CMA Clear Design ALL

ENTRANCE
EXAMINATION
PART 2
JUNE 2005

TABLE OF CONTENTS

June 2005 Entrance Examination Part 2

Page
Case Question:
Backgrounder .................................................................................. 1
Additional Information .................................................................... 24
General Comments on Candidate Performance..................................... 36
Global Marking of the Part 2 Case.......................................................... 41
Sample Response Successful Attempt #1........................................... 75
Markers Comments Successful Attempt #1 ........................................ 97
Sample Response Successful Attempt #2......................................... 101
Markers Comments Successful Attempt #2 ...................................... 125
Sample Response Unsuccessful Attempt .......................................... 129
Markers Comments Unsuccessful Attempt ....................................... 148
Supplement of Formulae and Tables*................................................... 153
*This supplement is provided to all candidates with the examination.

Copyright 2005 by the Society of Management Accountants of Canada. All rights reserved.
This material, in whole or in part, may not be reproduced or transmitted without authorization.

CMA Canada 1

The Societies of Management Accountants of Alberta, Manitoba, New Brunswick, Newfoundland, Northwest Territories, Nova Scotia, Ontario,
Prince Edward Island, Saskatchewan and the Yukon, Certified Management Accountants Society of British Columbia,
Ordre des comptables en management accrdits du Qubec

June 2005

Entrance Examination

Part 2

Backgrounder

The background information relating to the Part 2 case (Backgrounder) is provided to
candidates in advance of the Part 2 examination date. The Backgrounder contains information
about both the company and the industry involved in the case. Candidates are expected to
familiarize themselves with this information in preparation for the strategic analysis that will be
required during Part 2 of the Entrance Examination.
Candidates should note that they will not be allowed to bring any written material,
including the advance copy of this Backgrounder, into the examination centre. A new
copy of this Backgrounder, together with additional information about the company, will
be provided at the writing centre for Part 2 of the Entrance Examination.
Candidates are reminded that no outside research on the industry related to this case is
required. Examination responses will be evaluated on the basis of the industry information
provided in the Backgrounder and the question paper (Additional Information).

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Clear Design Limited
Backgrounder

Company History
Clear Design Limited (CDL) is a Canadian corporation providing electronic design services to
companies that produce or design electronic devices and equipment.
On May 1, 1999, near the height of the high-technology boom, CDL was incorporated by Rick
Smelkin. As President and CEO, he developed the following mission statement for his company:
To provide high-quality electronic designs to the Canadian electronics industry at competitive,
but profitable, prices. Smelkin was able to fund the company with investment capital from
family, friends, and one angel investor (see Exhibit 1 for a glossary of terms and acronyms).
The Technology Bubble
The high-technology boom, often referred to as the high-tech bubble, lasted from about 1998 to
2001. It was driven by many factors, including the growth of the Internet, the resulting need for
bandwidth, the deregulation of the long-distance telephone markets in North America, and the
improvements in fibre optic technology. The capital markets abundantly rewarded revenue
growth and technological promise. Venture capital funding was readily available for start-up
ventures, however risky. Initial public offerings made the founders and investors of many
companies very wealthy. Frequently, companies were bought out, some at outrageous
valuations. During this period, there was a critical shortage of electronics designers and related
professionals, and salaries rose significantly.
CDL commenced operations at the height of the boom to capitalize on the large number of
technology companies needing timely electronic design. Despite the general lack of available
engineers, Smelkin was able to hire some very talented people because of his extensive
network of contacts and his persuasive recruitment skills. Companies investing heavily in new
high-tech products tried to increase the speed at which they could bring such products to market
by involving CDL in various aspects of the design work. As a result, CDL enjoyed high revenues
and profits on a variety of projects, even in its first year of operation.
When the technology bubble deflated, it did so rapidly, causing an economic downturn. In
general, the share prices of Internet companies that failed to generate profits plummeted. Many
technology companies went bankrupt and venture capital funding became hard to obtain.
Capital expenditures and investments in research and development in technologies decreased.
Companies that had assembled huge research and development teams to develop the next
breakthrough products laid off large numbers of these employees. CDL was able to draw from
this talent pool and improve its own team by hiring some of the very best engineers and laying
off poorer performers.
An example of an industry sector that was affected by the technology bubble and deflation is the
information and communications technology (ICT) sector. Exhibit 2 provides general statistics
on the ICT sector in Canada for the 2000 to 2002 period.

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In 2002 and 2003, as the market recovered slightly, companies that had undergone massive
layoffs found they were short-staffed and, therefore, hard pressed to take advantage of new
business opportunities. However, mindful of their experiences at the end of the high-tech
bubble, they were unwilling to hire large numbers of full-time staff. This market dynamic resulted
in a steady flow of business for CDL, but at lower fees and profits than those of the bubble
period.
The Electronic Design Industry
The electronics industry, in Canada and around the world, has been growing steadily over the
last 25 years. Electronics are involved in nearly every imaginable business, government, and
consumer application. Demand has been rising because of steadily decreasing prices for
components, increasingly powerful computer chips, and low-cost manufacturing. The electronic
design industry services the broader electronics industry, and depends heavily on the
outsourcing dynamics of the electronics industry and industries that use electronics.
The production of any kind of electronic device first requires a design team to develop the
products electronics and to produce layout diagrams for the printed circuit boards (PCBs) in
preparation for manufacture. Many companies have their own internal design teams, but it is
generally impractical to maintain a staff of specialists in every possible area. When a company
needs a design for an item beyond its core expertise, contracting out is more efficient. For
example, companies with product ideas and marketing capabilities, but without design
expertise, often outsource all product development to third parties. As well, some companies
outsource design projects when they are operating at full capacity or when contracting out is
less expensive than doing the work in-house. For example, salaries and real estate costs in
Californias Silicon Valley are so high that outsourcing projects to companies in other regions is
often more economical. In addition, some companies contract out the redesign of existing
products, while their internal design teams work on new product designs. With the advances
made in electronic data interchange, the movement of design files from electronic design
companies to their customers has become more convenient, timely, and economical.
Although many companies handle the entire processdesign, manufacture, and salesof
marketing electronic products, increasingly, the manufacturing aspect is outsourced to contract
electronic manufacturers (CEMs). These firms own modern, well-equipped factories with
specialized equipment, such as pick-and-place machines that operate at high speed with little
human intervention, to manufacture components (such as PCBs) based on the layout plan
provided by the customer. CEMs are located in Canada and around the world, and manufacture
for a wide range of customers. Most North American companies outsource large-volume, low-
cost manufacturing to CEMs in Asia, but lower-volume and higher-value jobs are still done
extensively in North America.
CDL has a number of competitors in Canada and around the world. The main source of
competition is the internal electronic design capability of potential customers. Members of in-
house design teams, concerned about job security and loss of control, can be antagonistic
towards contract designers and suspicious of the quality of their work. Competition is also
provided by large CEMs that have branched into electronic design and, as a result, offer their
customers one-stop shopping: design services, prototype building, and volume manufacturing.
Often, these companies provide design services at cost and rely on the manufacturing business
to generate profits.

4 CMA Canada
Numerous companies in Canada operate very similarly to CDL, including three in the area
where CDL is located. Other competitors include the spin-off service businesses of electronic
design tool companies, which offer a narrow range of services using the costly software tools
developed by their parent companies. They have high infrastructure costs and charge high rates
for their services. Although some went out of business shortly after the high-technology boom
ended, several are still operating in competition with CDL.
Some independent contractors provide design services as well, working either on-site with the
customers team or from their homes. Independents offer customers an attractive alternative to
full-time employees because such arrangements can be terminated easily and employment
costs (benefits, etc.) remain low. In addition, independent contractors offer very competitive
rates because their infrastructure costs are minimal.
With the growth of the electronics industry, there has also been an increase in the number of
overseas electronic design suppliers serving North American companies. In India, China, and
Eastern Europe, such suppliers have the advantage of drawing from a large pool of skilled
engineers and designers at lower salaries than those demanded by similarly skilled North
Americans. Among overseas companies, Indian firms are often favoured because their
employees have better English communication skills.
The largest overseas supplier of electronic design services is IED Inc. About 1,500 of the more
than 10,000 employees of this Indian company work in electronic design. The firm began by
offering software design services and quickly expanded into the electronic design services
market. The companys success has been due in large measure to the low infrastructure costs
of its Indian base. It does not have a design centre in Canada. At any given time, hundreds of its
employees are working at customer sites in North America, its primary market, providing both
software and electronic design services.
CDLs Approach
CDLs main objective has always been to build long-term relationships with customers in order
to obtain repeat business. To that end, the company has focused on competing not only on the
basis of its competitive prices but also on the basis of its broad capabilities and the high quality
of its services. For its employees, the companys objective has been to create a pleasant work
environment that fosters teamwork.
Because of the depth and breadth of the technical expertise at CDL, the company is able to
offer a wide range of complex, expert services in a variety of disciplines. This gives CDL an
advantage over CEMs, which offer a narrower range of design services, as well as over
independent contractors, most of whom have a single speciality. In addition, CDL owns design
and other engineering tools and equipment that the independent contractors could not afford,
and has a larger network of contacts.
CDL has established alliances with some of the smaller and mid-size CEMs that do not have
design expertise. As a result, these companies refer design and related work to CDL, and CDL
refers manufacturing work to these CEMs.

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The overseas competition generally uses variable pricing based on actual service hours. To
compete against these firms, CDL has offered North American customers firm quotes for entire
projects, emphasizing the local or Canadian accessibility and connection. Because customers
prefer fixed-price contracts for cost certainty and budget reasons, CDLs approach has been
reasonably successful.
Most of CDLs early work involved developing electronic systems for clients in the Canadian
telecommunications (telecom) industry (see Exhibit 3 for information regarding the telecom
industry, which is a component of the ICT sector). The company also targeted clients in the
aerospace and defence industries, with large airplane manufacturer or government contracts in
mind. By 2003, CDL had various types of customers (see Table 1 below and Exhibit 4), but the
telecom industry continued to generate the greatest amount of revenue for CDL.
Table 1
Number of Projects and Revenue by Customer Type Fiscal 2003

Customer Type Number of Projects Revenue
Telephone service 42 $ 614,255
Telecom hardware 68 9,807,693
Computer chip 18 2,478,444
Consumer electronics 46 2,450,780
Defence 1 188,000
Transportation 18 748,522
Aerospace 2 178,999
Other 26 284,582
Total 221 $16,751,275

CDL has endeavoured to deliver complete service on time, remain accessible to the client
throughout the project, and maintain flexibility in accommodating client needs. In addition to
technical design, CDL has provided many other kinds of expert services, such as proof-of-
concept consultation, and system simulation and modelling. Approximately 90% of the work has
been carried out at CDLs premises, and the balance at the customers facilities.
By early 2003, the company had become well known in Canada and was believed to be among
the top five electronic design services companies in the country, although there were no official
industry statistics.
Management Team (see Exhibit 5 for Organizational Chart)
Rick Smelkin is 36 years old. He graduated first in his class from the electrical engineering
program of a top Canadian university in 1991 and is a professional engineer. Upon graduation,
he worked in engineering design for JKL Inc., a large telecom hardware manufacturer, and
quickly worked his way up to head a large design team. Seeking to widen his experience in
preparation for the entrepreneurial career he had always desired, Smelkin subsequently worked
in sales, marketing JKL Inc.s devices to telecom industry companies in the Northeastern US.
Consequently, he developed many contacts in this market, particularly in the Boston area.
Smelkin greatly enjoys his work at CDL and is particularly intrigued with projects that are

6 CMA Canada
technologically interesting or stimulating. He likes to interact with the designers, chat with them
about projects, and give them ideas, but not on a consistent basis.
Billy-John Carles, Vice-President, Business Development, is responsible for the companys
sales function and is 44 years old. Carles holds a Bachelor of Computer Science degree, but
has not written any computer programs since graduation. He held a progressive series of
positions in software and hardware sales and, most recently, spent six years with a systems
integrator selling services. Carles was recruited by Smelkin in 2001 and has been very
successful in his role of developing new business for CDL.
Prudence Joy is Vice-President, Operations. Joy is 38 years old and holds a Bachelor of
Commerce degree from a small Canadian university. She has a background in operations at
several technology companies and worked with Smelkin at JKL Inc., joining CDL at the time of
its incorporation. All the chargeable employees and the project coordinator report to her. In
addition, she is responsible for the contract administration function as well as finance and
information technology.
Annette Mulk, Controller, started with CDL in 2000 as the bookkeeper. When the previous
controller left in mid-2002, Mulk took over that position. She has been taking night courses in
accounting at a community college since 2000 and expects to earn her accounting diploma in
2005. Reporting to her are five employees that look after invoicing, accounts receivable,
accounts payable, expense claims, payroll, and the preparation of monthly financial statements.
Mulks work is very accurate and precise, and she is well-liked by her staff.
Cam Mondred, Project Coordinator, has a technology-related diploma from a community college
and was originally hired by CDL as a designer in 2001. He quickly showed aptitude and interest
in coordinating the companys staff and project requirements. In early 2002, he was rewarded
for his efforts by being promoted to the new position of Project Coordinator.
John Bates, Manager, Information Technology, is responsible for the network, desktop support,
security, and backup as well as design tool purchases and coordination. He has two assistants
and has been with the company since 2002. Bates has a Bachelor of Computer Science degree
and has taken many professional development courses to keep up to date.
Every two weeks, there is a management meeting to discuss the companys progress. The
prospect list (i.e. the list of potential jobs from current and prospective clients) is reviewed and
staff scheduling is considered. Revenue and profits on all active jobs are examined as well as
the metric of staff utilization (i.e. the number of hours charged to customers divided by
theoretical chargeable capacity, where theoretical chargeable capacity is equal to 40 hours per
week per chargeable employee, 52 weeks per year).
Shares and Shareholders Agreement
Prior to incorporating the company, Smelkin developed a business plan that projected steady
growth and allowed for generous dividends to shareholders by the second year of operations.
Initially, he approached venture capital firms to invest in CDL, but found them unwilling to invest
in service businesses. In general, these firms prefer to invest in product, software, or Internet
businesses where the potential payoff is usually much greater than from companies that
primarily offer services. He also approached family and friends and, ultimately, was introduced
to an angel investor who was impressed with Smelkins business plan.

