with the Board o mandate to grow the company through
expansion or diversification.
● FVT will need to keep up with the rapid changes to technology in order to
continue charging premium prices.
● PPV will need to obtain liquor licenses and adhere to government regulations
over serving alcohol.
Strategic Fit
● Vision – Aligned. Improved auditorium technology and new bar service will
contribute to FVT’s vision to provide a premier entertainment experience.
● Mission – Aligned. The investment tailors to local customers’ preference for an
entertaining night out and a premier experience.
Financial Analysis (Appendices VIII – X)
The NPV of the investment is -$3K and $354K if a $8.50 premium or $10 premium is
charged, respectively. Once all the renovations are complete, annual after-tax cash
flows are estimated to be $1.3 – $1.4 million.
17
The contribution margin (CM) percentage is highest at 57.8% when an $8.50 premium
is charged, compared to the current CM of 55.9%. The $CM is highest when a $10
premium is charged at $22 per attendee compared to $7.61 per attendee currently.
However, the analysis assumes that CRPA would increase to $19 from $4.95, which
may be optimistic.
After the auditoriums are renovated and cash flows from PPV is stable, PPV is expected
to improve net earnings by approximately 100%, assuming current earnings stay
constant.
Financing Needs
An initial investment of $3.5 million in 2017 and $3.75 million in 2019 is required.
Option 4: The Games Place (TGP)
FVT will open an interactive amusement centre that will appeal to adults and children.
TGP will have a restaurant and bar in addition to an assortment of interactive games.
Qualitative analysis
Advantages
● Aligned with Board’s mandate to diversify into other forms of entertainment.
● No similar establishment in London.
● Proposed location is near the head office.
● Credits will not expire, providing an incentive for customers to come back.
18
● Targets a wide market.
Disadvantages
● Arcades are not trendy; younger audiences prefer internet gaming
● 20-year lease with renewal every 5 years and penalties if terminated early
● Management lacks experience in this venture.
● Increased financial reporting complexity
● Arcades machines wear down quickly and need maintenance.
Strategic Fit
● Vision – Not Aligned. FVT could alter the vision to be broader to cover the
diversification of other entertainment sources, as TGP is not a theatre.
● Mission – Aligned. The investment offers a unique experience that will support
the entertainment and arts in the local community.
Financial Analysis (Appendices X-XII)
The investment yielded an NPV of $662K.The forecasted balance sheet shows an
increase in PPE balances and the recording of deferred revenue, prize point liability and
ARO.
Financing Needs
TGP requires $6.1 million in upfront costs. The additional capital expenditures for
games from 2022-2024 will can be financed through the incremental cash flows from
TGP operations.
19
Financial Reporting Issues
Revenue Recognition
Per ASPE 3400, revenue can only be recognized once performance is achieved and
collection is reasonably assured. The requirement for collection will be met since
customers load credits to their play card. However, performance won’t be achieved until
the credits are used.
Prize Points
Per IFRIC 13, the prize points should be interpreted as part of the sales transaction
since it provides incentives to pay for a service. Therefore, the consideration of the
points should be at fair value and be a separately identifiable component of the sale.
Asset Retirement Obligation
There will be an ARO at the end of the project to restore the location to its original state.
Per ASPE 3110, the ARO will exist as a liability as it meets the definition of an obligation
since restoring the site will not yield economic benefit to FVT.
Recommendation of Strategic Option
Based on our analysis of the strategic options above, we have assessed each option
using the decision criteria below:
Decision Criteria (1 Best to 4 – Worst)
CLR
CBG
PPV
TGP
Meets Vision and Mission (Strategic Fit)
3
2
1
4
20
Provides Long-Term Sustainability
4
3
1
2
Meets Required Rate of Return
4
3
2
1
Upfront Investment Required
4
1
2
3
Financing Availability
3
1
2
4
Competitive Advantage – Differentiation
3
4
2
1
Total Score
21
14
10
15
Overall Ranking
4
2
1
3
Decision Criteria
1. Strategic fit: The strategic option must align with the FVT’s vision and mission.
2. Provides long-term sustainability: The option must improve FVT’s financial
position and cash flows moving forward.
3. Required rate of return: The option must meet or exceed the Board of Director’s
required rate of return.
4. Upfront investment required: Whether initial investment costs are required is a
key decision factor, as it affects the company’s current cash flows and financing
ability.
5. Financing availability: The company must be able to obtain sufficient funds for
the strategic option.
6. Competitive advantage: The option must allow FVT to differentiate itself from
other competitors for the future.
Comparison of Strategic Options
Cinema LaRoche (CLR)
21
Acquiring CLR is not recommended. Despite the opportunity to expand geographically
into Quebec, there are too many risks associated with this option. The income-based
and asset-based valuation suggests that the selling price of $14 million is overvalued.
