Date: Nov 12th, 2014

Ankit Patil

Applied Corporate Finance Homework

1. Analyze Arch and its strategic position in the communication industry (financial analysis). Written
homework question Assess the John Adams valuation analysis in Exhibit 2. Are the forecasts
consistent with your analysis?
Strategic position in the Industry
Paging industry as a whole was not performing very good. Quarterly losses were normal in the financial
statements. Paging industry was facing competition from other communication services such as mobiles
phone. Although pagers were more affordable at the moment, pricing for the mobile phones was getting
more and more favorable to customers.
Arch is the third largest paging company in the industry. Its business was more reliable on proven
technology, low cost structure and excellent customer service. When it came to experimenting with newer
technologies, Arch let other competitors to test first. Arch had taken a beating on stock price. From
November 95 to July 96 stock had declined 60% whereas S&P 500 index had grown by few percentage
points. Although Arch had increased its revenues form year 93 to 95 its net losses increased as well.
Valuation Analysis
John Admas valuations starts with assumption that number of pagers in the industry will keep on rising
rapidly. He has assumed high growth of 55% in year 1996 and tapered down the growth to 5% in the year
2005.
He has also assumed that the monthly subscription plan of the pager will reduce somewhat. EBIDTA is
growing and company returns to profit in the year 2002.
Forecasts
According to me these forecasts seem to be highly optimistic. First the technology was rapidly changing.
In pager industry itself there were various products and their pricing plans. In these turbulent times it
would be difficult to forecast revenues and number of subscribers. I would hold on to the stock and sell if
company does not turn to profit in next year.

2. Assess BBBY's current performance, how does it compare to its competitors, what is driving its
superior ROE, is it sustainable?

Current Performance
In last last 4 years revenue had increased rapidly from $102,748 to $305,757 in the year 1994. Strounds
and Lechters were in the similar range. But JC Peney was very big department store $19.58 million sales
in 1994. Net Income Margin for BBBY was 7.13%. For Strounds, Lechter and JC Peney it was 1.27%,
3.14% and 4.80% respectively. Which shows us that BBBY was the most profitable amongst its
competitors.
Stocks of the company had increased 350% from the time it started trading and was trading 37 times the
projected earnings. BBBY were expanding their presence and building superstores. These superstores
allowed them to keep more SKUs and to improve the customer experience.
Financially also, BBBY had lower cost structure. Because of the superstore format, they didnt have
warehouses. They did not advertise. Their products were medium to high quality/price products.
Why superior ROE
Return equity for BBBY was 33.18%. For its competitors Strounds, Lechters and JC Peney it was
15.37%, 8.47% and 18.75% respectively. For BBBY its ROE was driven by higher profit before tax.
Sustainable?
BBBY did not distribute any dividends. It invested 00% back into the business. So everything else
remaining same financially its ROE is sustainable.
But it would be difficult for BBBY to maintain its profitability given increasing competition. Competition
was copying their model. Also increase in superstores would have an unknown impact on the market
share of BBBY. Till now BBBY prospered on the word of mouth publicity. If it had to advertise then it
will definitely eat into its profit margin.

Overall macroeconomic conditions might also affect it. If the home sales slowed or the interest rates
increased, BBBY will be hit by these. How much? Is unknown.