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By May 1, 1999, CDL had four shareholders in addition to Smelkin. Penny Fidal, a moderately
wealthy cousin of Smelkins who made her money in real estate, invested $150,000 in CDL
shares. Ralph Manton, an angel investor in several high-tech companies, invested $225,000
through G Holdings Limited. Dr. Marco Roberto, Smelkins dentist, invested $75,000. The final
outside investor was Chantale Blanger, the owner of a company that developed and
manufactured home alarms. She invested $150,000 and was one of the first customers of the
company.
The company has only one class of sharescommon shares. Every shareholder was required
to sign the companys shareholders agreement, which provides for a board of directors of at
least five members and a maximum of six. The agreement also stipulates that the sale of any
shares by a shareholder must be approved by all shareholders, except in the case of a buyout
offer for the whole company. Shareholders are not allowed to compete in the same business
with CDL as long as they hold shares in the company.
In 2002, three of the senior employees were permitted to purchase shares in CDL. In 2003,
stock options with an exercise price of $1.50 per share were issued to the senior employees.
Table 2 below shows the companys shareholdings and stock options as at April 30, 2003.
Table 2
Shareholdings & Stock Options as at April 30, 2003

Shareholder Shares Options
Option Price
Per Share
Rick Smelkin 1,000,000 50,000 $1.50
Penny Fidal 100,000
G Holdings Limited (Ralph Manton) 150,000
Dr. Marco Roberto 50,000
Chantale Blanger 100,000
Billy-John Carles 20,000 20,000 $1.50
Prudence Joy 30,000 20,000 $1.50
Annette Mulk 1,000 4,000 $1.50
1,451,000 94,000

Board of Directors
At the end of fiscal 2003, the board of directors was comprised of Smelkin (Chair), Ralph
Manton and Chantale Blanger (both shareholders), Neil Manro (a corporate and commercial
lawyer, and a friend of Mantons), and Bruce Bunburger (a retired telecom industry executive).
The board of directors meets quarterly. Each meeting starts with a discussion of statutory and
other legal approvals that are needed, and then turns to a consideration of strategic business
decisions. Smelkin has found the meetings to be useful for discussing ideas with experienced
people who present fresh views on the subject being discussed.

8 CMA Canada
Sales
Four senior salespeople, one junior salesperson, and three support staff report to Carles. All of
the salespeople started their careers as engineers, but migrated to sales because of their
inclinations and abilities. They understand the companys capabilities and the specifications of
prospective projects at a high level, but they do not have a strong understanding of the technical
details of the work that these projects require. The junior salesperson is responsible for making
initial calls to potential clients across Canada (cold calls), whereas the senior salespeople
service the current clients and follow up specific sales opportunities.
The salespeople spend a great deal of time on the road, networking with the project managers
and engineers of current and potential clients, including those from companies with in-house
electronic design capabilities that sometimes need to outsource projects that their internal
design teams are either not equipped or not willing to undertake. The salespeople also spend a
lot of time networking at electronics forums, conferences, lunches, and dinners.
One of the important roles of the salespeople is to respond to requests for proposals (RFPs).
The preparation of these proposals requires the assistance of CDL engineers, because of the
technical content, as well as contract administration personnel. The salespeople also prepare
proposals when potential projects are brought to CDLs attention by independent sales agents.
CDL offers two types of contracts: 1) fixed price for the entire project, and 2) variable price. For
the fixed-price projects, the salespeople initially propose a price that reflects the estimated
hours to complete the project multiplied by an appropriate rate. For variable-price projects, an
hourly rate is negotiated and customers agree to pay this rate times the number of actual
billable hours required to complete the project. For both types of projects, the hourly rate
specified or implied in the contract is referred to as the booked rate. Often, the contract
specifies an upper limit to the number of billable hours that can be charged. When the
specifications or deliverables for a project are not fully defined by the client, the salespeople
prepare a variable-price contract proposal.
For both types of projects, the average target booked rate is $100 per hour; however, the rates
that are proposed and negotiated depend on many factors, such as the nature of the work, the
level of the staff employed, the cost of tools needed to complete the project, the season, and the
local cost structure. Sometimes, a discount is provided for a large commitment or to secure a
first job with a key customer.
Out-of-pocket costs related directly to a particular project are billed separately to the customer
for both types of contracts. Such costs include travel expenses and the cost of outsourcing the
assembly of prototypes.
In addition to a base salary, both senior and junior salespeople receive a 2% commission on all
bookings with which they are involved, including those that are initiated by independent sales
agents. Expense claims are submitted for all trip-related expenditures that were not made with a
company credit card (e.g. tips) and for the use of a personal vehicle for business travel. The
expense claims are approved by Carles.

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At the end of fiscal 2003, 22 independent sales agents in strategic locations across Canada,
and three in the US, worked for CDL on a contract basis. These agents are knowledgeable with
respect to electronic design services and advanced technology industries. Armed with CDLs
brochures, they use their wide range of established contacts to bring business to CDL. In return,
the independent sales agents receive a 5% commission from CDL. Most of these agents also
represent several other technology companies that are not in direct competition with CDL (i.e.
companies that sell components, computer chips, and other products).
Operations
Most projects involve working with a client company on an electronic product idea. CDL designs
the electronics of the product, or a part thereof, and the intellectual property rights usually are
transferred to the customer under the terms of the contract. As the company grew and
completed projects, residual project knowledge has become an increasingly valuable asset of
CDL. Residual knowledge is the information that remains in the inventors unaided memory,
apart from notes and models; it is the designers expertise and experience. This knowledge has
enabled CDL to provide ever-increasing value to clients in the area of technical expertise.
For security reasons, every CDL project is given a code name that does not reveal the purpose
of the project. Sub-projects are then developed to classify the work categories within the project
(e.g. planning, architectural design, coding, printed circuit board design, testing, layout,
manufacturability, etc.).
Most of the design work is carried out in CDLs office, where the tools and laboratory are
located. Typically, a project is handled by a self-directed team that could consist of a single
engineer or layout designer, or as many as a dozen design staff, including engineers, software
developers, layout professionals, and technologists. For larger projects, Cam Mondred usually
designates one senior engineer to oversee the project as the technical lead. CDL contracts with
a CEM to produce the physical components or prototypes required for some projects.
CDL employees are classified as either chargeable or non-chargeable personnel. A chargeable
hour is defined as an hour spent working for a client under a signed contract and is charged as
a direct cost to the specific contract. Occasionally, a chargeable employee spends time on work
that is not directly related to a contract. This time, as well as the time of non-chargeable
personnel, is charged to an appropriate general overhead account.
From time to time, CDL hires independent contractors to complement its team on a specific
project. For example, if CDL does not have an employee with a particular engineering skill set
required for a project, a contractor is hired, typically at about $60 per hour.
During the sales effort, the Project Coordinator and one or two engineers who are expected to
be involved in the job assist the sales staff in estimating the number of hours that will be
required to complete the project.

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Human Resources
As at April 30, 2003, CDL had 127 employees (see Table 3 below), most of whom are the
engineers and designers who do the work required by the customers. Of CDLs chargeable
employees (see Table 4 below), two have doctoral degrees, 23 have graduate degrees, 18 are
registered professional engineers, and all but 22 have undergraduate degrees. Some layout
professionals are very experienced with their layout tools, but are self-taught.
Table 3
Employees as at April 30, 2003

CEO & Assistant 2
Operations & Design 104
Accounting 6
Contract Administration 3
Information Technology 3
Sales & Marketing 9
127

Table 4
Chargeable Employees as at April 30, 2003

Average Annual Salary Number
Senior designer $110,000 40
Intermediate designer $85,000 22
Junior designer $70,000 16
Layout specialist $75,000 10
Technologist $50,000 12
100
Total salaries, excluding benefits $8,740,000

Experience levels vary widely. Among the companys employees are new graduates who are
willing to take low salaries in the current market, designers with between two and five years of
experience, and experienced staff who have always worked in design services or are veterans
of R&D teams in companies of various sizes.
CDL tries to promote from within, encouraging professional development, mentoring young
engineers, and nurturing employer-employee loyalty. Designers generally enjoy their work and
obtain satisfaction from meeting client needs.
Employees have a standard, 40-hour workweek. During downtime (i.e. time that is not
chargeable), the chargeable employees work to improve internal processes, and assist the
salespeople in researching companies and technologies and developing project proposals.
When required to work large amounts of overtime, the chargeable employees usually receive
time off in lieu of overtime pay.

CMA Canada 11
Every CDL employee is required to sign an employment contract that includes a position
description, provides details pertaining to salary and benefits, outlines severance provisions,
and provides for a probationary period, during which the employees position could be
terminated or probation extended. The contract also includes a non-competition covenant that
prohibits the individual from entering the employ of a CDL client within six months of working
with that client on behalf of CDL. As well, the contract covers confidentiality and the ownership
of intellectual property, two very important industry issues given that clients generally expect
complete confidentiality surrounding their new product efforts.
CDLs employees come from diverse ethnic backgrounds and many have hobbies that relate to
the companys business, both of which are viewed to add value to projects. For example, Alex
Cvetovic, who emigrated from Eastern Europe where he received his first electrical engineering
degree, joined CDL after receiving a masters degree in electrical engineering in Canada. His
hobby is racing radio-controlled model cars and he improves the electronics of his handmade
racer in his spare time. Software engineer Dennis Xhang, who was born in the Peoples
Republic of China, earned a Bachelor of Computer Science degree in Canada. While writing top
quality software for CDL, he also wrote software for a video game that he and his friends
invented for their personal enjoyment.
Employee turnover in the post-boom period has been about two individuals per year and
replacements have been easy to find. Since the collapse of the technology bubble, CDL has
been inundated with resumes. Smelkins assistant has been trained to weed out those that are
not worth considering before passing the remainder to Smelkin for review. Once reviewed, the
approved resumes are saved in an electronic database, searchable by skill set. When the need
arises, the resumes of the best applicants can be accessed and the right person found quickly.
At the time of incorporation, the basic human resource policies of the management teams
former employers were combined and tailored to CDLs business and size. This set of policies
has worked well thus far. As well as annual performance reviews, chargeable employee reviews
are conducted shortly after the completion of each large project. Salaries are re-examined
annually, but few changes have been made, given the current job market.
Design Tools and Equipment
CDL uses many different computer software toolsthe equivalent of hammers and nailsfor
electronic design work. These software design tools are obtained from various vendors, mostly
in the US. Some are acquired under a perpetual licence for a one-time, up-front fee. Others are
obtained under time-based licences. For most of these tools, CDL has also purchased a
maintenance contract that includes services such as technical support and software updates. At
the end of the technology bubble, many suppliers were eager to gain new customers and had
lowered their prices. For most of the software tools, the licence was for a specific number of
concurrent users. For example, the Treble Claff layout software licence purchased by CDL
allowed any two computers to run the software at one time.
For accounting purposes, the perpetual licences are amortized on a straight-line basis over their
useful lives, usually four years. The cost of the time-based licences and the maintenance
agreements are amortized over the duration of the contracts. The effective cost for the high-end
software design tools can be as much as $150 per day or $55,000 per year.
CDL provides each employee with a computer. Those required to travel in performing their
duties have laptops and those who work only at the office have desktop models. It has been

12 CMA Canada
company policy to purchase mid-market and mid-price brands with good track records for
reliability.
Office
CDLs office is located in Eastern Canada, in a city close to the US border. Part of a high-
technology triangle, the city is one of three in the province in which the industry is predominantly
high tech.
The office is equipped with a high-speed fibre-optic cable that facilitates the transmission of
large design files. CDL entered into a new, seven-year office lease on February 1, 2002, at a
cost of $15.20 per square foot gross (including operating costs) for 18,102 square feet. A
security badge system controls access to the facility to ensure confidentiality of client
information at the site.
The office has a boardroom with electronic projection equipment and teleconferencing facilities,
a laboratory accommodating eight workbenches, a recreation area with ping-pong and pool
tables, and underground parking. At the end of the high-tech bubble, the company was able to
purchase a set of lightly used office cubicles and furniture. The laboratory contains key testing
equipment and other equipment required for design work, with which most of the employees are
familiar. A few pieces of the laboratory equipment were vendor-financed over 10 years.
Insurance
CDL carries standard property insurance on its physical assets, with a limit of $2 million and a
deductible of $5,000. The company has commercial general liability insurance of $10 million
with a deductible of $20,000. The errors and omissions insurance policy (covering failure of
designs to perform) has a limit of $15 million and a deductible of $25,000. The company has
never made a claim under any of these policies and there have been no legal actions against
the company for any reason.
Advertising and Promotion
In addition to and in support of the work of the salespeople, CDL markets itself through targeted
advertising and promotion efforts. Advertisements are purchased in certain industry
publications. Occasionally, the company rents booths at various trade shows, such as those that
showcase telecom hardware. The companys logo is prominent at all promotional venues and in
all advertising material.
CDLs Web site details the companys technical expertise and provides an overview of the
companys values and approach. The site includes a search engine that allows visitors to
access information on key types of expertise. CDLs Web site also contains links to its partners
(e.g. allied CEMs) and independent sales agents.