CLR is too highly leveraged by debt with negative cash flows. Additional costs relating
to rent, capital expenditures, and new management salary and benefits will increase the
overall risk. In addition, CLR does not offer assets that would help improve the
entertainment experience at FVT’s current theatres. Also, CLR does not help improve
FVT’s brand recognition. Finally, management is not experienced in the preferences
and language of the Quebec market and transitioning Marcel out of his role will propose
challenges due to his heavy workload. It would be best if FVT pursued another option at
this time.
Connery’s Bar and Grill (CBG)
CBG fulfills the majority of the decision making criteria, bringing in steady cash flows
with long term stability. There is alignment with both FVT’s vision and mission, as is
improves the entertainment experience through unique concession items tailored to the
local community. However, the investment has a return of 13%. FVT can negotiate to
have 50% ownership, as there is joint decision making and an equal share of earnings
and assets. Increased ownership has an NPV of $39K. If Fred agrees, the option is
recommended. FVT can also meet their shareholder goal for BORPA by only offering
discounts to restaurant patrons for premium admission tickets. The option should
reduce concession costs and help increase earnings by $518k over the 5 year lease.
22
Premium Plus Viewing (PPV)
Our financial analysis shows two separate outcomes based on the two price points: $3K NPV for an $8.50 premium and $354K for a $10 premium. Therefore, pursuing PPV
is highly profitable and meets the Board’s required return of 15% if a $10 premium on
admission fees is charged.
PPV is aligned with FVT’s current mission and vision to provide a premier entertainment
experience to customers. Based on our 10-year projection, PPV is a sustainable option,
as it brings steady positive cash flows to FVT annually. As competitors have begun to
implement similar high-end technologies, FVT will be able to maintain competitive with
other theatres through PPV.
After renovating the two auditoriums in London #1 theatre, FVT should assess the
profitability of PPV compared to current projections. If PPV meets or exceeds current
projected cash flows, FVT can consider implementing PPV in the Leamington location in
2019 and other locations in the future. FVT can reinvest the net cash flows from PPV to
fund future renovations.
The Games Place (TGP)
Although TGP offers opportunities of long term sustainable profits, and differentiation in
entertainment, it does not fit the vision of the company to improve the movie experience.
The current management team does not have the expertise to be successful with a
venture of this size within the gaming centre industry. Additionally, it is a risky
23
proposition since the company will need to invest a high amount of capital into assets
over a long term in a building lease. FVT would inquire penalties if they wish to end the
venture earlier, and deal with the aftermath of selling the assets and providing for the
ARO. TGP does not synergize well enough with FVT’s current operations to justify the
long term commitment. Therefore, it is not recommended at this time.
Recommendation
Our overall recommendation is for FVT to pursue and implement PPV and negotiate the
ownership structure of CBG. Together with addressing operational issues identified
below, FVT will achieve the growth goals set by the shareholders.
Analysis of Secondary Options
Flix Rewards
One of the secondary proposals FVT should consider implementing is the Flix Rewards
program. The points program will increase both box office and concession revenues
and provide better value for FVT’s customers.
Qualitative Analysis
Advantages
● Synergy; Customers earn points at the theatre and restaurants (CBG).
● Analytics can be performed over customer data to identify trends.
● Access to new customers from different markets.
● Decreases buying power of consumers.
24
Disadvantages
● Risk of cannibalizing box office revenue.
● 4-year commitment required, with a penalty for ending the contract early.
● Increased complexity in accounting for the unredeemed points.
● Does not provide a sustained competitive advantage, as competitors have
rewards programs.
Strategic Fit
● Vision – Aligned. The loyalty program enhances the customer’s experience and
synergizes with the company’s current operations.
● Mission – Aligned. The points will incentivize customers to return to the theatre
for a premium experience, while tailoring rewards redemption to local community
preferences.
Financial Analysis (Appendices XV)
From the analysis performed, FVT will be able to improve net sales by $2.7 million
annually once implemented. However, the company will need to factor in the upfront
cost of $3.5 million in the first year of implementation.
Financial Reporting Issues
FVT should expect 20% of the points to be unredeemed each year. As noted in the
TGP’s analysis, reward points are considered a liability since the points offered
25
incentives for the customers to pay for the service. This means the company will need
to record a liability on the balance sheet.
Recommendation
Based on the analysis above, FVT should implement the Flix Rewards program as it will
open an opportunity to reward loyal customers, and encourage customers to return to
their theatres and restaurants in the future. Given the shareholder’s goal of improving
net earnings by 5% in 2017, the Flix Rewards should be implemented in 2018 to allow
more flexibility in operations.
The Mobile Strategy
Another secondary option that FVT should consider implementing is the mobile
strategy. This involves updating the company’s current website and developing a new
mobile application that allows customers to book tickets online, view show times, write
reviews and access other interactive functions.
Qualitative Analysis
Advantages
● Allows FVT to keep up with new technology and remain competitive
● Allows customers to interact with company website and enjoy service more
conveniently, which aligns with FVT’s vision – providing premier entertainment
experience
● Increase box office revenue by expanding methods to improve ticket sales.
26
● FVT can leverage the mobile application to improve the experience by including
linking trailers and reviews.
