Homework answers / question archive / Case 1: Purchase Point Media Corporation (PPMC) INTRODUCTION This case is based on actual financial projections developed and provided by a publicly traded firm, Purchase Point Media Corporation (PPMC)

Case 1: Purchase Point Media Corporation (PPMC) INTRODUCTION This case is based on actual financial projections developed and provided by a publicly traded firm, Purchase Point Media Corporation (PPMC)

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Case 1: Purchase Point Media Corporation (PPMC) INTRODUCTION This case is based on actual financial projections developed and provided by a publicly traded firm, Purchase Point Media Corporation (PPMC). Carefully examine the PPMC projections, which are presented in a sequence and format suitable for break-even calculation and analysis. After you calculate the break-even point, use additional, publicly available information to come to a decision with respect to market potential. The increase in the price per share of PPMC stock suggests that, over time, the market may have reacted to their results and analyses, using a comparable methodology. OBJECTIVES When you complete this case, you’ll be able to • Identify discernable errors, irregularities, and improprieties in style and format within publicly reported data • Meet financial statement presentation requirements for a specific “real world” example • Determine whether financial information provided follows generally accepted accounting principles (GAAP) or is presented in “good form” • Distinguish between the substance and form of financial statements • Estimate variable and fixed costs for a publicly traded company • Assess publicly disseminated information from publicly traded companies to determine the feasibility of market potential and market penetration • Exercise enhanced critical-thinking skills Senior Capstone: Business 9 CASE BACKGROUND Purchase Point Media Corporation (Pink Sheets: PPMC) is what some refer to as a thinly traded “corporate shell.” The firm held patents in the United States, Canada, United Kingdom, and Germany for a shopping-cart display device, but was a nonreporting and nonoperating entity. On March 18, 2002, PPMC reported its intention to sell these patents and related trademarks. The initial estimates suggested a stock price of nearly $2.50 per share, before related per-share deductions for sale-related broker’s commissions and legal fees. At the

Case 1: Purchase Point

Media Corporation (PPMC)

INTRODUCTION

This case is based on actual financial projections developed

and provided by a publicly traded firm, Purchase Point Media

Corporation (PPMC). Carefully examine the PPMC projections,

which are presented in a sequence and format suitable for

break-even calculation and analysis. After you calculate the

break-even point, use additional, publicly available information

to come to a decision with respect to market potential.

The increase in the price per share of PPMC stock suggests

that, over time, the market may have reacted to their results

and analyses, using a comparable methodology.

OBJECTIVES

When you complete this case, you’ll be able to

• Identify discernable errors, irregularities, and improprieties

in style and format within publicly reported data

• Meet financial statement presentation requirements for a

specific “real world” example

• Determine whether financial information provided follows

generally accepted accounting principles (GAAP) or is

presented in “good form”

• Distinguish between the substance and form of

financial statements

• Estimate variable and fixed costs for a publicly

traded company

• Assess publicly disseminated information from publicly

traded companies to determine the feasibility of market

potential and market penetration

• Exercise enhanced critical-thinking skills

Senior Capstone: Business 9

CASE BACKGROUND

Purchase Point Media Corporation (Pink Sheets: PPMC) is

what some refer to as a thinly traded “corporate shell.” The

firm held patents in the United States, Canada, United

Kingdom, and Germany for a shopping-cart display device,

but was a nonreporting and nonoperating entity.

On March 18, 2002, PPMC reported its intention to sell these

patents and related trademarks. The initial estimates suggested

a stock price of nearly $2.50 per share, before related

per-share deductions for sale-related broker’s commissions

and legal fees. At the time of the news release, the firm’s

stock was trading at $0.04 per share. In less than 60 days

the stock was trading at more than $0.60 per share (Cataldo

2003, 55–60), for a 1,400 percent increase in price per share.

(Note that investors and speculators alike would view this as

a very risky investment, and the price per share for PPMC

stock would be expected to fall short of or sell at a significant

discount to the “anticipated” selling price for the firm’s intangible

assets. See Arbel and Strebel 1982 and 1983; Arbel,

Carvell and Strebel 1983; and Arbel 1985 for guidance on

thinly traded or “neglected” firms.)