CMA Canada 13
Banking and Financing
CDL has had a relationship with the same bank since incorporation. The bank granted CDL a
variable line of credit equal to 75% of the companys North American receivables (under 30
days past due and deemed collectible) less prior claims up to a limit of $1,000,000. The
receivables list must be submitted to the bank monthly along with financial statements. Prior
claims are defined as statutory payments that rank ahead of the bank, such as rent and any
unpaid taxes. At the end of most months, CDLs prior claims amount to approximately $70,000.
In 2002, Smelkin read in a business magazine that a large company effectively pays a
processing cost of $800 per purchase order. Consequently, he reduced the use of purchase
orders and encouraged the use of the company credit cards that were distributed to many CDL
employees. All salespeople are issued credit cards to pay for their travel expenses. Certain
engineers are given credit cards so that they can make emergency or late-night purchases of
project components over the Internet, with minimal hassle. Each credit card has a limit of
between $5,000 and $10,000.
SRED Tax Credit
CDL qualifies as a Canadian-controlled private corporation (CCPC) and is eligible to receive
refundable investment tax credits for qualified scientific research and experimental development
(SRED) expenditures. For CDL, these include qualifying costs of internal development projects
and of projects undertaken for customers outside Canada. Canadian clients are eligible to claim
the SRED tax credit for themselves for any qualifying development projects CDL performs on
their behalf.
Although the calculations are complex, CDL estimates that, on average, the SRED refundable
tax credit is about 40% of both project labour (not including benefits) and out-of-pocket costs.
Any part of this credit that is not used to offset taxes payable for that year is refunded to CDL.
For a company that is not a CCPC, the credit is calculated at a lower rate and any portion not
used to offset current taxes payable must be carried forward or back (i.e. it is not refunded).
Financial Reporting and Systems
CDL uses the Dabit accounting system to invoice customers, pay bills, and produce its
financial statements (see Exhibit 6 for audited financial statements). The software package
includes a job-cost accounting module. Each project is set up as a different job in the system,
and invoicing and costs are recorded by job. Each chargeable employee is required to complete
an electronic time sheet so that time can be tracked by job for billing and budgeting purposes.
Customers are invoiced for projects at designated milestone dates according to the contracts.
For recording revenue in the year-end financial statements, CDL uses the percentage-of-
completion method, based on hours worked to date divided by estimated total project hours. On
the year-end balance sheet, unbilled receivables representing revenue recognized in excess of
billings are accrued, and invoiced amounts in excess of revenue recognized for the applicable
projects are recorded as deferred revenue.
In accordance with Canadian generally accepted accounting principles, the SRED tax credit is
deducted from related expenditures on the year-end income statement.

14 CMA Canada
Each February, a preliminary flexible annual budget is prepared for the following year and is
finalized close to the April 30 year end. These budgets have proven to be accurate over the
years.
The companys auditor and income tax advisor is Jacques Genest, CA, a sole practitioner. CDL
has received an unqualified audit report since incorporation.
History of a Typical Client Project
Although every CDL project has unique aspects, the following account is representative of the
way the company does business.
In June 2002, a former colleague of Carles approached CDL to design the electronics for a new
device being developed by BabyKeep Inc. (BI). The concept involved a wireless unit that, when
attached to a child, would send a signal causing a second (parent) unit to beep if the child
moved more than a selected distance from the adult wearing the parent unit. At this time, the
customer did not have clearly defined specifications for the design. The client had only a small
design team, which was busy with other projects.
Carles assigned a salesperson to meet with the customer and prepare a proposal for the work.
Numerous meetings were held, involving engineers from both CDL and the client, to try to clarify
the scope of the engagement with respect to the deliverables, the milestones, and the terms of
acceptance.
After BI accepted the preliminary proposal, work began on negotiating a formal contract. This
process involved CDLs salesperson, one senior CDL engineer, and CDLs contract
administration people. CDL pushed for a variable-price contract at $100 per hour, but BI insisted
on a fixed-price contract of $96,000 to provide cost certainty for the venture. The contract
specified, among other things, the basic design of the printed circuit board, the regulatory
requirements, the requirement to provide six working prototypes (to be assembled by a CEM),
the acceptance criteria for the prototypes, the billing milestones, the ownership of intellectual
property, and the warranty. The salesperson and the senior engineer estimated that the project
would require 960 billable hours to complete. Therefore, management knew that if this time
budget were met, the target booked rate of $100 per hour would be earned.
One significant issue took time to resolve. The preliminary contract provided for unlimited
liability to CDL should a unit fail and BI be taken to court. CDL has always been concerned that
a problem with a design could leave the company open to lawsuits and tries to negotiate
favourable liability clauses in its contracts. Considering the way in which the unit was to be used
to safeguard children in the US, CDL insisted that liability be capped at the contract amount.
Eventually, CDL was able to win this battle. After final legal review, and approval of the contract
and the time budget by Carles, the contract was signed.
The time that CDL engineers spent on the project prior to the contract being signed (e.g.
assisting in the development of the proposal and fine-tuning the contract) was not charged
directly to the project. Instead, this time was charged to marketing activities.
The Project Coordinator assigned a project number to the project as well as a code name,
Project Brazil. A team of three CDL engineers and one layout designer worked on the project
continuously for several weeks. Most of the work was done at CDLs office, but there was
occasional travel to the clients premises.

CMA Canada 15
Invoicing was carried out at the following milestones: upon signing of the contract, after 30 days,
and upon approval of the preliminary design by the client. Out-of-pocket costs, primarily
components and CEM fees for the prototype, were tracked so that they could be billed to the
customer upon completion of the project. CDLs billing terms were net 30 days.
Halfway through the project, the customer requested that the unit be designed to transmit and
receive over a distance of 30 metres, rather than the 20 metres specified in the contract, for no
extra charge. After much discussion, the CDL salesperson was able to convince BI to sign an
Engineering Change Order (ECO). An ECO serves as an amendment to the initial contract,
providing additional fees for the additional agreed-upon service. This particular ECO was for
$8,000, based on a budget of 80 hours to complete the work.
By week six, the project was nearly complete and the PCB layout had been delivered to the
CEM that had been contracted to produce the prototypes. The prototypes were delivered to the
customer in week eight along with the final electronic design files, after CDLs engineer was
satisfied that all contract testing criteria had been met. After some negotiation regarding one of
the acceptance criteria, the client signed off the final acceptance papers by the end of week ten,
permitting the final invoice to be sent and the contract closed. By this time, actual project hours
were 998 for the base project and 77 for the ECO component. The project thus earned
$104,000 for 1,075 hours of work, or $96.74 per hour. BI was satisfied and planned to mass-
produce the product offshore. BI also expected to apply for a patent for the design.
Four Other Typical Jobs
A local computer chip design company, Canot Inc., required the full design of an evaluation
board (i.e. a PCB that enables the testing of custom computer chips). The company approached
CDL because of its reputation. A fixed price of $340,000 was quoted and the project was carried
out by a team of six CDL designers.
An independent sales agent promoted CDLs services to Medsystems Inc. (MI), a Western
Canadian manufacturer of blood alcohol measurement devices and other medical equipment.
MIs blood alcohol measurement device was originally designed in the 1980s by an R&D team
no longer employed at MI. CDL was engaged to update the design of MIs basic product, using
some newer, less expensive computer chips. Because the specifications required for the project
were uncertain, MI agreed to a variable-price contract. Three CDL designers were able to
complete this work in 440 hours instead of the originally expected 485 hours.
Local start-up company Vehicle Vision Electronics Inc. (VVEI) had an idea for a product that
would use an infrared beam to trigger a beep when a vehicle reached a specified distance from
a wall. The product would be battery-operated and sell for less than $50. The product was
conceived when the founders wife drove her car into the wall at the end of his garage and
caused serious damage to both the car and the wall. The company was financed by the
founder, some family members, and two angel investors. Rather than hire an engineering team
that would no longer be needed once the product had been developed, VVEI decided to
outsource the work, and issued requests for proposals to CDL and two other electronic design
companies. After reviewing the submitted proposals, CDL was awarded a contract to conduct
an architectural study to define the specifications of the product, at $110 per hour. Upon
completion of the study, for which VVEI paid $18,450, CDL then quoted a $77,000 fixed price to
complete the project and deliver two working prototypes within four months. A team of two
engineers and one technologist was assigned. VVEI obtained all intellectual property as part of
the agreement.

16 CMA Canada
A large, local telecom hardware company needed expertise in signal integrity analysis for one of
its projects, but did not have such high-level expertise internally. Therefore, it contracted CDL to
provide consulting services at $120 per hour, with no maximum time specified.

CMA Canada 17
Exhibit 1
Clear Design Limited (CDL)
Glossary of Terms and Acronyms

Term or Acronym Explanation
Angel investor A wealthy individual interested in investing money in early-stage
businesses with good potential.
BI BabyKeep Inc.
Booked rate Contracted hourly rate specified in variable-price contracts and the
effective hourly rate implied in fixed-price contracts.
CCPC Canadian-controlled private corporation.
Contract electronic
manufacturer (CEM)
A company that manufactures electronic products and components
for other companies on a contract basis.
Engineering Change
Order (ECO)
An amendment to the original contract.
Electronic design The act of designing the layout or circuitry of electronic
components or products to be manufactured.
ICT sector Information and communications technologies sector - includes
industries primarily engaged in producing or supplying goods,
services or technologies used to process, transmit or receive
information.
Industrial design The act of designing objects for manufacture by industry.
Layout A diagram of the design of a printed circuit board (PCB) from
which a prototype of the PCB can be manufactured.
MI Medsystems Inc.
Perpetual licence A licence to use software for an unlimited period of time.
Printed circuit board
(PCB)
A thin plate on which computer chips and other electronic
components are mounted in electric circuits.
Product company A company that focuses on providing a product rather than a
service.
R&D Research and development.
RFP Request for proposal.
SRED Scientific research and experimental development.
Technologist An individual holding a technology-related diploma from a
community college.
Time-based licence A licence to use software for a specified period of time.
VVEI Vehicle Vision Electronics Inc.

18 CMA Canada
Exhibit 2
Information and Communications Technologies (ICT) Sector
in Canada

Revenues (in millions of dollars):

2000 2001 2002
Telecommunications services $30,661.2 $32,404.2 $33,199.8
Software and computer services 25,708.8 27,378.2 27,651.4
Cable and other program distribution 3,998.2 4,539.8 5,110.4
ICT manufacturing 44,829.7 34,146.8 26,452.9

Number of Workers:

2000 2001 2002
Telecommunications services 103,692 104,879 105,096
Software and computer services 254,602 260,901 236,148
Cable and other program distribution 14,734 14,616 14,720
ICT manufacturing 118,051 113,568 97,694

R&D Expenditures (in millions of dollars):

2000 2001 2002
Telecommunications services, cable and
other program distribution
$ 64.6 $ 238.9 $ 219.1
Software and computer services 1,023.9 1,390.0 1,325.4
ICT manufacturing 4,731.0 4,878.7 3,496.7

Capital Expenditures (in millions of dollars):

2000 2001 2002
Total ICT services $10,728.2 $11,970.3 $9,696.8
ICT manufacturing 1,820.6 1,731.8 882.9


CMA Canada 19
Exhibit 3
Telecommunications (Telecom) Industry

The telecom industry suffered some of the heaviest blows as a result of the collapse of the
technology bubble in the early 2000s. No other industry touches as many technology-related
business sectors as telecom. It encompasses not only the traditional areas of local and long-
distance telephone services, but also advanced technology-based services including wireless
communications, the Internet, fibre optics, and satellites. Telecom has also become intertwined
with cable television systems, since cable companies have begun to offer local exchange
service and Internet service. Overall, the telecom industry is in a state of continuous
technological and economic shift.
The Canadian telecom market was one of the few to weather the storm after the collapse of the
technology bubble. Revenues continued to increase between 1999 and 2002, but began to
plateau in 2003 as competition increased. Companies offering local telephone services
experienced a drop in sales as the market shifted from fixed-lines to mobile phones. In terms of
broadband penetration, Canada is one of the leading countries in the world. Broadband services
are being driven by the governments desire to establish Canada as a leading information
economy and an attractive country for investment. The high penetration of broadband Internet
access is also beginning to fuel growth in other industries, such as interactive and digital
television services and e-commerce. Capital expenditures in the Canadian telecom services
industry increased from 1998 to 2001, but then decreased by 25% from a peak of $8.4 billion in
2001 to $6.3 billion in 2002. It is predicted that this decrease would continue in 2003, but at a
slower rate.
In the US, equipment spending in the telecom industry dropped during 2001 and 2002 by a total
of 24%, but showed signs of rebounding in 2003. As well, double-digit increases in wireless
services, services in support of equipment, and high-speed Internet access offset the decrease
in equipment spending. Spending as a whole in the US telecom industry totalled US$681 billion
in 2002, up 3.5% over 2001. In 2002, US imports of telecom equipment declined by 9% to
US$30.6 billion. Mexico was the largest supplier of imports to the US market, accounting for
19% of total imports. Korea, Taiwan, Canada and Malaysia were the next four top import
suppliers. Overall, imports from Asia accounted for 5 of the top 10 suppliers, totalling
US$14.5 billion.
International telecom spending, not including US figures, amounted to approximately
US$1.27 trillion in 2002. It is predicted that spending will increase in this industry over the next
few years, and that the international telecom markets will grow faster than the US market.