Disadvantages
● Actual results and ROI are not easily measurable.
● There are on-going costs for FVT to maintain the website and mobile application.
● Research is required for the design of website and mobile application.
The website will likely be completed within a year. Initial costs are $125K. Despite
ongoing costs, there is low risk and FVT has sufficient cash flows to fund this option.
The website is a strategic fit and improves the customer experience and should be
implemented.
Implementation Plan
Task
Time
Frame
Champion
CBG
Immediately
with a July
1, 2017
launch date
PPV
Immediately Kent
Lightfoot, as
he is involved
in managing
FVT’s real
estate and
works with
Zobair to find
theatre
Cost
Zobair Terdel, $1 million
as he has
expertise in
operations
and execution
of activities
Initial costs of $3.5
million for
auditoriums in
London #1 theatre
in 2017, and $3.75
million for the
Leamington
location in 2019.
An estimated
Other
Requires a 50%
ownership
PPV auditoriums
should be
implemented in
London #1 theatre
first. As financial
results are obtained
from the first few
years of PPV
operations, FVT
27
locations.
Flix
Rewards
Mobile
Strategy
2018
$20,000 for initial
concession
inventory for each
new location.
Suisui Yang,
$3.5 million and
as she is in
$0.02 per point
charge of
earned
marketing and
has been in
contact with
Flix Rewards
Immediately Viktor Pablo,
as he is
experience
with
implementing
IT
$125,000
should evaluate
expansion of PPV to
other theatres.
4 year commitment;
penalty if terminated
early
May require ongoing
costs for
maintenance
Financial Forecast and Financing
A pro forma income statement and balance sheet are provided in Appendix XIX & XX.
Key Performance Indicators
Based on the recommendations, net earnings will increase 11.2% (compared to the 5%
growth goal) to $2.2 million in 2017, and grow from $2.75 to $7 million over the next 4
years. The forecasted BORPA will rise from $8.67 to $8.85 in 2017, meet the
shareholder target in 2018, and hit $9.44 in 2019 when PPV has been fully
implemented. As CBG has only been implemented at one location, the cost savings
generated will not have a significant impact on overall concession costs, which will
remain at 25% of concessions revenue. Further expansion will allow for more significant
concession cost savings. CRPA will also surpass industry standards in 2018, at $5.27.
The growth in earnings will increase the cash balance each year, allowing FVT to
28
accelerate expansion of PPV in other theatres, possibly pursue additional strategic
investments, and pay down existing debt.
Debt Covenant
The growth in EBITDA and cash flows from earnings will help reduce overall long term
debt, lowering the debt to EBITDA covenant to 2.02 in 2017 and 1.64 in 2018.
Financing
Financing Required
PPV
Flix Rewards
CBG
Mobile Strategy
Total Cost
Year 1
Year 2
Year 3
$3,500,000
$250,000
$3,750,000
$0
$3,500,000
$150,000
$1,000,000
0
0
$125,000
0
0
$4,625,000
$3,750,000
$3,900,000
Sale and Leaseback (Appendix XIII)
The proceeds from the sale of the building is $10.12 million. The lease is considered an
operating lease since there is no bargain purchase option or ownership being
transferred at the end of term, the lease is not a major part of the economic life of the
property, and the PV of $3.7 million is not substantially greater than the fair value of the
leased asset. The profit of $4.4 million that resulted from the transaction is deferred and
in proportion to the rental payments over the lease term, which is 5 years. Therefore,
$870K of the deferred profit is recognized as revenue each year.
29
Redemption of Shares (Appendix XIII)
The delayed redemption of shares will free up $1.5 million in cash flow each year. If the
redemption price increase is not waived, FVT can defer $9.16 million in total over the
five years. If FLL can waive the 10% penalty increase in redemption price, a total of
$7.5 million in total can be deferred over the five years and $1.66 million will be saved
from penalty fees.
Financing Recommendation
FVT has $1.86 million cash on hand available. It is recommended that FVT should
accept the sale and leaseback offer to assist with the financing of PPV, CBG, Flix
Rewards and the Mobile strategy. This will add an additional $10.12 million in available
financing, increasing the total available financing funds to $11.98 million. Total initial
financing required for all recommendations is $8.13 million (Appendix XVII). With the
remaining cash of $3.85 million, FVT can consider retaining the cash in short-term
investments in order to earn a return. This will allow FVT to have $3.75 million in cash
available to be used for the PPV investment at Leamington theatre in 2019.
Alternatively, FVT may also make repayments on their long-term debt to reduce
financial leverage, or considering funding pension plans for employees.
Analysis of Operational Issues
General Operational Issues
Vision and Mission Statement Update
30
The vision and mission statements have been updated to reflect the recommendations
provided above:
Vision
“Our vision is to ensure every guest enjoys a premier entertainment experience each
and every time they visit our theatres, with innovative technology, unique cuisine and
excellent customer service.”
