Story Problem Versus Quantitative Writing Assignment
Here is an example of the difference between a story problem and a quantitative writing assignment from an upper division course in finance from Bean and Carrithers, 2005 .
Story Problem in Finance
You have been hired as a consultant to Kulpa Fishing Supplies (KFS), a company that is seeking to increase its value. KFS has asked you to estimate the value of two privately held companies that KFS is considering acquiring. The first acquisition target is a privately held company in a mature industry. The company currently has free cash flow of $20 million. Its WACC is 10% and it is expected to grow at a constant rate of 5%. The company has marketable securities of $100 million. It is financed with $200 million of debt, $50 million of preferred stock, and $210 million of book equity.- What is its total corporate value?
- What is its value of equity?
- What is its value of operations?
Quantitative Writing Assignment in Finance
Background: Meredith and James Kennedy own a business, Office Products, Inc. (OPI), which is a wholesale distributor of office equipment. Sales have grown about 5% per year over the past five years and are expected to grow at the same rate in the future. This past year, sales reached $800,000. A computer manufacturer recently approached OPI about becoming the exclusive distributor for a laptop computer it manufactures. Sales are projected to be $400,000 from this product in the first year and to grow at 20% for two years before settling down to a 5% growth rate over the longer run. It is possible however, that sales from this product could be as high as $800,000 in the first year. OPI has been earning a before-tax profit of 6% of sales. Variable operating costs are expected to remain the same percentage of sales even with the added laptop sales. Fixed operating costs would be unchanged. Meredith and James are aware that increased sales will mean they need to maintain additional inventory and accounts receivable. They will also need to purchase additional equipment. OPI currently has no debt but it can acquire additional short-term financing from a bank. It could borrow up to $50,000 at 10%. Above $50,000 the interest rate would increase to 12%. It is not possible to raise more equity so any external financing would have to come from bank financing.
Your Task: The Kennedys have asked your help in determining whether taking on the new product line would be in their best interests. Since they are content for the most part with their present business, they feel that the financial rewards would have to be significant, and that the added debt load not too stressful to decide in favor of taking on the additional product line.
Please write a memo to the Kennedys with a recommendation regarding the appropriate decision to make. Attach to your memo any visuals (graphs, tables, etc.) that you think would be helpful.
Comparison of the Two Assignments
The first example consists of three math problems for which just enough information is provided. The correct result is three exact answers with no need for interpretation and no argument supported by reasoning per se, simply application of appropriate formulae. In short, this is not a quantitative writing assignment.
The second example requires one to make a recommendation supported by evidence, rather than solving a math problem. The evidence is not well-defined and left to the author's discretion. The ill-structured nature of this problem makes it a good example of a QW assignment.