20 CMA Canada
Exhibit 4
Ten Largest Completed Projects in Fiscal 2003

Customer
Final
Value
Contract
Type
Booked
Hourly
Rate
Budgeted
Hours
Final
Hours
Work
Consumer
Systems Inc.
1
$314,288 Variable $104 3,022 3,022 Cost reduction, phone
electronics
103313904
Canada Inc.
2
$264,000 Fixed $105 2,514 2,477 Embedded software
Wireless Phone
Inc.
3
$514,211 Fixed $102 5,041 6,020 Wireless phone electronics
JX Corp.
4
$400,000 Variable $100 3,678 4,011 Design & prototypes
Chime Telephone
Co.
5
$401,200 Fixed $97 4,136 3,877 System simulation
Nesther Inc.
6
$398,700 Fixed $111 3,592 4,877 System PCB
Chip Design Ltd.
7
$378,540 Variable $108 3,441 3,505 Computer chip evaluation
PCB
Rec Vehicles Ltd.
8
$402,155 Fixed $104 3,867 4,040 Computer chip evaluation
PCB
White Defence
Inc.
9
$269,702 Fixed $88 3,065 3,090 Military control system
Rentokon Inc.
10
$284,000 Fixed $98 2,898 4,020 Telecom hardware
electronic design

Notes:
1
Ngar Inc. did the industrial design for this project
2
Five engineering change orders (ECOs) obtained, included in final value
3
Poor initial time budget
4
Contract called for a maximum of 4,000 hours
5
Excellent team performance
6
Customer kept asking for more
7
Three ECOs obtained, included in final value
8
Good experience with global positioning systems
9
Strategically low rate
10
Will not deal with this customer again


CMA Canada 21
Exhibit 5
Organizational Chart

President and CEO
Rick Smelkin
Board of Directors
Rick Smelkin (Chair)
Ralph Manton
Chantale Blanger
Neil Manro
Bruce Bunburger
Vice-President
Operations
Prudence Joy
Project Coordinator
Cam Mondred
100 Design Staff
Manager, Information
Technology
John Bates
3 Contract
Administration
Staff
8 Sales Staff
Vice-President,
Business
Development
Billy-John Carles
Controller
Annette Mulk
Assistant
2 IT Staff
5 Accounting
Staff
2 Operations
Support Staff

22 CMA Canada
Exhibit 6
Balance Sheets (Audited)
As at April 30

ASSETS 2003 2002 2001 2000

Current assets:
Cash $ 147,051 $ 86,854 $ 88,152 $ 87,455

Accounts receivable &
accrued revenue

1,861,253

1,856,050

1,845,595 1,906,258
Supplies inventory 28,478 19,785 28,748 41,855
Prepaid expenses 220,458 201,585 197,852 194,255
2,257,240 2,164,274 2,160,347 2,229,823
Capital assets:

Property, plant, equipment &
design tools

2,537,753

2,387,491

2,232,706 1,945,221
Accumulated amortization 1,157,207 799,362 496,907 216,455
1,380,546 1,588,129 1,735,799 1,728,766
Total assets $3,637,786 $3,752,403 $3,896,146 $3,958,589

LIABILITIES & SHAREHOLDERS EQUITY

Current liabilities:
Bank operating line $ $ 75,042 $ 283,038 $ 626,752
Accounts payable 660,121 671,194 696,612 817,264
Deferred revenue 44,222 54,522 58,443 39,444
704,343 800,758 1,038,093 1,483,460
Long-term liabilities:
Future income taxes 22,288 17,706 17,706 9,852

Shareholders equity:
Common shares 2,186,211 2,186,211 2,084,211 2,084,211
Retained earnings 724,944 747,728 756,136 381,066

2,911,155 2,933,939 2,840,347 2,465,277
Total liabilities and equity $3,637,786 $3,752,403 $3,896,146 $3,958,589


CMA Canada 23
Exhibit 6 (contd)
Statement of Income and Retained Earnings (Audited)
For the Fiscal Years Ended April 30

2003 2002 2001 2000

Net revenue

$16,751,275 $16,704,454 $18,455,952 $20,968,838
Operating expenses:

Salaries, commissions and
benefits

12,405,122 13,061,032

13,973,607 15,681,746
Subcontractors 240,147 137,452 67,852 57,855

Commissions
independent agents

332,071 317,852

310,478 745,875
Rent 275,150 285,842 287,888 289,741
Software maintenance 242,955 235,478 239,788 241,788
Insurance 140,785 139,722 110,422 109,758
Travel 450,422 440,228 442,853 841,222
Professional 174,488 171,895 189,745 199,748
Advertising & promotion 419,852 418,743 416,787 621,855
Communications 239,010 237,489 234,258 278,748
Office & other supplies 315,788 319,728 317,852 319,428
Other 474,825 476,845 471,852 532,042
Bad debt expense 167,513 167,045 184,560 209,688
Amortization expense 357,845 302,455 280,452 216,455
Interest & bank charges 4,027 5,785 29,011 27,473
16,240,000 16,717,591 17,557,405 20,373,422
Income (loss) before taxes 511,275 (13,137) 898,547 595,416
Income taxes current 179,477 (4,729) 315,623 204,498
Income taxes future 4,582 7,854 9,852
Income taxes 184,059 (4,729) 323,477 214,350
Net income (loss) $ 327,216 $ (8,408) $ 575,070 $ 381,066

Beginning retained earnings $747,728 $756,136 $381,066 $ 0
Net income (loss) 327,216 (8,408) 575,070 381,066
Dividends (350,000) (200,000)
Ending retained earnings $724,944 $747,728 $756,136 $381,066


24 CMA Canada

The Societies of Management Accountants of Alberta, Manitoba, New Brunswick, Newfoundland, Northwest Territories, Nova Scotia, Ontario,
Prince Edward Island, Saskatchewan and the Yukon, Certified Management Accountants Society of British Columbia,
Ordre des comptables en management accrdits du Qubec

June 2005

Entrance Examination

Part 2

Additional Information

(Time Allowed: 4 hours)
Notes:
i) Part 2 consists of one case question to be answered in the four hours allotted.
ii) Candidates must not identify themselves in answering the question.
iii) All answers must be written on official answer sheets. Work done on the question paper
or on the Backgrounder will NOT be marked.
iv) Included in the examination envelope is a standard supplement consisting of formulae
and tables that may be useful for answering the question.
v) Examination answer sheets MUST NOT BE REMOVED from the examination
writing centre. All used and unused answer sheets and working papers must be sealed
in the examination envelope and submitted to the presiding officer before the candidate
leaves the examination room.

CMA Canada 25

Additional Information

Company Update
Clear Design Limited (CDL) has continued its operations but the financial results for fiscal 2004
and 2005 (see Appendix A) have been disappointing. Revenues have fallen short of the
budgeted levels and losses have been realized. The competitiveness of design service
companies in other areas of the world (e.g. Asia and Eastern Europe) has grown steadily, the
Canadian dollar has strengthened (hurting many Canadian technology exporters), and the
electronic design industry in Canada has weakened.
Sales
The breakdown of the projects undertaken by CDL during fiscal 2005, by customer type, is
shown in Table 1 below:
Table 1
Number of Projects and Revenue by Customer Type Fiscal 2005

Customer Type Number of Projects Revenue % of Revenue
Telephone service 21 $ 561,688 4%
Telecom hardware 38 7,582,786 54%
Computer chip 22 2,668,017 19%
Consumer electronics 37 1,825,486 13%
Defence 2 280,844 2%
Transportation 22 702,110 5%
Aerospace 3 140,422 1%
Other 32 280,844 2%
Total 177 $14,042,197 100%

CDL has tried to deal with the growing competition through increased sales efforts, including
more advertising and sales calls on the road. In addition, CDL has held its budgeted average
booked rate at $100 per hour. Competitors charge between $80 and $120 per hour. As a result
of these efforts, CDL has maintained its market share, but the overall shrinkage of the Canadian
market has caused sales to drop.
Although the sales focus has been on the Canadian market, approximately 2% of CDLs
revenues were derived from US companies in 2004 and 5% in 2005. Some of this business has
been generated by the three independent sales agents working for CDL in the US, but most of
the contracts resulted from referrals to US parent companies by Canadian subsidiaries. A
project contracted in fiscal 2005 for a customer in Silicon Valley, California, was one of the most
profitable projects CDL has ever completed. CDL had been awarded the contract because the
client believed that CDLs hourly rate of US$100 was a bargain and that no offshore company
had the capabilities required for the project. In two other contracts with smaller US companies,

26 CMA Canada
the client insisted that CDL absorb all travel costs so that, for the customer, it was equivalent to
dealing with a local design services partner.
Increasingly, CDL has lost bids and business to a new, aggressive, large Indian competitor that
has been quoting very low rates. CDL management estimates that $2 million of business that
CDL normally would have obtained has been lost to this new competitor since January 1, 2005.
Two of CDLs local competitors have gone out of business as a result of these market
pressures.
Operations
Because of the overall decline in sales, CDL has reduced its staff over the past two years,
primarily through the dismissal of poorer performers. By April 30, 2005, the number of
chargeable design staff had been lowered to 89, with total annual salaries excluding benefits
amounting to $7,830,000.
One senior engineer has complained that there is a lack of consultation between sales and
design employees and that sometimes the salespeople promise customers more than CDL can
deliver. According to Prudence Joy, some customers have felt that CDLs proposals sounded
better than what could reasonably be delivered within the parameters of the contract. The senior
sales staff insist that they are just trying to save time by basing quotes on similar past projects.
The design staff maintain that even subtle differences in project specifications can make
significant differences, both more and less, in the time required to complete a project.
With respect to fixed-price projects, some customers request additional features or design
changes not included in the original contract, but insist on paying the original, fixed price. With
respect to variable-price contracts that stipulate a maximum number of billable hours, the
project team continues working until the desired project targets are met, even if this requires the
maximum hours to be exceeded. In such cases, the client is not charged for the extra hours of
work. Often, deliverables are not clearly defined in contracts, and necessary engineering
change orders (ECOs) are not obtained.
Financial Reporting and Systems
Mulk has continued her part-time accounting studies and expects to graduate at the end of June
2005. Although she understands the percentage-of-completion method of accounting, she has
only applied it at year-end with the help of the auditor. Throughout the year, revenue is recorded
upon invoicing because this method is easier to apply and most contracts take less than a year
to complete. Monthly revenue and income fluctuates significantly because invoicing takes place
on project milestone dates, which can be at highly irregular intervals. At year-end, it is usually
necessary to accrue revenues on some projects and defer revenues on others as a result of
applying percentage-of-completion accounting.
The monthly volume of credit card charges has reached several hundred transactions. Often,
the salespeople neglect to report their charges to the accounting staff, making it necessary for
an accounting clerk to track down the salespeople to verify charges when the monthly statement
from the credit card company arrives. To avoid late payment charges, CDL often pays the bill
before all of the charges have been properly verified.

