Category Archives: Management Science

Marketing research done poorly!

Like many contemporary marketing concepts, marketing research is both an art and a science, containing many qualitative and quantitative aspects.

Star Wars and Friends would not have been created if its producers had listened to their “high-esteemed” marketing researchers.

Even for iPhone, many marketing researchers thought that the product would fail because consumers would still prefer to have their phones and MP3 players stand-alone.

Although these examples are of poorly conceived and conducted marketing research projects that still could not derail excellent products, there are still many successful products and services shaped by the insights gained through marketing research.

Success or failure of a marketing research project can be measured more easily, albeit in hindsight, if the product is launched.

For products that are scraped through marketing research, such measurement is more complicated: Obviously, you will never know if you never launch.

Think once what would have happened if George Lucas or Steve Jobs had listened to these “marketing researchers”!

Solution to Management Science Series #171: Estimating Equity Risk Premiums

Calculate the implied equity risk premium!

Assume that S&P 500 is the market portfolio.

Base your calculations on the data for 2022 year-end.

Assume that consensus analysts’ 5-year growth rate to forecast cash flows for the next five years is 5% a year.

For the terminal growth rate, use the yield on the 10-year US Treasury.

Also calculate the equity risk premium by using the historical approach and observing the last 50 years, using 2022 as the end year!

Compare the results you get from both methods!

Solution to Management Science Series #170: Which risk-free rate?  🧠

Which risk-free rate?
1. You need to value a Turkish company whose revenues and expenses are in Turkish Liras. What should the risk-free rate be in this valuation?
2. As an investor, you want to consider the default risk of the government in your valuation for this company. What should the risk-free rate be in that valuation?

Detecting Fraudulent Practices in Financial Statements: Close Look at Inventory Fraud and Solution to the question asked

There are many different types of frauds in financial accounting.

Many times, even the most trained eyes cannot detect frauds on financial statements.

The most basic one is inventory fraud.

Solving the following example will lead you to evidence.⬇️

“Amazing” company overstated its ending inventory by $20MM for the year.

What are the effects of this deliberate act on following accounts given a corporate income tax of 25%?

-Current and next year’s net income?
-Current and next year’s retained earnings?
-Next year’s inventory?
-Current and next year’s cash flows from operations?

Solution to Management Science Series #169: How to account for the bonds: NVIDIA 🧮

Refer to the NVidia’s 10-K for the fiscal year ended January 31, 2021. Find the information related to the bonds issued by the company.
Answer the following questions related to the bonds defined as “2.85% Notes Due 2030”

a. Were these notes initially recorded at par, at a discount, or at a premium?

b. What was the effective market rate at the time the notes were issued? Assume that it was not given. So, you are expected to calculate it! (Since current NBV of the bond is equal to the bond principal (probably because of the rounding), first calculate the NBV that should have been reported without the rounding, by using the effective interest rate given. Then, calculate the effective market rate from there!)

c. What will be the exact carrying value (net book value) of the notes at the end of 2025 (or January 31st, 2026)?

d. Assume further that as of December 31, 2025, the prevailing market rate for interest obligations similar to NVidia’s Notes due 2030 will be 7%. What would be the carrying value (net book value) of the notes at the end of 2025?

e. Now assume further that NVidia would redeem these notes from their holder at market value at the end of 2025. Which of the company’s financial statements would be affected, in what direction, and by how much? (Ignore taxes).

f. Assume that as of December 31, 2025, the prevailing market rate for interest obligations similar to NVidia’s Notes due 2030 will be 2%. What would be the carrying value (net book value) of the Notes at the end of 2025? If the company were to decide to retire these bonds, which accounts would be affected?

Where did Apple get its inspiration to build its own D2C stores or allegedly even its sleek design policy? What about their marketing mix strategy?

Where did Apple get its inspiration to build its own D2C stores or allegedly even its sleek design policy? What about their marketing mix strategy?

Solution to Management Science Series #167: Estimating the risk of Apple’s automotive venture

Estimating the risk of Apple’s automotive venture (will it ever happen?) 🧮

Apple is considering entering automotive industry. The analysts at Apple identified three pure plays: namely, Ford, General Motors, and Stellantis.

Determine the risk of this new project for Apple! Applicable tax rate is 35%! Use appropriate current yields on risk-free assets! Equity risk premium is estimated to be 7.4%. For all pure plays, proxy market is S&P 500.

Assume that Apple’s new project will be 100% equity-financed. Assess whether the value for the risk of this new project would make sense practically!

Solution to Management Science Series #166: Estimating Betas: Real-world example #4 🧮(Tesla)

Estimating Betas: Real-world example #4 🧮

Estimate the beta of Tesla stock.

First, observe the time period from 2019 to 2023.

Then observe the time period from 2014 to 2018, as well as from June 29, 2010 (the day TESLA went public) to 2013.

Proxy market is S&P 500. Time interval is monthly.
Compare the betas you estimated!

Identify the industry Tesla operates in. Relying on that identification, use the industry-wide betas shared publicly. Compare that estimate to those you calculated in the first step above.

Solution to Management Science Series #165: Estimating Betas: Real-world example #3 🧮(Walmart)

Estimating Betas: Real-world example #3 🧮

Calculate beta of the Walmart stock through regression analysis.

Time interval will be monthly and the time period to be observed will be last 5 years.

The proxy for the market portfolio will be S&P 500.