While this initial news release attracted speculators, causing

the stock price to rise, after months without any additional

news releases, the stock price drifted down again. On August

20, 2003, PPMC again announced its intention to sell the

firm’s intangible assets (Business Wire 2003).

In the second announcement, PPMC management referred

interested investors to their corporate Web site. Among the

data provided, PPMC included a financial projection and

other items they felt might be of interest to potential purchasers

of the firm’s intangible assets (see Exhibit 1,

Purchase Point Media Corp. statement, which follows).

To begin this case, review and comment on the “form” of

the public disclosure circulated by PPMC. Then use the

“substance” of this information to develop per-unit, salesbased

contribution margins and break-even points for the

first year of operations. Last, gather other publicly available

information to determine the market feasibility of achieving

its break-even point.

10 Senior Capstone: Business

 

 

 

 

 

20 Senior Capstone: Business

SUPPLEMENTAL INFORMATION

Brand Name versus Generic Stocks

Graphs

Supplemental information is provided in Figures 1 and 2.

Figure 1 illustrates the price per share for PPMC common

stock for the time period August 20, 2003 through September

27, 2004. The latter date represents the specific event when

PPMC filed their 10QSB. Figure 2 compares the PPMC price

per share with comparable index measures, such as the Dow

Jones Industrial Average, Standard and Poor’s 500, NASDAQ,

and Russell 2000 indices, for the same period of time.

Brand Name Stocks Generic Stocks

Less information risk More information risk

Higher quality of information Lower quality of information

Large sample of consensus

estimates

Small or no sample of consensus

estimates

Monitoring service or fee No monitoring service or fee

Lower return Higher return

Higher price (premium) Lower price (discount)

Lower uncertainty Higher uncertainty

MoGraphs

Supplemental information is provided in Figures 1 and 2.

Figure 1 illustrates the price per share for PPMC common

stock for the time period August 20, 2003 through September

27, 2004. The latter date represents the specific event when

PPMC filed their 10QSB. Figure 2 compares the PPMC price

per share with comparable index measures, such as the Dow

Jones Industrial Average, Standard and Poor’s 500, NASDAQ,

and Russell 2000 indices, for the same period of time.

 

 

References

Arbel, A. 1985. Generic Stocks: An old product in a new

package. The Journal of Portfolio Management 68: 4–13.

Arbel, A., Carvell, S., and Strebel, P. 1983. Giraffes,

Institutions and Neglected Firms. Financial Analysts

Journal 39: 57–63.

Arbel, A., and Strebel, P. 1982. The Neglected and Small Firm

Effects. The Financial Review: 201–18.

Arbel, A., and Strebel, P. 1983. Pay attention to neglected

firms! The Journal of Portfolio Management 9: 37–42.

Business Wire. 2003. Purchase Point Media Corp.: Corporate

Update (August 20).

Cataldo, A. Information Asymmetry: A Unifying Concept for

Financial and Managerial Accounting Theories (including

illustrative case studies). Studies in Managerial and

Financial Accounting 13, 2003. Oxford, England:

Elsevier Science (JAI). Series Editor: Marc Epstein.

 

 

PROJECT REQUIREMENTS

Substance versus Form and

Critical Thinking

Step 1

In the infamous Enron bankruptcy case, the form of the

financial statements prepared by the Enron Corporation

and WorldCom was very professional; however, the substance

was lacking, leading to audit and market failures and the

eventual bankruptcy of both of these big-cap, or largecapitalization

firms. PPMC represents a reverse case, in

which the form of the data contained in the PPMC news

release and corporate Web site was very poor.

To begin, read the PPMC report, focusing on problems with

the form of the report. There are many, including font changes

that have been corrected for printing here. Prepare a typed,

clearly communicated summary of all errors or weaknesses

you find in the form of this report. There’s no magic number

of errors that you must identify and different students will

produce variations in their responses to this part of the

assignment. Simply identify as many problems as you find,

including spelling, punctuation, and usage errors. Although

the PPMC report isn’t well-written, don’t attempt to correct

or rewrite the report.

Here are a few examples of the kinds of errors you may find

and how you’ll present them.