Mission
“To provide a premier entertainment experience tailored to the local community. We
accomplish this by hiring and training employees to be respectful, attentive and friendly;
selecting the best films and crafting unique cuisine to appeal to the local community;
ensuring clean and safe venues for employees and attendees; and supporting premium
entertainment and arts in the local community.”
Governance Issues
Board Composition
Viktor (CTO), Lanny (CFO), and Stephanie (CEO) are currently part of the management
team at FVT as well as holding a position in the Board of Directors, which causes a
conflict of interest since they are potentially assessing their own performance and
compensation. Therefore, opinions and decisions are subjected to bias due to their
personal involvement with the company. FVT should consider additional board
31
members that have experience in the theatre industry, but also expertise in audit,
finance and law to complement existing members.
Board Structure
Board members have a lot of responsibilities without defined roles. It is also not
practical for the entire board to meet on every single matter. FVT currently has no
formal board of committees to review hiring and audit functions, which increase risk if
the company continues to grow.
Common subcommittees recommended to be established are the following:
● Nominating Committee – responsible for evaluating board size and effectiveness.
● Audit Committee – responsible for overseeing the company’s quality and integrity
of financial reporting functions.
The Board only meets twice a year and since major shareholders have different
opinions regarding the future of the company and strategy the company should moving
forward, it is recommended to increase the frequency of meetings to four times per year
to discuss quarterly financial results, and ensure actions that are implemented align with
FVT’s strategy.
Code of Conduct and Ethics
FVT requires a code of conduct and code of ethics to prevent the risk of legal liability
and loss of reputation with the company. Senior management is also prone to the risk
32
of personal liability if they fail to develop ethical standards to follow. The code of ethics
should reflect the values of FVT as well as standards of society.
The code of conduct will define what is considered acceptable and unacceptable
employee behavior. The policy document will also indicate the implications resulting
from violation of the code of conduct which can include suspension, penalties, and
possible dismissal.
Performance Management Issues
The Balanced Scorecard
The Balanced Scorecard (Appendix XIV) is a performance measurement tool starts at
the organization’s mission and vision. Strategic objectives are then determined in
alignment to the mission and vision, and finally how each objective will be measured.
The BSC allows organizations to:
● Provide expectations to employees and measure their actual results.
● Allow employees to develop their own personal goals.
● Recognize how their actions impact the organization’s objectives, and align their
goals with the shareholders goals.
● Recommend areas for improvement.
● Apply bonus compensation in a structured way.
Bonus Structure
The current bonus structure has a few drawbacks:
33
● No fixed formula for the bonus pool
● No fixed guidelines for distribution
● No formal indicators are used for assessment
As a result of these drawbacks, employees are unaware the bonus amount each year,
and whether or not a bonus is justified, which some employees may feel is unfair. To
mitigate this, FVT can tailor the BSC to each individual employee and measure their
achievements of objectives. Based on the weights assigned in the BSC and the
maximum bonus for each employee, FVT can calculate the bonus amount, while
providing a feedback mechanism for their performance.
Retirement Planning Alternatives
A retirement plan can increase employee satisfaction, as they recognize the
organization is making a long term investment in their future. FVT can look at 3 options
for retirement planning:
● Defined contribution plan
● Defined benefit plan
● Deferred profit sharing plan
Defined contribution plan
Under a defined contribution plan, the organization pays a fixed contribution to the plan
administrator. As the contribution is fixed, the employee bears the risk of how the fund
performs, in case the fund does not hold sufficient assets to pay benefits.
34
Defined benefit plan
Under a defined benefit plan, the future benefits paid out are defined in the plan terms.
As the benefits are defined, the employer bears the actuarial and investment risks. Due
to the additional risk, financial reporting is more complex.
Deferred Profit Sharing Plan
Under a deferred profit sharing plan (DPSP) the employer elects to share profits with
employees. The employee bears the risk of the plan, as contributions are based on
company performance, and benefits are not defined.
Tax Implications
The tax implications are similar across the three types of plans. Contributions made by
FVT to the plan are deductible for tax purposes. For employees, any contributions they
make to the RPP is deductible; they do not make contributions for a DPSP.
Furthermore, employees do not pay personal taxes on the RPP or DPSP until the funds
are withdrawn from the plan, deferring income taxes. However, a DPSP cannot be
registered if the employer or related individual is a beneficiary (Kent, Sheila, Stephanie,
Lanny and Viktor are shareholders). Taxes will not be deferred for those individuals.
Setting up a RPP or DPSP to compensate employees would be more tax efficient than
paying bonuses, as this would be taxable to employees.
35
Audit Issues
Control Deficiencies
Based on the current procedures, there are a deficiencies that could be improved at the
Sarnia theatres. They affect both admission and concession sale procedures. See
Appendix XXI for an explanation of risks and areas for improvement.
