Gravestone Inc.

i

• Sell the business to a third party.
• Sell the assets of the company and close it.
• Keep everything as it is.
• Keep operating, but invest in the new technology

Information that can be shared on the interviewee’s inquiry:

• Gravestone Inc. has a 10% market share and a relative market share of 1 (ratio of Gravestone Inc.’s market share to that of the nearest competitor).
• The market is expected to remain at the same level for the near future.
• The market size can be calculated with different methods (let the candidate brainstorm before you provide him with the different possibilities):
  • Calculation with total population, growth and birth rate
  • Review of death records in a certain period
  • Number of obituaries in newspaper and coverage
  • Calculation from population and average life expectancy

Cost of goods sold or COGS refer to the carrying value of good sold during a particular period.

The interviewee should gather information about the client’s competitors and the situation on the market.

With the provided information the candidate should calculate the amount of demanded gravestones per year. The candidate can use the number of gravestones to calculate profits and finally the value of the business:

(Every year 1/80 of the population dies)

(Discount rate of 10% and infinite future profits of $100,000)

Main conclusion

The company is worth $1 m whether they keep or sell it.

Information that can be shared on the interviewee’s inquiry:

• Fixed assets are mainly only land and improvements. These are owned by the company.
• There are different possibilities to determine the value of the land (let the candidate brainstorm them before you tell him):
  • Find comparable real estate and determine the selling price
  • Find comparable real estate and determine the rent per square meter, then discount the cash flows generated by renting
  • Find the rate of appreciation of property in the near area and then apply to book value of current land and improvements.

With this information the candidate can calculate the value of the property/assets. Due to the fact that the property was held for 54 years, the present value will be

Main conclusion

As the value of the assets ($0.83 m) is lower than the discounted cash flows ($1 m), it would be better to continue the business.

Information that can be shared on the interviewee’s inquiry:

• The new technology is sold by a tool company that holds the patent. They could sell it to competitors of Gravestone Inc., as they are not selling an exclusive right.
• The impact on the recognition of the brand is negligible.
• Fixed assets are mainly only land and improvements. These are owned by the company.

As every competitor can buy this technology it is assumed that the overall cost structure of the industry will become lower.

As a result the prices will fall as the companies want to gain market share by cost competition.

The gross margin will remain the same since the industry structure did not change.

The new technology will make the business unprofitable.

The candidate should include these points in the conclusion:

• As the technology will make the business unprofitable pretty soon, the owner should try to sell his company as soon as possible.
• Due to the value of the assets and the present value of the discounted cash flows, he should try to sell the company as a whole.

The only other possibility would be to gain more market share. However, this is seen to be practically impossible (advertising/marketing rather complicated for this topic and acquiring other competitors not wanted by client).

Suggested answer:

• He can utilise the business as a cash cow, but should avoid investing more in the business than is necessary to run it on the present level.
• At some point the business will become less profitable as the other competitors are adopting the new technology. This is the point where he should really try to sell the company’s assets and shut the company down.