Summary of Errors in the Form of the PPMC Report

1. There are two sentence fragments, plus a

spelling error, in the introductory paragraph,

as follows:

Safe harbor statement under the private

securities litigation act of 1995.

Changes in assumptions or changes in other

factors effecting such statements.

2. The second sentence in the introductory paragraph

refers to a “project” statement of net

income (“This project statement of net income

contains . . .”). It appears that the author of

this report intended to refer to a “projected”

statement of net income, although that’s not

a conventional accounting term.

3. The third sentence in the introductory paragraph

refers to “Corporate house,” in which the

first word of what appears to be a firm’s name is

capitalized and the second isn’t.

4. The last sentence in the introductory paragraph

uses “risk” in the singular form when it requires

the plural: “You should independently investigate

and fully understand all risk before making

investment decisions.”

Next, reread the PPMC report, focusing on problems with the

substance of the report. Identify the obvious errors or problems

first by focusing on the addition or math errors. Prepare a

typed, clearly communicated summary of all errors or weaknesses

you find in the substance of this PPMC report.

A few examples follow:

Summary of Errors in the Substance of the

PPMC Report

1. The report refers to a “Projected Statement of

Net Income” having been prepared in “accordance

with generally accepted accounting

principles.” I have never heard of this financial

statement or any such GAAP requirement.

2. Note 6 of the report contains an apparent math

error in the table. Specifically, there appears to

be a transposition error for the 3rd quarter in

the “15% commissions” column. The $5,382,000

amount should be $5,832,000.

Sometimes an issue may appear to represent both form and

substance problems. In these cases, identify the problems

with the form of the PPMC report first. After completing this

requirement, build on these results by identifying substance

problems with the PPMC report. This methodological approach

will save you time and make it easier for you to organize your

thoughts as you progress through these requirements.

Step 2

Below is a recommend framework for the analysis and computation

of the PPMC break-even point in terms of carts and

stores (Table 1). The PPMC Note column refers to the notes in

the PPMC source document. In fact, the PPMC notes appear

to be organized by cost behavior. This is similar to the approach

you used in your Managerial Accounting course. You should

follow this approach or framework as you compute the PPMC

break-even point in terms of carts and stores. Begin with revenues,

follow with variable costs (VCs), develop the contribution

margin (CM; in aggregate), followed by fixed costs (FCs),

and, finally, compute PPMC’s net operating income (NOI)

and break-even point in terms of both carts and stores.

 

Senior Capstone: Business 25

There’s some potential for variation in answers, but your

conclusion should approximate a break-even point

between 3,000 and 4,000 stores for the first year

of operations.

Step 3

Now study Table 2, which presents a recommended framework

for the analysis and computation of the amount of market

share required to achieve break-even in stores for PPMC. The

composition of the stores in the example will change over time.

Using your own research skills and abilities, determine the

number of grocery stores in the United States. For example,

you could go to Yahoo!Finance to identify a stock for a publicly

traded grocery retailer (e.g., KR for Kroger), then use the

Yahoo!Finance feature that allows you to view stocks for

competing firms in the same industry. Once you’ve done

that, go to the Web site for each firm, where the vast majority

list the number of retail outlets.

Table 1

PPMC First year

Note J F M A M J J A S O N D Annual

Stores

Multiply by 200 carts

Total Carts

Multiply by

revenue per cart

Total revenues 1

Variable costs (VC)

Amortization

(2 year S/L) 2

26 Senior Capstone: Business

Writing Guidelines

Refer to the “Submitting Your Work” section at the end of

this book for details on submission requirements for the

PPMC Case assignment.

Table 2

Stock Ticker No. of Stores Firm Name

KR Kroger

ABS Albertson’s

Safeway

Ahold

SUPERVALU

Winn-Dixie Stores

Publix Super Markets

Great Atlantic & Pacific

Smart & Final

Ingles Markets

Blue Square-Israel

Pathmark

Ruddick

Whole Foods Market

Weis Markets

Marsh Supermarkets

Nash Finch

Fresh Brands

Wild Oats Markets

Spartan Stores

Eagle Food Centers

Gristede’s Foods

Village Super Market

Foodarama Supermarkets

Arden Group

Total