Goodwill Impairment (Appendix XVI)
Per ASPE 3064, goodwill should be tested for impairment when there are indicators that
the carrying value of the asset is greater than the fair value. When the carrying value is
indeed greater than the fair value, the asset will be impaired and written down to its fair
value. In the case of Sarnia operations, the emergence of a national competitor and a
decline in their projections are impairment indicators. Per the analysis performed
(Appendix XVI), the fair value of the company was determined to be $3 million, while the
carrying value of the company was $5.4 million. This means that goodwill is possibly
impaired and a write-down equal to the excess calculated ($2.3 million) may be
required. This will need to be investigated further by the auditors.
In order to test the impairment, the auditors will need to inquire with management about
indicators of impairment. Auditors will ask for support such as internal financial
statements to calculate their own forecast and projection. Afterwards, they will need
support for the carrying value of any material assets or liabilities (such as equipment
and leasehold improvements) to calculate the anticipated carrying value for comparison
against the fair value of the goodwill. They will likely vouch the assets to invoices and
36
recalculate the depreciation on the PPE to determine the carrying value. Lastly, the
auditors will need to test the valuation of FVT’s anticipated fair value. FVT will need to
provide their calculation working papers and documentation that will allow the auditors
to perform their own calculations for reasonability.
Tax Issues
Employer-provided Vehicle
FVT would like to determine whether providing cars to executives would be more tax
efficient for the executives than providing an annual allowance of $24,000. The
executives would receive taxable benefits known as standby charge and operating cost
benefits if they were provided with a vehicle owned by FVT. The standby charge is
based on the purchase or leased cost of the vehicle, and the benefit is reduced if the
vehicle is primarily used for business purposes (>50%). Whether this is more tax
efficient than a fully taxable allowance of $24,000 is dependent on the cost and usage
of the vehicle. FVT may also consider providing a reasonable allowance based on
kilometres instead, which is not taxable to the employee. This would be the most tax
efficient option.
Dividends or Salaries
Kent and Sheila earn $350,000 in annual salaries, but would like to receive dividends
instead moving forward. There are a few advantages and disadvantages in
compensating shareholders with dividends compared to salaries:
37
Advantages
● Dividends are not subject to personal withholding taxes, such as EI and CPP,
which need to be deducted each pay period and remitted to the CRA regularly.
● Dividends do not need to meet the reasonability test, as it is not deductible to the
corporation. Salaries need to be reasonable for the amount and type of work
performed by the employee. As Kent and Sheila are planning to cut back on work
in FVT, the CRA may question the deductibility of a $325,000 salary.
Disadvantages
● Dividends do not create contribution room for RRSP. Income used to make
contributions to an RRSP is not taxable to the individual; instead, taxes are
deferred until funds are withdrawn.
● Dividends are not deductible to the corporation, so FVT would have an increase
in taxable income of $650,000 if salaries were not paid to Kent and Sheila.
Typically, a mixture of dividends and salary as compensation for shareholders would be
most tax efficient. However, more information on FVT’s current tax position and the
shareholders’ personal income sources is required to provide an accurate estimate.
Finance Issues
Hedging Foreign Exchange Risk
The US exchange rate has been fluctuating significantly since 2014 and it is
recommended that FVT should look into hedging to decrease the risk of foreign
38
transactions. A forward and future contract are similar in nature, but the difference is
that forward contracts are privately negotiated while future contracts exchange traded
with less risk. Appendix XVIII provides a qualitative analysis associated with the
contracts. It is recommended that FVT purchase the future contract and lock in at the
December 2017 rate of 0.7766 since this will achieve the highest foreign exchange gain,
while mitigating foreign exchange rate risk.
Conclusion
After evaluating FVT’s business model and assessing the internal and external
situational analysis as well as analyzing the current strategic options available, we
recommend to implement PPV and CBG. These investments will be financed with the
help of sales leaseback, which will increase available funds by $10.12 million. With the
residual funds, we recommend FVT to implement mobile strategy and Flix Rewards,
which will complement the implemented strategic options. These options will help the
board achieve their core objectives as well as support the company’s vision, mission,
and values.
39
Appendices
Appendix I: SWOT Analysis
Strength (Internal)
● FVT has an established reputation in
their community.
● Differentiates itself from market leaders
by understanding the locals and what
films appeal to their local community.
● Sheila has a strong relationship with film
distributors. This gives FVT an advantage,
since the company is usually able to
obtain their desired licenses for films.
● Significantly lower employee turnover
rates compared to the industry average.
● Kent and Sheila are involved in the
community and in several charitable
boards.
● FVT promotes from within, which
increases motivation for employees to
work hard in order to be promoted.
● All theatres have gone through
upgrades, which is beneficial since
comfortable seating and overall theatre
quality are leading factors that moviegoers
consider.
● A simple board structure compared to
other companies, which may speed up the
decision making process.
● FVT has added arcades in their theatre
lobbies
Weakness (Internal)
● FVT currently has weak controls in
place to prevent theft, which could result
in lower profit margins.
● Limited capital to pursue strategic
options.
● The company website is also outdated,
which results in FVT losing market share
against their competitors who have a
more interactive and up-to-date website.
● No pension plan for employees and no
retirement/deferred profit sharing plan for
senior management.