CMA Canada 27

Chargeable employees are required to complete an electronic time sheet twice per month,
detailing the number of hours they have worked on the various projects. Many employees
ensure that the total time entered on the time sheet equals 40 hours per week regardless of the
actual number of hours worked. Mondred is responsible for reviewing the time sheets before the
information is downloaded into the Dabit accounting system and the payroll system. On one
occasion, an employee entered on the time sheet 400 hours for a particular project in a single
week, causing the customer to be billed for 400 instead of 40 hours.
Electronics Industry
Competition in the personal computer market has been increasing steadily, which has resulted
in lower profits for manufacturers of computers and their components. Web browser and
Internet security software issues have taken precedence over hardware issues to a certain
extent. Sales of flat screen monitors have surged dramatically and there has been growth in the
area of voice-over Internet protocol (VOIP) technology.
In Canada, sales of electronic equipment are expected to continue to decrease. Revenues,
capital expenditures, and investments in R&D in the ICT industry continued to decrease in 2003
and 2004. Competition in the telecom industry intensified, causing profits to decrease in spite of
a slight increase in revenues.
In the US, recent industry predictions indicate that sales of Internet equipment will grow at a rate
of 6% in each of the next two years, and sales of other electronics equipment will grow by 8%
per year. The Silicon Valley in California continues to be the largest high-tech centre in the US,
followed by Texas, and then the Northeastern states. Salaries for electronic engineers and
designers continue to be substantially higher in these areas than in Canada or the rest of the
US.
Increasingly, for their outsourced work, firms in the US electronics industry have favoured
suppliers that are ISO certified. Few companies that offer electronic design services in North
America have this certification. Since 2003, a general feeling against foreign outsourcing has
grown among the members of the US public because many white-collar, technology, and other
service jobs in the US have effectively gone to India and China. However, businesses looking at
the bottom line have not stopped reducing costs through all available means, including
outsourcing to foreign companies.
Some companies have had significant intellectual property issues with design services
companies outside North America. Trade secrets have been stolen by either the design services
company or its employees and redress has proven very difficult to obtain, due to cross-border
legal issues and the lack of intellectual property protection in many of these countries.
Tellcall Corp.
On April 27, 2005, Smelkin was asked to meet with Ben Jones, Vice-President, Strategic
Planning & Analysis of Tellcall Corp. (TC), one of CDLs customers. TC is a fairly large, publicly
traded Canadian telecom company offering long distance and local telephone service. During
the past two years, CDL has invoiced TC for $1 million on four projects, representing an
average booked rate of $100 per hour. The meeting initially focused on a prospective design
project for a special telecom PCB. The focus then turned to broader issues.

28 CMA Canada
Jones indicated that, in order to remain competitive, TC will have to increase its focus on
developing innovative ways to improve service to customers and to decrease operating costs.
This will require more investment in electronic design as well as controlling the escalating costs
of procuring design services. It was determined that hiring permanent staff to handle this ad hoc
work would be neither efficient nor effective, and that procurement costs could be best
controlled by developing a strategic partnership with a company that offers electronic design
services. TC has been impressed with the work done by CDL over the past two years and would
like to consider a strategic alliance. To this end, Jones asked to see CDLs financial statements.
He indicated that the value of CDLs intellectual capital would be factored into any offer.
On May 10, Smelkin received TCs strategic partnership proposal, which included the following
terms: 1) CDL given the option to swap 200,000 CDL common shares for 85,000 TC common
shares or to sell 200,000 CDL common shares to TC for $850,000 cash; 2) CDL shareholders
agreement to be amended to increase the maximum size of the board of directors to seven
members and to stipulate that two members must be TC representatives; 3) on May 31, 2005,
both companies sign a memorandum of understanding regarding future design work; 4) TC
guarantees to give CDL at least $4 million of business per year for the following three years,
based on variable-price contracts at the rate of $90 per billable hour; 5) CDL refrains from
accepting any contracts from TCs main competitors; and, 6) TC recommends CDL to any of its
customers requiring electronic design work. If CDL does not accept these terms, TC will form a
strategic alliance with one of CDLs competitors and will no longer give any business to CDL.
Smelkin determined CDLs current contracts with TCs main competitors amount to about
$3.5 million per year, and that TCs profits and share price have dropped over the past two
years due to heavy competition. TCs shares are currently trading for $10 per share in the
market.
Form Innovations Limited (FIL)
Over the past several years, CDL has worked on a few small projects for Form Innovations
Limited (FIL). This small Canadian electronics company was founded by Marcus Mills, a very
talented industrial designer, to develop innovative new products based on his ideas and take
them to the market. Mills understands that being the first to take the products to market and gain
market acceptance is critical to the companys success, and he has tried to achieve this in two
ways. For some products with a relatively small potential market, FIL has manufactured the
product in its small production facility and sold the units to a larger electronics company in the
US, which has then incorporated the product into its own line of branded consumer products
marketed through retail chains. For other products that have a larger potential market and
require too large an investment in manufacturing processes for the company to handle, FIL has
patented the products and licensed a large manufacturer to produce and market them. Both of
these approaches have been successful and FILs products have retained respectable market
shares even after competitors have introduced their own versions of the products.
Mills products have required increasingly sophisticated PCBs, which CDL has designed for him.
His most recent idea is a small, inexpensive electronic device that would allow consumers to
control programming for the recording of television programs and the subsequent playback from
their home computers. FILs initial market research has suggested that, conceivably, this low-
cost technology could replace VCRs and DVD players in the consumer market, and demand
would be in the millions of units. Although production costs would be small, development of this
product, designated as product X15, would require a significant investment in electronic design.

CMA Canada 29

FIL requested CDL to submit a proposal for completing the electronic design. CDL estimated
that about 25,000 hours of work over twelve months, as well as $50,000 in out-of-pocket costs,
would be required in order to create a working prototype. Rather than a fixed-price or variable-
price contract based on design hours, FIL requested that the contract be based on a percentage
of FILs revenues from product X15 and that the work be done on credit.
Smelkin knew that CDL could not afford to accept this project on credit unless additional
financing could be found. He approached Ralph Manton of G Holdings Limited to ask for the
necessary funds. Manton responded that G Holdings Limited would be willing to advance
$1 million to CDL in the form of fully secured, five-year, 6% convertible bonds on the condition
that FIL merge with CDL. The bonds would be convertible into 400,000 Class A common voting
shares if CDL defaulted on payment at any time during the term of the debt.
Smelkin decided to explore the merger idea and met with Mills on April 29, 2005. At the
meeting, Mills agreed to provide Smelkin with FILs financial statements (see Appendix B) in
exchange for a copy of CDLs financial statements. He promised to consider a merger and
respond by May 13.
Project Belleville
In late September 2004, CDL signed a contract with Multi-Comm Corp. (MCC) for project
Belleville. This contract was for the design of telecom and Internet equipment for this large,
private telecom company. Project Belleville was a fixed-price contract in the amount of
$1.6 million, the largest contract that CDL had ever signed. This project was expected to be
completed by July 31, 2005. By April 30, 2005, CDL had completed 70% of the work and had
invoiced MCC on three milestone billing dates for a total of $900,000, but had received payment
of only $300,000. Since MCC was a significant player in the telecom industry, CDL had not
made any serious efforts to pursue collection of the overdue payments, and had recognized
$1.12 million of the revenue from project Belleville in the year-end financial statements.
On May 12, 2005, CDL received the news that, because MCC had just filed for bankruptcy
protection, project Belleville was cancelled and no further payments would be forthcoming. Mulk
informed Smelkin that MCCs bankruptcy would cause CDL to violate the banks covenants for
its line of credit and that something would have to be done quickly to avoid cancellation of the
banks credit facility. The banks two covenants on CDL are as follows: 1) maintain a net book
value, excluding intangibles but including software, of $2.0 million, and 2) maintain a current
ratio of at least 1.5 to 1. If CDL violates either of these covenants, the bank can cancel the credit
facility. The MCC bankruptcy will cause the 2005 after-tax loss to increase by $524,800 (i.e.
$820,000 increase in bad debts less $295,200 increase in income tax refund due to loss carry-
back).
Emergency Meeting
Smelkin called an emergency meeting of the members of senior management and the board of
directors on May 13, 2005. They discussed the need to strengthen the balance sheet through
an issue of long-term debt and, possibly, new shares. Those that held CDL shares indicated
that they would prefer to avoid diluting their shareholdings, if possible, and Smelkin suggested
that obtaining debt financing could be difficult. Another option was to develop a strong business
plan that would address the problem of CDLs decreasing revenues and that could be used to

30 CMA Canada
convince the bank to increase the companys line of credit. This led to a discussion of the future
direction of CDL.
Blanger and Manro felt that CDL should downsize further and reduce risk by seeking out
strategic partnerships, such as the TC proposal. Smelkin was concerned that if staff levels are
cut down any further, CDL would not have the capacity to match even last years revenues.
Smelkin believes that the company has an excellent design team that is capable of returning the
company to profitability. In his view, all the weaker employees of a few years earlier have either
resigned or been encouraged to pursue other opportunities. He does not want to lose anybody
from the current team, whose members he recruited. Before the news of the MCC bankruptcy,
he felt that a profit of $800,000 for fiscal 2006 was achievable.
Bunburger and Carles argued that the focus of the sales effort should be shifted from the
Canadian market to the US market. Carles indicated that a full-time sales office could be set up
in the US for about CDN$200,000 per year, including travel, premises, and salaries, but
excluding commissions. He also suggested that the possibility of success in the US would be
enhanced greatly if CDL were ISO-certified.
Manton felt that the offshore providers of design services were growing too fast and too big for
CDL to remain competitive as a service company and that CDL should change its focus to
become a product company instead. He suggested that CDL should begin to develop and sell
innovative electronic products and that a merger with FIL would be a step in the right direction.
Smelkin indicated that he had just received an answer from Mills indicating that FIL would agree
to a merger if certain conditions were met (see Appendix C). He also distributed a summary of
some background information on FIL assembled by Prudence Joy and the results of a market
study for product X15 conducted by Carles (see Appendix D).
At the end of the meeting, the participants agreed to recruit an independent consultant, Jana
Sonn, CMA, to help them assess their options and recommend a course of action.
Other information
Since the news of the MCC bankruptcy, Bud Magee, a friend of Blanger, has expressed an
interest in investing $420,000 in CDL common shares if there is a viable turnaround plan
and the share price is no more than $3.50 per share. Aware of the problem with the MCC
receivables, Magee says he is not deterred by short-term financial fluctuations and would be
investing for the long term.
A professional business valuator has estimated that CDLs unrecorded intangible assets are
worth around $4 million as at April 30, 2005.
The US dollar has weakened from nearly CDN$1.60 in 2001 to CDN$1.19 in April 2005.
This development has hurt Canadian exporters, many of which use CDLs services.
In 2004 and 2005, approximately 41% of CDLs revenue came from business brought in by
the independent sales agents. It had been expected that they would bring in about 50% of
total revenue.
Since 2001, each of the two vice-presidents, Carles and Joy, have received a 1%
commission for new business in addition to a base salary.

CMA Canada 31

CDL has not changed its salary levels to keep up with the market and, in 2004, three
employees left for higher-paying jobs elsewhere.
Some of the design team members have experience in industrial design in addition to
electronic design.
CDLs tax advisor has indicated that opening a sales office in the US would significantly
increase the companys regulatory and tax burden.
Carles rarely turns down work because, in his view, unless all of the engineers are fully
occupied, the work might as well be done by CDL.
During fiscal 2004, 20,000 stock options were exercised for $1.50 each bringing the total
number of shares outstanding to 1,471,000.
CDL received SRED tax refunds of $196,300 in 2005 and $81,200 in 2004. The SRED tax
credits claimed pertained mainly to qualifying work done for US customers. The MCC
bankruptcy has no effect on the SRED tax credit.
During fiscal 2003, a total of 172,000 actual hours were spent on contracts by chargeable
employees (168,000 hours) and subcontractors (4,000 hours), and 167,500 booked hours
were reflected in the contract revenue.
The company has developed high-quality project documentation processes. Work is very
well documented and files are stored in an orderly fashion.
Recently, three engineers admitted that, on their electronic time sheets, they did not record
time spent on contract work that they felt was unproductive, such as pursuing a technical
dead end or doing fruitless Internet research on a component. The related contracts
addressed overall objectives, but not the use of every hour. Carles believes that clients with
variable-price contracts should be charged for all hours worked on their projects, no matter
how productive the designers time has been. Mondred, the Project Coordinator, has been
debating the ethics of this with Carles.
An independent sales agent, who also holds a full-time job at Nesther Inc., is suspected of
soliciting business for CDL from companies that compete with Nesther Inc. CDL is not sure
what to do about this potential conflict of interest.
CDLs effective tax rate is 36% and its after-tax cost of capital is 10%.
Required:
As Jana Sonn, CMA, develop an integrated report for CDLs board of directors, advising them
on the strategic direction that should be taken, including recommendations and an
implementation plan, and addressing other issues and concerns requiring their attention. In
undertaking this task, you will need to take into consideration your background knowledge of the
company as well as the additional information provided above.

