Author Archives: selimhasagasioglu

Doing the simple math in college admissions 🧮

46,000 applicants apply to a top-tier university in a given year. The university has only 2,000 seats for the incoming freshman class. The university’s statistical model based on historical measures implies that 40 students will enroll in a typical year out of 100 students admitted to the university.

How many students does this university need to accept so that beds and classrooms are filled at full capacity?

What is the admit rate of this university?

The same university wants to move up in the college rankings. One tactic the university could utilize is to increase selectivity and enrollment. So, the university rolled out a binding early decision (ED) round in addition to its regular decision rounds for the next admission cycle. That year, the university received 5000 ED applications and admitted 1000 students. In the regular decision rounds, the university received 41,000 applications. The class size for the incoming freshman did not change, staying constant at 2,000. The yield rate for the regular decision was expected to be 25%.

What was the overall rate of admission and yield for that year?

Did the university improve its yield and admission rates compared to those in the previous year?

Forward-looking or backward-looking 🏫

‘The irony of college admissions is that the decision whether to admit someone is based on the future, not the past. It ultimately hinges on a judgment about the potential of that teenager over the next four years on a college campus, not what they’ve done the previous four years in high school’

Taken from Jeff Selingo’s ‘Who gets in and Why’
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Does not this apply to all admissions (college, grad, and the professional schools)?

This is a domain in which predicting the future through the reliance on the past data may not work well.

Statistical modeling in corporate finance: Determining beta đź”®

Statistical modeling in corporate finance: Determining beta đź”®

As a statistical measure, beta estimation is prone to measurement error.

Which of the following inputs do affect beta estimates?

-Time period observed

-Time interval used

-Market portfolio against which the individual stock is benchmarked

-Whether close or adjusted close values are used

Solution to ‘Understanding Inventory Valuation for Automakers, a real-world example: Medium From the courses I have been teaching đź“–

Understanding Inventory Valuation for Automakers, a real-world example: Medium
From the courses I have been teaching đź“–

The following note was contained in a recent Ford Motor Company annual report:

Inventory Valuation–Automotive.

Inventories are stated at the lower of cost or market. The cost of most US inventories is determined by the last-in, first-out (“LIFO”) method. The cost of the remaining inventories is determined substantially by the first-in, first-out (“FIFO”) method.

If FIFO were the only method of inventory accounting used by the company, inventories would have been $1,235 million higher than reported this year and $1,246 million higher than reported last year.

1. Determine the ending inventory that would have been reported in the current year if Ford had used only FIFO.
2. The cost of goods sold reported by Ford for the current year was $74,315 million. Determine the cost of goods sold that would have been reported if Ford had used only FIFO for both years.
3. If the company had always used FIFO, what would have been the effects on taxes and retained earnings? Assume 30% marginal tax rate.

Story of Paola: Things to consider after getting a new job offer

Paola has many abilities. She is smart, hard-working, ethical, and amiable. She graduated from an estimable institution and has been working at a decent company that puts her skills to test every day. Recruiters have been contacting Paola for some time and after completing numerous interviews with different companies, she is now contemplating accepting an offer from a top global company. The company she is planning to join is ranked higher compared to her current company. Her total compensation in cash will increase by 70%. Even if she needs to relocate, the company will reimburse her for these expenses and offered her a hefty signing bonus. She will not receive any RSU or RSA but that is OK for her because her current compensation plan does not include such stock compensation schemes. On the cusp of accepting the offer, Paola actually needs to research more. What are the many other aspects she needs to know?
Hint: Even all the information I shared above, i.e. things she thinks that she knows certainly, may turn out to be bad for her. For example, as she dug more, she might find out that her hourly rate would decrease, compared to that in her previous company, despite the 70% increase in absolute salary (Some people are still OK with that considering that they do not have any side hustles or family commitments or they want to earn and save more money regardless of how many hours they work).
What else? There are many other things to consider. To be continued…

Management Science Series #158: Solution to the ‘Understanding acquisitions costs, retention and churn rates (Nintendo example)’ 🧮

Understanding acquisitions costs, retention and churn rates 🧮

Nintendo has launched Nintendo Online membership program. The membership allows members to play additional retro Nintendo games, as well as store data. Subscribers are charged $10 per month and cost of maintaining this service is $2 per month per customer.

Nintendo expects the churn rate for this service to be 3%.

What is the maximum acquisition cost per customer?

Nintendo has a four-year time horizon for this new project so that the success of this project will be evaluated over a 4-year time period. Time value of money is not important and can be ignored.

Management Science Series #156: Solution to the Understanding Receivables and Revenue Recognition: Medium

Refer to Amazon 10-K for the year 2020.

Record summary journal entries related to the allowance for doubtful accounts for the current year!

What was the effect of bad debt expense entry on “Income before income taxes?” What was the effect on “Net cash provided by operating activities?”

What was the effect of the write-off entry on “Income before income taxes?” What was the effect on “Net cash provided by operating activities?”

Did bad debt expense as a percentage of Net revenues increase or decrease from 2019 to 2020?
Did management disclose any information indicating the reason for the increase or decrease?
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Assume that all of Amazon’s sales to customers are on account. Its 10-K indicates that $1 billion bad (trade) accounts receivable were written-off in 2020 and there were no reinstatements. Bad debt expense for the period were recorded by debiting “General and Administrative Expenses” and crediting the “Allowance for doubtful accounts.” What amount of bad debt expense was recorded in 2020?

Assuming all sales revenues were on account, what were collections on accounts receivable during 2020?