● Management has different opinions
regarding the future of the company
● No fixed guidelines on how bonus is
distributed, which concerns the CEO.
● There is no code of conduct and code
of ethics, which increases the risk of
legal and personal liability.
● No formal subcommittees to assist the
board in decision making. (i.e.
Compensation, Risk, etc.)
40
Opportunities (External)
Threats (External)
● There is a large untapped market for
special event exhibition for small-budget
films with a message, but this may tarnish
FVT’s brand.
● Many companies are broadening their
concession items to include lunches,
dinners, and bar services. This is an
opportunity for FVT to attract consumers
who are interested in a “night out”.
● There is a trend to implement a rewards
program to increase customer loyalty.
● Heavy moviegoers in Canada primarily
reside in Ontario (49%), while Quebec is
the second largest (21%). (Source #1)
● There have been recent technological
advancements in entertainment (virtual
reality) that FVT could capitalize on to
enhance the theatre experience.
● Partner with local vendors to provide
concessions tailored to the local
community.
● Enhanced digital platform for purchasing
tickets where FVT can track moviegoer
preferences and use targeted advertising.
● To expand or acquire companies within
Ontario or at another province.
● Few key players dominating the market,
which increases the risk of consolidation.
● There is also a rise of cheaper
substitutes to view films.
● Competitive mature market with slow
growth
● Profits are highly dependent on
filmmakers and the quality of the films
released in a given year.
● Shorter exhibition times for films, which
causes revenues to decline.
● Film costs are affected by USD
exchange rates, which increases the risk
of foreign exchange loss if the Canadian
conversion is unfavourable.
● 28% of moviegoers are attending less
films, while only 10% are attending more.
(Source#1)
● Larger competitors have the economies
of scale to implement disruptive changes
in the industry.
● Cineplex is the leader in revenue and
operates in all of the busy and profitable
metropolitan areas (i.e. Toronto, Montreal,
and Vancouver) and earn three times as
much as the industry average per
location. (Source#2)
41
Appendix II: Porter’s 5 Forces
Barriers to Entry
(Level: High)
● Theatre exhibition industry is in a mature stage, which results
in lower profit margins and slow growth.
● Industry requires heavy capital to enter and to remain
competitive, smaller operators need to focus on upgrading their
facilities to include the latest technology.
● There are only a few key players dominating the market.
Industry leader holds 65% market share.
Bargaining Power of
Suppliers (Level:
High)
● Companies compete for film licenses and exhibitors must
negotiate film costs on a film-by-film and theatre-by-theatre
basis.
● Suppliers hold high bargaining power, since film distributors
represent major production companies who own the film, so
FVT cannot easily switch suppliers.
Competitive Rivalry
(Level: High)
● Two of the largest companies in the industry own 73% of the
market share, while the remaining 27% of the market is shared
amongst 416 companies.
● Increased risk of consolidation occurring within the market.
● Industry is not considered attractive for newcomers due to its
low profitability, slow growth, and competitive nature.
Bargaining Power of
Customers (Level:
High)
● Variety of options to watch films at a lower cost and
revenues are dependent on whether or not the consumers
have the disposable income.
● Consumers will diverge to other substitutes if FVT’s prices
are too high.
Threat of Substitution ● There are numerous alternatives to visiting the theatres.
(Level: High)
Consumers have the choice of watching in-home videos,
DVD’s, pay-per-view, digital downloads, and internet
streaming.
● It requires little to no cost for consumers to switch to these
other mediums.
42
Appendix XXI – Control Deficiencies
Weakness
Implication
Response
Admission Sales – Only 1
staff member validates
and checks movie tickets
prior to admission into
theatre
Staff members could be
allowing their friends into
the theatre without a ticket,
or allowing their friends to
provide fake tickets for
admission.
FVT should hire a second
staff member that will check
the tickets alongside the first
staff member. This would
prevent the staff members
from allowing their friends
into the theatre without a
valid ticket.
Admission Sales Assistant Manager
manually inputs the
number of people in the
auditorium prior to the
film starting
This process is manual
which can lead to human
error when inputting the
values. This could be
causing the discrepancy
when the daily
reconciliation is performed
FVT should have a second
person perform a count prior
to the start of the film to
ensure the count is agreed
upon by both counters. A
recount will be performed if
there are differences.
Admission Sales Employee staff members
are able to attend free
films, however, no record
is kept
The discrepancy from the
reconciliation could be
related to the unrecorded
staff members viewing free
films
FVT should record and track
employees that are viewing
free films. Their attendance
should be included into the
daily reconciliation.
Concession Sales – A
inventory count is
performed on a weekly
basis and compared to
the perpetual inventory
record
Inventory counts are
performed too infrequently
and does not provide
management enough time
to deal with discrepancies
FVT should implement daily
inventory counts to
determine to track
discrepancies between the
count and the perpetual
system. Any variances can
be followed up on with staff
members that were on shift
that day.
