The following information relates to Questions 13– 18.
Gertrude Fromm is a transportation sector analyst at Tucana
Investments. She is conducting an analysis of Omikroon, N.V., a
publicly traded European transportation company that manufactures
and sells scooters and commercial trucks. Omikroon’s petrol scooter
division is the market leader in its sector and has two
competitors. Omikroon’s petrol scooters have a strong brand-name
and a well-established distribution network. Given the strong
branding established by the market leaders, the cost of entering
the industry is high. But Fromm anticipates that inexpensive
imported small petrol-fueled motorcycles may become substitutes for
Omikroon’s petrol scooters. Fromm uses return on invested capital
as the metric to assess Omikroon’s performance. Omikroon has just
introduced the first electric scooter to the market at year-end
2014. The company’s expectations are as follows: Competing electric
scooters will reach the market in 2016. Electric scooters will not
be a substitute for petrol scooters.
The important research costs in 2015 and 2016 will lead to
more efficient electric scooters. Fromm decides to use a five-year
forecast horizon for Omikroon after considering the following
factors: Factor 1 The annual portfolio turnover at Tucana
investments is 30%. Factor 2 The electronic scooter industry is
expected to grow rapidly over the next 10 years. Factor 3 Omikroon
has announced it would acquire a light truck manufacturer that will
be fully integrated to its truck division by 2016 and will add 2%
to its total revenues. Fromm uses the base case forecast for 2015
shown in Exhibit 5 to perform the following sensitivity analysis:
The price of an imported specialty metal used for engine parts
increases by 20%. This metal constitutes 4% of Omikroon’s cost of
sales. Omikroon will not be able to pass on the higher metal
expense to its customers. EXHIBIT 5 Omikroon’s Selected Financial
Forecasts for 2015 Base Case (€ millions) Petrol Scooter Division
Commercial Truck Division Electric Scooter Division Total Sales
99.05 45.71 7.62 152.38 Cost of sales 105.38 Gross profit 47.00
Operating profit 9.20 Omikroon will initially outsource its
electric scooter parts. But manufacturing these parts in-house
beginning in 2016 will imply changes to an existing factory. This
factory cost € 7 million three years ago and had an estimated
useful life of 10 years. Fromm is evaluating two scenarios:
Scenario 1 Sell the existing factory for € 5 million. Build a new
factory costing € 30 million with a useful life of 10 years.
Scenario 2 Refit the existing factory for € 27 million.
13) Using Porter’s five forces analysis, which of the
following competitive factors is likely to have the greatest impact
on Omikroon’s petrol scooter pricing power?
A. Rivalry
B. Threat of substitutes
C.
14) Threat of new entrants The metric used by Fromm to assess
Omikroon’s performance takes into account:
A.degree of financial leverage.
B. operating liabilities relative to operating assets.
C. competitiveness relative to companies in other tax
regimes.
15) Based on Omikroon’s expectations, the gross profit margin
of Omikroon’s electric scooter division in 2016 is most likely to
be affected by:
A. competition.
B. research costs.
C. cannibalization by petrol scooters.
16) Which factor best justifies the five-year forecast horizon
for Omikroon selected by Fromm?
A. Factor 1
B. Factor 2
C.Factor 3
17) Fromm’s sensitivity analysis will result in a decrease in
the 2015 base case gross profit margin closest to:
A.0.55 percentage points.
B. 0.80 percentage points.
C. 3.32 percentage points.
18) Fromm’s estimate of growth capital expenditure included
inOmikroon’s property, plant, and equipment under Scenario 2 should
be:
A. lower than under Scenario 1.
B. the same as under Scenario 1.
C. higher than under Scenario 1.