32 CMA Canada
Appendix A
Balance Sheet (Audited)
As at April 30

ASSETS 2005 2004
Current assets:
Cash $ 83,520 $ 84,789
Accounts receivable and accrued revenue 2,340,366 1,867,653
Supplies inventory 26,924 28,144
Prepaid expenses 184,875 201,748
2,635,685 2,182,334
Capital assets:
Property, plant, equipment & design tools 3,070,460 2,972,608
Accumulated amortization 2,105,247 1,626,692
965,213 1,345,916
Total assets $3,600,898 $3,528,250

Bank operating line $ 777,958 $ 25,969
Accounts payable 646,320 635,553
Deferred revenue 48,776 40,111
1,473,054 701,633
Long-term liabilities:
Future income taxes 22,288 22,288
Common shares 2,216,211 2,216,211
Retained earnings (deficit) (110,655) 588,118

2,105,556 2,804,329
Total liabilities and equity $3,600,898 $3,528,250


CMA Canada 33

Appendix A (contd)
Statement of Income and Retained Earnings (Audited)
For the Fiscal Year Ended April 30

2005 2004
Net revenue $14,042,197 $15,127,990
Operating expenses:
Salaries, commissions and benefits 11,039,208 11,544,004
Subcontractors 178,680 180,120
Commissions independent sales agents 287,865 310,124
Rent 275,150 275,150
Software maintenance 255,411 241,588
Insurance 151,888 149,785
Travel 614,788 463,285
Professional 174,090 176,222
Advertising & promotion 591,400 420,411
Communications 197,845 196,255
Office & other supplies 301,445 302,588
Other 428,444 456,485
Bad debt expense 140,422 151,280
Amortization expense 478,555 469,485
Interest & bank charges 18,839 4,998
15,134,030 15,341,780
Income (loss) before taxes (1,091,833) (213,790)
Income taxes current (393,060) (76,964)
Income taxes future - -
Income taxes (393,060) (76,964)
Net income (loss) $ (698,773) $ (136,826)

Beginning retained earnings $588,118 $724,944
Net income (loss) (698,773) (136,826)
Dividends - -
Ending retained earnings (deficit) $(110,655) $588,118

Statistics:
Chargeable employee hours worked 148,666 156,240
Subcontractor hours 2,978 3,002
Actual hours worked on contracts 151,644 159,242
Total booked hours reflected in contract revenue 140,422 151,280
Number of jobs completed 177 221


34 CMA Canada
Appendix B
Form Innovations Limited (FIL)
Balance Sheet (Unaudited)
As at April 30

ASSETS 2005 2004
Current assets:
Cash $ 21,485 $ 28,485
Accounts receivable 214,810 207,376
Prepaid expenses 6,455 6,045
242,750 241,906
Capital assets (net) 214,792 215,819
Total assets $457,542 $457,725

Accounts payable $166,601 $167,643
Common shares 1 1
Retained earnings 290,940 290,081
290,941 290,082
Total liabilities and equity $457,542 $457,725

Income Statement (Unaudited)
For the Year Ended April 30

2005 2004
Revenue:
Product sales $2,298,472 $2,241,619
Licence revenue 428,863 60,259
2,727,335 2,301,878
Operating expenses:
Production costs 726,841 744,762
Salaries and benefits 1,202,444 806,826
Subcontractors 76,458 73,485
Amortization expense 10,485 11,789
Selling and administration 388,975 364,664
2,405,203 2,001,526
Income before taxes 322,132 300,352
Income taxes 71,273 66,681
Net income $ 250,859 $ 233,671


CMA Canada 35

Appendix C
Response from Marcus Mills, FIL

I have reviewed the numbers with my accountant and lawyer and suggest the following as
reasonable terms for a merger of FIL and CDL: all FIL assets, including all intellectual capital,
patents, and goodwill (intangibles estimated to be valued at $4,900,000), to be combined with
those of CDL in exchange for $1,000,000 cash and 1,000,000 of CDL common shares. A
condition of the merger is that I be appointed Vice-President, Products, of the merged company.
Please note that I have been approached by an offshore company that is willing to purchase FIL
at a much higher price, but I would not have the opportunity to be involved. I would rather work
with CDL on product X15, as well as future products, but the terms have to be fair.

Appendix D
Information Pertaining to FIL and Product X15

FIL operates from a small office and production facility located 17 kilometres from CDLs office.
The rent is $4,500 per month. This facility is currently operating at full capacity and would not be
able to handle production of product X15. Apart from Mills, FIL has 20 full-time employees plus
a part-time bookkeeper. The companys financial statements are not audited, but they have
been given a good review engagement report every year. The accounts receivable aging is
good and there is no long-term debt. The fair market value of the tangible capital assets,
consisting mainly of computers and production equipment, is $200,000.
Initial market research on product X15 confirms that, if the product functions as envisioned,
worldwide demand would be tremendous. The following table summarizes FILs potential sales
of product X15 at different price points, assuming that competitive products would be available
in the market by Year 3:
Volume (millions of units) Potential Retail Revenue (millions of CDN$)
Retail Price
Year 1 Year 2 Year 3 Year 1 Year 2 Year 3
$81 - $100 0.5 1.0 3.0 50 100 300
$51 - $80 1.0 2.0 7.0 80 160 560

The life cycle for this kind of product would be not greater than five years, with demand levels in
Years 4 and 5 being very uncertain.
To go to market, FIL would have to license a large manufacturer to produce and market product
X15. The revenue from licensing would likely equal $1.00 per unit.

36 CMA Canada
General Comments on Candidate Performance

The subject of the Part 2 case is Clear Design Limited (CDL), a Canadian controlled
private corporation providing electronic design services to companies that produce or
design electronic devices and equipment. CDL commenced operations at the height of
the high-technology boom to capitalize on the large number of technology companies
needing timely electronic design. When the technology bubble deflated, CDL was able
to continue its operations and, as the market recovered in 2002 and 2003, CDL took
advantage of the outsourcing dynamics of the market, but at lower fees and profits than
those of the bubble period.
In the fiscal years 2004 and 2005, CDLs revenues fell short of the budgeted levels and
losses were realized. The competitiveness of design service companies in other areas
of the world (e.g. Asia, India and Eastern Europe) was increasing steadily, the Canadian
dollar was strengthening (which was hurting Canadian exporters, many of which use
CDLs services), and the electronic design industry in Canada overall was weakening.
As well, one of CDLs major contracts recently became uncollectible, resulting in a pre-
tax loss of more than $800,000. This loss, combined with decreasing revenues, caused
CDL to be unable to meet the bank covenants for its line of credit.
In consideration of these issues, CDL must decide on a strategy to ensure its future
growth and financial success. Specific strategic options available to address CDLs
situation are as follows: 1) reduce risk by accepting a strategic partnership with Tellcall
Corp. (TC) or seeking out other strategic partnerships; 2) enter the electronic products
manufacturing industry and merge with Form Innovations Limited (FIL); and, 3) shift the
sales effort to focus on the US market. The one major constraint to any expansion plan
is the need to ensure that the bank covenants are met.
As a consultant hired by the board of directors, the examination writer is expected to
use an appropriate strategic planning approach to analyze the companys situation,
assess its strategic options in light of its strengths and weaknesses, interpret and use
the financial and non-financial information provided in the Backgrounder and Additional
Information, and make supported recommendations. The response is expected to be in
the form of a formal report to the board of directors and exhibit appropriate written
communication skills. The report should advise the board on the strategic direction that
should be taken and provide an implementation plan. This case provides an opportunity
for examination writers to demonstrate judgment skills on a number of different levels.
There are several strategic issues to consider, and some important operational issues
also require attention. Analysis of the relevant operational issues should be
appropriately incorporated in the various sections of the report.
Overall, performance on this examination was acceptable. Most responses reflect an
effort to use the strategic planning process, focus mainly on the various strategic
alternatives and the major implementation and operational issues, and present a report
in a reasonably acceptable format. In general, the responses reflect a good
understanding and familiarity of the information provided in the case, and an ability to

CMA Canada 37
draw on this information to identify many of the internal strengths and weaknesses of
the company and, to a lesser extent, its external opportunities and threats.
The better responses 1) include a comprehensive and balanced analysis of both the
internal and external environments, 2) demonstrate extensive use of the information
learned from the environmental analysis in the evaluation of the strategic alternatives
and operational issues, 3) calculate the effect of various options on CDLs ability to
meet the two bank covenants, 4) consider CDLs ability to finance the various options,
and 5) provide useful and supported recommendations for a strategic direction and an
implementation plan that will guide the company to increased revenues and financial
health.
The average response reflects an attempt to follow a reasonable approach to the case
(e.g. situation analysis, analysis of options, recommendations, implementation plan) and
to recommend a strategic direction that offers good prospects for CDL to increase
revenues and profits. It also addresses financing and attempts to demonstrate that the
recommended strategy would allow CDL to meet the bank covenants. Many otherwise
adequate responses do not provide evidence that the recommended strategy can be
successfully implemented by CDL within the limiting constraints provided.
In weaker responses, the depth and breadth of analyses of the strategic options are not
sufficient. In some instances, one or two aspects of the case are overemphasized. In
other instances, many aspects are addressed but only at a superficial level. Some
responses reflect a simple case analysis approach that does not place enough focus on
the strategic issues or does not effectively address the issues of the case in a
comprehensive and integrative manner. For example, in analyzing the strategic
alternatives, this case requires a careful analysis of how CDL should amend its strategic
direction in the context of available financing options while simultaneously remaining in
good standing with the bank (compliance with the bank covenants).
Other common tendencies reflected in weaker responses are as follows:
1. Devoting too large a portion of the report to documenting the situation analysis.
Although a good environmental analysis is the cornerstone of a good response, it is
only the first step in solving the business case. If too much time is spent on
documenting the situation analysis, not much effort can be devoted to addressing
the strategic alternatives and business issues, which represent the essence of the
response. In many responses, a substantial portion of the situation analysis
appears to consist of extensive pre-memorized lists of strengths, weaknesses,
opportunities and threats prepared from the information provided in the
Backgrounder. In some responses, the documentation of the situation analysis
makes up as much as 75% of the total response.
2. Failing to consider the information learned from the situation analysis, particularly
the external environment analysis, in the analyses of the strategic options.

38 CMA Canada
3. Failing to calculate the impact of the MCC bankruptcy on CDLs current ratio and
net book value (e.g. the revised 2005 current ratio and net book value after
accounting for the lost revenues and uncollectible accounts receivable).
4. Providing only a qualitative analysis of the strategic options. Good responses
include numerical support that demonstrates the feasibility of the proposed strategy
in terms of profitability and how it can be financed. For example, some responses
provide a good analysis of the merger with FIL, but do not address the issue of
financing the investment in electronic design for product X15 as well as the
$1 million cash payment to FILs owner that is specified in the merger proposal. In
many responses, the $1 million from G Holdings Limited was inappropriately
presumed to be sufficient.
5. Limiting the list of external opportunities to the specific strategic options mentioned
(e.g. reduce risk by accepting TC proposal, merge with FIL, expand to US market)
rather than including general environmental factors (e.g. US industry growth,
government assistance, growth of international telecom market predicted to be
faster than US market). These environmental factors are essential considerations
in assessing which of the strategic options will help CDL meet its corporate
objectives.
6. Evaluating the various expansion options and requirements independently without
considering the combined effect on CDL from the perspective of the current ratio
and net book value constraints and/or the amount of financing available from
various sources. For example, if more than one option is recommended, the
combined impact on the two bank covenants should be calculated.
7. Providing inappropriate and insufficient quantitative analyses for the strategic
options. For example, the option pertaining to FIL (producing product X15) requires
some form of profitability analysis. The most effective approach is to calculate the
net present value, i.e. present value of estimated licensing revenues per year
minus the estimated cost to complete the electronic design of the product. Some
candidates incorrectly assumed that the merged CDL/FIL would realize the gross
retail revenues from the sale of product X15.
8. Failing to take into account the shareholders preferences in the analysis of the
strategic options. For example, the shareholders clearly state that they would
prefer to avoid diluting their shareholdings if possible. This should be taken into
account when analysing each of the strategies involving share issues (TC, FIL, and
Bud Magee).
9. Failing to consider issuing shares to Bud Magee. Selling new shares in the amount
of $420,000 to Bud Magee would sufficiently offset the losses resulting from the
MCC bankruptcy such that CDL could satisfy the bank covenants.
10. Dealing with each strategic, operational, and implementation issue in isolation,
thereby failing to demonstrate integrative thinking.