43
External Sources
Telefilm and Movie Theatre Association of Canada (June 2015). Canadian Movie-going
Statistics. Retrieved from https://telefilm.ca/en/studies/canadian-moviegoing statistics
Gavin Smith (March 22, 2013). Movie Theatres in Canada Industry Market Research
Report. Retrieved from http://www.prweb.com/releases/2013/3/prweb10557302.htm
44
Appendix III: Vertical and Horizontal Analysis
DRAFT
2016
$
AUDITED
2015
$
AUDITED
2014
$
YoY Change
2016
2015
2016
% of Sales
2015
2014
Revenue
Box office revenue
Concession revenue
Other income — arcade games
Other income — party room rentals
Total revenue
41,057
23,445
660
344
65,506
46,511
24,224
651
341
71,727
45,117
22,481
648
350
68,596
-11.7%
-3.2%
1.4%
0.9%
-8.7%
3.1%
7.8%
0.5%
-2.6%
4.6%
62.7%
35.8%
1.0%
0.5%
100.0%
64.8%
33.8%
0.9%
0.5%
100.0%
65.8%
32.8%
0.9%
0.5%
100.0%
Expenses
Film costs
Concession costs
Advertising and promotion
Amortization
Employee wages and benefits
Employee bonuses
Rent
Theatre operating costs
General and administrative
Total expenses
24,142
5,887
718
4,691
11,868
1,250
3,926
7,972
1,536
61,990
25,953
5,261
703
4,640
13,075
3,975
4,020
8,607
2,078
68,312
23,362
5,176
695
4,628
13,292
1,850
3,978
9,550
2,080
64,611
-7.0%
11.9%
2.1%
1.1%
-9.2%
-68.6%
-2.3%
-7.4%
-26.1%
-9.3%
11.1%
1.6%
1.2%
0.3%
-1.6%
114.9%
1.1%
-9.9%
-0.1%
5.7%
36.9%
9.0%
1.1%
7.2%
18.1%
1.9%
6.0%
12.2%
2.3%
94.6%
36.2%
7.3%
1.0%
6.5%
18.2%
5.5%
5.6%
12.0%
2.9%
95.2%
34.1%
7.5%
1.0%
6.7%
19.4%
2.7%
5.8%
13.9%
3.0%
94.2%
Operating income (loss)
3,516
3,415
3,985
3.0%
-14.3%
5.4%
4.8%
5.8%
Interest income
Interest expense
Foreign exchange gain (loss)
Income before taxes
Income taxes (25%)
22
(792)
(93)
2,653
663
23
(851)
(172)
2,415
604
15
(910)
(55)
3,035
759
-4.3%
-6.9%
-45.9%
9.9%
9.8%
53.3%
-6.5%
212.7%
-20.4%
-20.4%
0.0%
-1.2%
-0.1%
4.1%
1.0%
0.0%
-1.2%
-0.2%
3.4%
0.8%
0.0%
-1.3%
-0.1%
4.4%
1.1%
Net earnings
1,990
1,811
2,276
9.9%
-20.4%
3.0%
2.5%
3.3%
Appendix IV: Financial Statement Ratios
Comparable ratios
Box office revenue per attendee
Concession revenue per attendee
Box office revenue per theatre (in
$thousands)
Liquidity ratios
Current ratio
Quick ratio
Solvency ratios
Long-term debt to equity
Total debt to equity
Total debt to assets
Activity ratios
Days in concession inventory (ending
inventory only, and not average)
Days in payable
Days in film costs payable
Profitability
Film costs to box office revenue
Concession costs to revenues
Advertising as % of revenues
Employee wages / benefits as % of
revenues
Theatre costs as % of total revenues
G&A as % of total revenues
Operating margin
Net profit margin
Return on assets
ROA adj for after-tax bonuses
Return on equity
Debt Covenants
Long term Debt to EBITDA
Pro Forma Statements
Benchmarks
2019
2018
2017
$9.10 $
9.44 $
9.10 $
8.85
$5.25 $
5.54 $
5.27 $
5.07
$
4,453
$
3,825
First View Theatres Inc.
2016
2015
2014
$
8.67 $
8.89 $
8.75
$
4.95 $
4.63 $
4.36
$
3,732
$
4,228
$
Cinéma LaRoche
2016
2015
$
9.25 $
9.11
$
5.34 $
5.27
$3,948 $
4,635
4,102
0.67
0.64
1.66
1.60
1.32
1.27
0.95
0.90
0.30
0.22
0.29
0.23
0.25
0.18
0.50
0.36
0.52
0.36
0.47
1.2
0.54
0.49
0.59
0.30
0.74
0.86
0.37
0.97
1.11
0.42
1.24
1.69
0.63
1.56
2.24
0.69
1.95
2.55
0.72
4.61
7.16
5.57
3.20
5.59
4.50
21
32
35
23
39
28
22
40
31
26
41
32
23
44
33
27
39
34
26
36
36
25
44
40
28
42
40
52%
23%
2%
59%
25%
1%
59%
25%
1%
59%
25%
1%
59%
25%
1%
56%
22%
1%
52%
23%
1%
53%
25%
5%
53%
24%
6%
19%
15%
16%
18%
18%
18%
19%
18%
18%
12%
6%
9%
6%
4.7%
4.7%
10.4%
11%
2%
9.8%
7.5%
10.6%
10.6%
20.8%
11%
2%
4.6%
3.5%
5.1%
5.1%
11.8%
12%
2%
4.3%
3.3%
4.1%
4.1%
10.7%
12%
2%
5.4%
3.0%
4.0%
4.0%
10.8%
12%
3%
4.8%
2.5%
3.4%
3.4%
11.1%
14%
3%
5.8%
3.3%
4.4%
4.4%
15.6%
14%
91%
8.6%
6.6%
146.9%
14%
93%
6.9%
5.4%
114.6%
188.7%
142.4%
0.98
1.64
2.02
2.02
2.22
2.22
Appendix V: Income Based Valuation
Valuation of Cinema LaRoche
Capitalized Cash Flow (in thousands of $)
Step 1 – Estimated maintainable operating cash flow (normalized EBITDA)
Notes
Income before interest and taxes
Add/deduct:
Building Rental Income
Manager Salary and Benefit
Savings in General and Admin Costs
Lease Savings due to Favorable Rates
Income from Marketable Securities
Add:
Amortization Per Income Statement
$
(1)
(2)
Estimated maintainable operating cash flow (normalized EBITDA)
$
2016
4,587
$
2016
4,587
(250)
(425)
300
(117)
(178)
(250)
(425)
300
(117)
(178)
2,013
2,013
5,930
$
5,930
Step 2 – Capitalized cash flow
Estimated maintainable operating cash flow (EBITDA)
Income taxes
Annual maintainable cash flow from operations after tax
$
Sustaining capital expenditures
Maintainable discretionary cash flows
Capitalization rate
Capitalized discretionary cash flows
Average Capitalized discretionary cash flows
PV of CCA tax shield of equipment
PV of CCA tax shield of Leasehold improvement
Capitalized value of operations
Add-back: Redundant marketable securities
Enterprise value
Interest bearing debt
Estimated fair market value of equity
(3)
(3)
5,930 $
(1,483)
4,448
5,930
(1,483)
4,448
(2,300)
2,148
14%
15,339
12,768
(2,300)
2,148
16%
13,422
13,422
1,849
123
14,739
1,690
16,429
(8,623)
7,806
1,746
140
15,308
1690
16,998
(8,623)
8,375
Conclusion:
The value of Cinema LaRoche shares as calculated using the capitalized cash flow approach is approximately
Notes
(1) Salary and benefits of the two managers replacing Marcel: $170,000 x 2 x 1.25 = 425,000
(2) Lease adj due to favourable market rates for Pierre, Laurent and Sharone theatres =
116,880
The favourable market rate is temporary and rate may change in the future, therefore the saving is not
maintainable and should be subtract from operating income
14%
16%
(3) PV of CCA tax shield for equipment
1,848,529
1,745,833
PV of CCA tax shield for leasehold improvement
122,500
140,000
Hidden below are case facts
Appendix VI: Asset Based Valuation
Cinéma LaRoche
Balance sheet (As at November 30)
(Under ASPE)
(In thousands of C$)
2016
Assets
Current assets
Cash and cash equivalents
Marketable securities
Concession inventories
Latent taxes and selling costs
Total current assets
Property, plant and equipment
Forgone Tax Shield
Latent taxes and selling costs
Total assets
Liabilities
Current liabilities
Trade payables and accrued liabilities
Film costs payable
Deferred subscriber fees
Total current liabilities
Shareholder’s loan
Total liabilities
Total Value
Book Value
FMV
Adjustment
20
1,690
315
Adjusted Net
Asset Value
(79)
20
1,690
315
(79)
1,946
(1,845)
(637)
(1,283)
19,450
(637)
(1,283)
19,476
1,923
1,860
985
4,768
–
1,923
1,860
985
4,768
8,623
13,391
–
8,623
13,391
2,403
21,295
23,698
10,307
Low (-14%)
High (+16%)
6,085
5,233
7,058
Notes:
Note 1: Forgone tax shield
Equipment – Class 8 (20%) FMV > Tax Value
(17030*20%*25%)/(15%+20%)-(12570*20%*25%)/(15%+20%)
Note 2:
Original Cost
Fair Market Value
Selling Costs (3% of proceeds)
Net Proceed for Tax Purposes
Lower of Cost or Proceeds
UCC / ACB
Recapture (Terminal Loss)
Taxabale Capital Gain – 50%
Taxes @ 25%
Latent Taxes and Selling Costs
Hidden below are case facts
637
Equipment
16,940,000
17,030,000
(510,900)
16,519,100
16,519,100
12,570,000
3,949,100
Leasehold
4,355,000
2,420,000
(72,600)
2,347,400
2,347,400
3,500,000
(1,152,600)
987,275
1,498,175
(288,150)
(215,550)
Securities
1,4…