CMA Canada 39
11. Failing to provide a comprehensive plan to successfully implement the strategic
recommendations, or providing a plan that does not sufficiently address the issues
that need to be solved to effectively implement the strategic recommendations.
12. Placing most of the emphasis on the analysis of the strategic issues to the
exclusion of a reasonable attempt to address operational issues.
13. Recommending strategies and solutions to various problems that are not realistic.
For example, providing a recommendation to accept TCs offer, merge with FIL and
establish a US sales office without including a workable financing plan.
14. Not addressing some important operational issues, such as the contracting
problems (e.g. lack of consultation between the salespeople and the design
employees, failure to clearly define deliverables in the contracts, and failure to
obtain the necessary engineering change orders), and focusing on less relevant
operational issues, such as the percentage of completion accounting concern, the
compensation structure, and marketing concerns.
15. Providing a lengthy executive summary, covering memorandum and/or
introduction. While the executive summary and introduction are required for a
formal business report, they should be kept relatively brief in light of the restricted
examination response time. A covering memorandum is not required; a report title,
the date of submission, and identification of the author will suffice. The executive
summary should identify the strategic options, present the recommended strategy,
and mention the major operational recommendations; however, it should not
contain descriptive information or analysis. The introduction should simply state the
purpose and scope of the report; it should not contain a synopsis of the companys
entire history.
16. Providing a very brief, generic table of contents, rather than one that is specific to
the case (i.e. each alternative accompanied by a descriptive heading or brief
explanatory phrase should be listed, and each appendix with its descriptive title
should be listed).
17. Exhibiting many weaknesses in the use of the English or French language and
providing reports that are neither coherent nor concise. Providing generic
statements that can be applied to any case situation, as well as pre-formatted
executive summaries, introductions and conclusions may be one way of
contributing toward grammatically correct English in those limited circumstances;
however, all aspects of the report should be case specific. As well, when the
general grammar, spelling and style is weak, the use of artificial sentences only
serves to highlight the contrast between the original thoughts of the candidate and
the memorized statements.
Unsuccessful responses often demonstrate an inability to effectively apply a strategic
case approach to solving a business problem. An approach similar to the following is
recommended:

40 CMA Canada

Recognize that there is a current mission statement and that it needs to be further
developed.
Perform a situation analysis by looking both inside the organization for strengths and
weaknesses, and outside the organization for opportunities and threats. This
analysis can be in point form in an exhibit with the major elements explained in the
body of the report. It should be noted that the situation analysis is incomplete without
an evaluation of the current financial situation.
Identify the various strategic alternatives facing the organization, and evaluate the
pros and cons of each using case facts and specific references to the situation
analysis performed in the previous step. The purpose is to find a strategy that
provides the best fit for the organization. It should be noted that this analysis is
incomplete without some quantitative analysis in addition to the qualitative analysis.
Make a clear recommendation regarding which options should be pursued.
Revisit the mission to see if it requires revision in light of the internal and external
environments and/or the recommended changes to the strategic direction of the
company.
Discuss the specific implementation issues related to the recommended strategy as
well as the operational issues and problems that must be addressed to help support
the successful achievement of the new strategy. Provide clear recommendations as
well as a detailed action plan that will help management move forward with the
recommendations.

Following these steps, using an appropriate business report format (table of contents,
executive summary, introduction, analysis, recommendations, implementation plan,
conclusion, and exhibits), and presenting the contents of the report in a logically
sequenced and well-written manner would enhance the effectiveness of responses to
strategic cases.

For each of the five higher-order skills being tested, specific characteristics of a strong
response versus a weak response are presented in the marking guide. To further
demonstrate what constitutes an acceptable attempt versus an unacceptable attempt,
three sample responses are presented, with accompanying markers comments on the
strengths and weaknesses of each.

Rather than provide a complete, full-scale model solution that would be impossible to
achieve during a four-hour examination, the two sample successful attempts, while not
perfect, demonstrate what can realistically be achieved during the available examination
writing time.


CMA Canada 41
Global Marking of the Part 2 Case

Overview
Part 2 of the June 2005 Entrance Examination was marked according to an approach
known as global marking, which is designed to focus on the examination responses in
total according to the skills that are being evaluated, rather than focusing on discrete
elements of the responses. This approach was designed to provide a high degree of
assurance that maximum credit is received for demonstration of these skills.
The following describes the global marking approach that was used:
A general marking guide was used which rated the examination responses
according to the following five higher-order skills:
1. Strategic Thinking
2. Analysis
3. Integration
4. Judgment
5. Written Communication
The strategic thinking, analysis, and integration skill areas were further divided
into subsections to assist the markers in evaluating the responses, with each of
the subsections being separately evaluated.
With respect to each of these eight sections and subsections, the markers
evaluated the responses in accordance with the marking guide and, with the
assistance of a marking worksheet, assigned a ranking value based on a scale of
0 to10.
To ensure that the responses were ranked fairly, two different markers marked
each response independently. In addition, if the difference between the rankings
for a particular skill or the total ranking of all skills did not fall within a
predetermined range of tolerance, the response was arbitrated by a third
member of the marking team.
After the examination responses were marked, the following weightings were
applied to the assigned rankings for each of the five skill areas:
1. Strategic Thinking 24
2. Analysis 18
3. Integration 18
4. Judgment 24
5. Written Communication 16
Total 100

42 CMA Canada
After the examination responses were ranked and the rankings weighted as
described above, each response with a mark that was within a designated range
around the pass mark was reviewed by a marking team leader or his/her
delegate, and a final judgment was made as to the mark to be assigned to the
response.

The following is an example of how the final mark for a response to the June 2005 case
was determined:
A
Markers
Ranking
B
Weight
Factor
C
Final Mark
(A x B)
1. Strategic Thinking
a) Elements of the strategic planning process
b) Systematic use of the strategic planning
process

7/10

6/10
13/20

12

12
24

8.4

7.2
15.6
2. Analysis
a) Breadth
b) Depth

7/10
7/10
14/20

4
14
18

2.8
9.8
12.6
3. Integration
a) Linkages to situation analysis
b) Linkages between alternatives, and
between issues and alternatives

8/10

2/10
10/20

12

6
18

9.6

1.2
10.8
4. Judgment 6/10 24 14.4
5. Written Communication 7/10 16 11.2
Total
50/80 100 64.6

The marking worksheet and marking guide used by markers in assessing responses
and determining the ranking values to assign to each of the skill area subsections are
presented on the following pages.
The marking worksheet is a tool used by the markers to document the attributes of the
response being marked and to indicate the page numbers where coverage of the
various issues can be found in the response. On the second page of the worksheet, the
most common issues are preprinted so that the markers need only underline those that
are addressed in the response, and space is made available for markers to write notes
regarding these and other issues addressed in the response. The first page of the
marking worksheet is used to document the markers assessment of each skill area
subsection.

CMA Canada 43
The marking guide provides an overview of what the markers are looking for in a
response. To learn how to apply this marking guide consistently for all candidate
responses, each member of the marking team must undergo extensive training.


44 CMA Canada
Marking Worksheet

STRATEGIC THINKING
S/A/W* Ranking
BOX 1
Elements of the Strategic Planning Process
mission/vision/stakeholder preferences (M/P)
situation analysis (e.g. SWOT, financial assessment, ...)
strategic alternatives addressed
make clear recommendations re strategic direction
implementation plan (IP) (strategy implementation, operational
recommendations)
/10

BOX 2
Systematic use of the Strategic Planning Process
(M/P S W O T IP)

/10
ANALYSIS
BOX 3
Breadth:
strategic issues
operational & implementation issues
recommendations on operational & implementation issues
/10

BOX 4
Depth:
strategic issues
operational & implementation issues
quantitative analyses
/10

INTEGRATION
BOX 5 Linkages to situation analysis /10
BOX 6 Linkages between alternatives and issues /10
JUDGMENT
BOX 7

(a) Issues - consider relative emphasis of the following:
organization of strategic issues
strategic vs. operational issues
major vs. minor issues
(b) Analysis - consider the following criteria:
balance of pros & cons; overcoming cons
balance of quantitative vs. qualitative
quality of quantitative
quality of qualitative
information from the case understood and used
(c) Conclusions/recommendations:
logical? consistent? recommendations/implementation plan convincing?
feasible? addresses bank covenants (NBV $2M; CR 1.5) & financing?
/10

BOX 8

WRITTEN COMMUNICATION
(a) Format:
layout (table of contents, executive summary, introduction, analysis,
conclusion, exhibits)
organization (headings, lists)
(b) Language and style:
professional tone, tact, consideration of audience
grammar, spelling, sentence structure, punctuation
clear and concise expression, logical and coherent flow, audit trail

/10

*Note: S = Strong; A = Adequate; W = Weak; M/P = Mission/Preferences; IP = Implementation Plan
NBV = Net Book Value; CR = Current Ratio

CMA Canada 45

SITUATION ANALYSIS:
1. a) Mission/Vision Current____ Critiqued_____ Updated ____
b) Preferences Smelkin____ Blanger/Manro_____ Manton_____ Shareholders_____
2. Internal Analysis Strengths / KSFs / Core Competencies / Competitive Advantages:
Price___ Quality___ LT relations___ Range of/Expert services___ Cust serv___ Contacts___ Alliances(CEM)___
Own tools___ Rep.(top 5)___ Res. knowl./des.___ Team env___ Mgmt___ HR policies___ Ind. des. exp.___
Pricing options___ Sales/Indep. agents___ Promo/Website___ Location___ Security: system___
Insurance___ Bank rel.___ Doc. process___ Maint. mkt. share___ Capacity (S/W)__
3. External Analysis Opportunities 4. Threats: Domestic Cdn competition___ CEMs___
Co. downsizing__; Engineer avail___ Overseas/Indian___ PC & telecom comp /price ___
Internat. mkt. : Tel.___ Elec.___ Cdn elect. design mkt ___ Cdn ICT ind. ___
US mkts: ___ Lrg___ IPP____ US $ /Cdn $ (O/T)____ US anti-foreign trend(O/T)___
VOIP tech.___ SRED___ EDI___ Outsourcing dynamic(O/T)___ Eng. salaries in US (O/T)___
Govt ICT support___ Internet tech___
5. Financial Assessment: Sales ; Losses; Booked vs actual hours/rate; US sales
Historical Ratios: NBV, CR, A/R, other; After MCC bankruptcy: NBV, CR, Line of credit
STRATEGIC ANALYSIS: Pros (+) or Cons (-) or Points() Quant. NBV CR Fin.
Rec.
pg#
W/A/S
6. Tellcall Corp.

7. Diversify:
- FIL
- Product company

8. Product X15

9. US Market
- US sales office

10. Other
CDLS INTERNAL OPERATIONAL ISSUES/WEAKNESSES: R/C W/A/S
11. Contracting Problems: lack of consultation between sales & design staff;
deliverables not clearly defined; ECOs not obtained; variable and/or fixed pricing;

12. Marketing/Sales: benefit vs increased marketing costs; independent agents not
effective enough; conflict of interest; over-concentrated in telecom sector;

13. Systems/Time Tracking: errors on time sheets; not recording/billing all time

14. HR/Management/Governance/Performance Evaluation: salaries lagging/employees
leaving; Joy receives commission; Joy has no financial background; Mulk is not
designated; Carles rarely turns down work;

15. Financial Accounting: % of completion only used at year end; poor collection
practices; control over credit card use;

16. Operations: Not ISO certified

17. Other
FINANCING/EQUITY CONTROL: R/C W/A/S
18. Long-term bank loan; sell/swap shares (TC); G Holdings/Manton bonds;
Bank covenants

19. Magee share purchase
R/C = Recommendation/Conclusion; W/A/S = Weak/Adequate/Strong; IPP = Intellectual Property Protection

46 CMA Canada
Marking Guide
Clear Design Limited

OVERVIEW
The June 2005 Part 2 CMA Entrance Examination is a case that is evaluated using
global marking techniques. While technical competencies (knowledge, comprehension,
application) are evaluated extensively in the Part 1 examination, Part 2 focuses on the
following higher-order skills:
Strategic thinking
Analysis
Integrative capabilities
Judgment
Written communication
Strategic thinking focuses on the understanding and use of the strategic planning
process. Analysis focuses on the ability to identify and analyze strategic and business
issues to an appropriate level of depth and breadth. The quality of the strategic and
business analysis is captured under integrative thinking and judgment. Written
communication assesses the ability to make effective use of format and language in
the report.
The following sections of this document describe the approach to be taken to evaluate
each of these skill areas using global marking. The objective is to ensure that all
examination responses are evaluated consistently in each area.

STRATEGIC THINKING
This section pertains to the understanding of the strategic planning process, knowledge
of a strategic planning method, and ability to apply the methodology in a systematic way
to arrive at an integrated strategic plan. It focuses on the integrity and consistency of the
logic from one step to another in the strategic planning process.
Strategic thinking is evaluated from two different perspectives: (a) elements of the
strategic planning process and (b) systematic use of the strategic planning process.
(a) Elements of the Strategic Planning Process (BOX 1)

This sub-section evaluates the understanding of the elements of the strategic planning
process as a tool to solve a business problem (see the following table):

CMA Canada 47
Elements of the Strategic Planning Process
PROCESS STEPS APPLICATION TO THIS CASE
Mission/Vision

Responses should identify that CDL currently has a mission
statement and should comment on its deficiencies (e.g. does not
include US market). A more appropriate current mission statement
may be suggested. After assessing the current situation,
analyzing the strategic alternatives and recommending a strategic
direction, the mission should be revisited to ensure that it still fits
with the recommended strategic direction. If this is not the case, a
new mission statement should be provided that aligns with the
recommended strategy. [Note: A mission statement defines the
companys reason for its existence by indicating who the target
customers are, what customer needs are being satisfied, and how
the company is achieving these needs; a vision statement
provides a picture of how the company would like to be perceived
in the future (where are we going). It is acceptable to combine
these two into one forward-looking mission statement. For
purposes of this marking guide, mission will encompass both
mission and vision.]
Weak does not address the mission, simply refers to the
current mission statement without assessing it or offering a
new one, or ignores the current mission statement and
provides a new one that is not consistent with the strategic
recommendations.
Strong clearly identifies and assesses the current mission
statement, and then, if necessary, provides a new mission
statement that is consistent with the strategic
recommendations.

Situation Analysis

Assessment of CDLs current internal environment (aspects of the
environment that are specific to CDL, which include the strengths
and weaknesses of the organization, as well as an assessment of
its current financial condition) and external environment (aspects
of the environment that CDL does not control but within which it
must operate; these include the opportunities and threats
presented by market conditions and competition). While a broad
range of tools may be used to achieve a thorough analysis
(Porters 5 forces, PEST, etc.), the most common tool will be a
SWOT analysis combined with some level of ratio and profitability
analysis.
The quality of the situation analysis is to be considered in the
global assessment of this element. For example, there should be

48 CMA Canada
a relatively high proportion of distinct internal strengths &
weaknesses, and external opportunities and threats (repetition of
closely related points is not worth much more than making the
main point once, e.g. listing internal design companies, spin off
services and independents as separate threats is not effective as
they are all examples of domestic competition).
The external opportunities and threats need to be industry or
market driven. For example, that the Canadian government
provides a SRED tax credit for qualified expenditures and that the
US markets for Internet and other electronic equipment are
expected to grow are valid opportunities in the industry; CDL did
not cause the situation (has no control of it), but can benefit from it
by increasing its focus on the US market. Opening a US sales
office is a means to accessing the opportunity (i.e. a strategic
alternative), but is not an opportunity on its own.
A sample of some of the issues that could be included in a
situation analysis for this case is provided in Appendices A and B.
Weak contains no structured situation analysis (i.e.
discussion regarding the current situation is found
throughout the report instead of grouped together in a
separate section) or one that is quite sparse (very limited in
number of points mentioned, particularly in the internal
sections where the available points are more plentiful).
Weaker reports will provide as opportunities only the specific
options available to CDL (e.g. alliance with Tellcall Corp.,
merge with FIL) and not the external opportunities.
Strong provides a structured and good quality analysis of
the internal and external environments of the organization,
including a reasonable financial assessment of historical
performance and the effects of the MCC bankruptcy on CDLs
liquidity and ability to meet the bank covenants.

Strategic
Alternatives
Addressed

Clear identification of strategic alternatives that will help restore
CDLs profitability. The response should attempt to analyze the
following alternatives:
Accept the Tellcall Corp. (TC) strategic alliance proposal
Accept the FIL merger proposal, or alternatively accept the
initial contract offer of developing product X15 on credit
Shift the sales focus to the US market and, if so, decide
whether or not to open a US sales office

CMA Canada 49
Downsize the existing operation
Diversify into the products market independent of the FIL
merger proposal
The response should attempt to analyze more than one of these
strategic issues. Merely identifying the strategic alternatives is
insufficient. Note that breadth and depth of analysis will be more
fully considered in the next major section entitled Analysis.
Weak addresses only one strategic option/issue.
Strong addresses two or more strategic options/issues.

Recommendations

The response must include clearly stated recommendations
regarding a strategic direction for CDL. The quality of the
recommendations will be considered in the Judgment section of
the marking guide.
Weak contains no recommendations, or the
recommendations do not clearly indicate the strategic
direction that CDL should take (indecisive, conditional, or
imprecise recommendations, e.g. might, could).
Strong contains at least one clear recommendation
regarding the strategic direction that CDL should pursue.

Implementation
Plan
This is the final step in the process. The implementation plan
should include the following:
1) an actionable plan detailing how to implement the
recommended strategy (timelines, tasks, etc.).
2) recommendations on operational actions that need to be
taken to support the recommended strategy, including
how the operational issues should be addressed.
Other issues that are not specifically related to the implementation
of the strategy but had previously been identified as concerns that
require attention (e.g. contracting problems) should also be
included as part of the implementation plan.
Note that the depth, breadth and quality of the analyses and
recommendations regarding implementation and operational
issues are to be assessed in other sections of the marking guide.

50 CMA Canada
Weak contains no implementation plan, or simply provides
a list of operational recommendations that are not
specifically tied to the recommended strategy.
Strong provides a plan that identifies the actions that need
to be taken to ensure the successful implementation of the
recommended strategy and provides operational
recommendations.

NOTE 1: It is possible to award a high ranking value in this section if the response has
all the elements of a strategic planning process but does not use them in a systematic
manner. This section looks at the pieces of the puzzle. The next section (BOX 2)
focuses on the candidates ability to use the process in a systematic way to solve the
business problems facing the company.
NOTE 2: In assigning an overall ranking value for BOX 1, the quality of the situation
(SWOT) analysis is given more weight than the other elements of the strategic planning
process. It is not possible to do well in this section unless the situation analysis is well
done.
(b) Systematic Use of the Strategic Planning Process (BOX 2)

This sub-section evaluates how effectively the strategic planning process is used in the
response to arrive at a coherent strategic plan. Whereas the previous sub-section
focuses on the pieces of the puzzle (or the ingredients in the recipe), this sub-section
focuses on how well the puzzle is put together (or whether the cake was successfully
baked).
Each of the five elements in BOX 1 should connect to the other steps. CDLs mission,
major stakeholders preferences, strengths, weaknesses, opportunities and threats
should be considered in the analyses of the strategic issues and alternatives. The
reason for the situation analysis is to learn from it and use it to find the strategic
direction that is a good fit with CDLs internal and external environments. The analysis
of each strategic alternative should lead to a conclusion or recommendation.
The new mission statement that is proposed should encompass the recommended
strategic direction. In the implementation plan, the response should address how the
strategic options are to be executed and how operational issues can be resolved to
make the recommended strategy work. This would include addressing how the
disadvantages (i.e. cons) and operational issues pertaining to the recommended
strategy would be resolved.
There is usually a strong correlation between how well the strategic planning process is
applied in the response and the degree of integration demonstrated in the response (as
seen by the links awarded in BOXES 5 and 6). However, integrative points to strengths,

CMA Canada 51
weakness, opportunities and threats identified outside of a structured situation analysis
(on the fly) do not indicate the use of a systematic process.
A strong response would include an evaluation of the strategic alternatives using a
significant proportion of the information identified in the situation analysis (i.e. mission,
preferences, strengths, weaknesses, opportunities and threats are all used and referred
to in the analyses of the alternatives). The response contains recommendations that
derive from the analyses, a proposed new mission statement that embodies the
recommended strategy, and a detailed plan that addresses the operational and
business issues that must be resolved to effectively implement the recommended
strategy.
A weak response may identify the mission and may include a SWOT analysis, but the
contents are not referred to again in the response such that they seem to be stand-
alone exercises. The entire strategic analysis revolves around the strategic choices and
is not part of a larger process. As well, the implementation plan does not consider the
strategic direction, e.g. it is a list of recommendations regarding business issues that
are not consistent with, or do not take into account, the recommended strategic
direction.
NOTE: The ranking value for BOX 2 cannot be higher than the ranking value given for
BOX 1 (elements of the strategic planning process). When the response contains no
integrative points between the strategic analysis and one of the main strategic process
elements (mission/preferences, strengths, weaknesses, external opportunities, threats,
implementation plan), it is a disconnect. Each of these disconnects is support for
lowering the ranking value for BOX 2 and should be indicated/explained on the
worksheet. The marker is encouraged, however, to maintain a global perspective and
not become overly rule-oriented. For example, if many strengths are identified in the
SWOT analysis but they are rarely used in the strategic analysis, this would warrant
awarding a lower ranking value for BOX 2 than for BOX 1.

ANALYSIS
This section evaluates the ability to make use of the information available in the case.
The primary focus is on the extent of the analysis that has been done. This includes the
ability to identify the many issues in the case that need to be addressed (breadth) and
to analyze the issues in detail (depth). The quality of the analyses is assessed primarily
in BOX 7 (Judgment), except that no credit is given to points that are clearly illogical or
contradict case facts.
(a) Breadth Clear Recognition of the Strategic Alternatives/Issues, Internal
Operational Issues and Implementation Issues, and Provision of
Operational/Implementation Recommendations (BOX 3)

Breadth refers to recognition as opposed to analysis. Identifying an issue within
the situation analysis as a weakness, for example, or providing a listing of

52 CMA Canada
problems that must be addressed by the company demonstrates recognition of
the problems. In some cases, an issue may be addressed indirectly by
suggesting a solution or discussing how a strategic alternative might help solve a
particular weakness.
Strategic alternatives and their related issues should be recognized. In assessing
the breadth of strategic issues, the following three main strategic options for this
case must be addressed to award a fairly high ranking value:
Accept the Tellcall Corp. strategic alliance proposal
Accept the FIL merger proposal
Shift the focus of the sales effort from the Canadian market to the US market.
A strong response would address at least one of the following strategic options
and issues in addition to the three main options:
Accept the product X15 contract on credit rather than merge with FIL
Establish a full-time sales office in the US
Downsize CDLs operations further
Diversify into the products market (with or without the FIL merger)
CDLs internal operational issues and weaknesses, and the operational issues
pertaining to implementation of the strategic direction should be recognized (see
Appendix A).
Clear recommendations and/or conclusions on the operational and
implementation issues are also required. (The presence of a clear
recommendation regarding the strategic direction is covered under BOX 1.) The
main consideration is whether or not recommendations are provided for most of
the operational and implementation issues that were identified. These
recommendations must be specific, consistent with the case facts, and provide a
guide to action. Quality of the recommendations is evaluated further in BOX 7.
In assessing BOX 3, more weight is given to the breadth of the strategic
alternatives and issues identified than the breadth of the
operational/implementation issues identified or the recommendations regarding
the operational/implementation issues.
A strong response would address most of the strategic options (at least Tellcall, FIL,
and US market) and a reasonable number of operational/implementation issues or
problems. It would also include recommendations on most of the operational and
implementation issues addressed.

CMA Canada 53
A weak response would address few of the strategic, operational and implementation
issues, and include few recommendations for operational and implementation issues (or
the recommendations provided for the operational and implementation issues are not
specific enough to be a guide to action).
NOTE: To award the maximum credit permitted for this component, recommendations
need not be made for every identified business issue.
(b) Depth Analysis of the Issues Identified (BOX 4)

Depth recognizes the ability to use information provided in the case in the
analysis of the issues identified. Each issue merits different levels of analysis.
Some of the operational and implementation issues can be adequately
addressed in a single paragraph; however, some require more extensive
analysis. The strategic options require fairly extensive analysis.
More weight should be placed on the strategic issues than on the operational and
implementation issues.
The quantitative analysis in this case is important and should receive the same
weight as the depth of analysis of strategic issues. For each strategic option, the
response should provide a calculation of whether the two bank covenants will be
met and whether CDL will have enough cash (financing) to implement the option.
As well, the effect on the shareholders holdings could be considered. For the FIL
merger option or the option to accept the product X15 contract on credit, the
potential profitability of product X15 should be analyzed (preferably a net present
value analysis). Although capacity is not really a constraint in this case, some
examination of the usage of design hours could be useful. Responses could also
include other quantitative analyses, such as the effect of accepting the Magee
share purchase offer on the bank covenants and the lost contribution margin
from not billing for all chargeable hours worked. Appendices C, D, and E illustrate
some of the quantitative analyses that can be provided in responses.
The volume of the quantitative analysis contained in the response is the main
criteria. The quality of the analyses and their relevance will be assessed in Box 7.
Note: The historical financial assessment provided for the situation analysis is
not considered in evaluating depth of analyses except to the extent this it is used
in the analyses of the strategic and operational issues.
Depth of analysis must be demonstrated on all of the strategic issues and a few
of the operational/implementation issues. The response must also have good
breadth to receive a high ranking value for depth.
A strong response would provide qualitative and quantitative analyses for each of the
strategic alternatives identified, and also provide analysis and recommendations for
several of the operational and implementation issues (adjusting for the fact that a report

54 CMA Canada
that is quite strong in strategic analysis, with detailed quantitative support, would not be
able to address a large number of operational issues adequately).
A weak response would provide superficial analyses of the strategic issues and
options or focus on only one or two of the issues/options.
NOTE: The assessment (S/A/W) for the depth of analysis of strategic issues cannot be
greater than the assessment that is given for breadth of analysis of strategic issues.
Similarly, the assessment for the depth of analysis of operational/implementation issues
cannot be greater than the assessment of the breadth of analysis of operational and
implementation issues. However, the overall ranking value for BOX 4 can be higher
than for BOX 3 if the quantitative analyses are strong.

INTEGRATION
Integration is the ability to identify connections between related elements of the case
and to consider how one element impacts another. For simplicity and brevity, the
term link or linkage is used throughout this document to represent integrative
connections between elements and consideration of how one element impacts another.
Integration is evaluated from two different perspectives:
(a) Fit of Alternatives & Issues to Situation Analysis (BOX 5)

Integration should be demonstrated by links between the situation analysis (shareholder
preferences, strengths, opportunities, threats) and the strategic options or
operational/integration issues. For BOX 5, the weaknesses are categorized as
operational issues; therefore, a link from an operational issue (weakness) to a
shareholder preference, strength, opportunity or threat would be given credit in BOX 5.
In terms of mission, when the current mission is revisited and either a statement is
made that the current mission is sufficient given the strategic alternative chosen or an
updated mission is offered that incorporates the parameters of the recommended
alternative, this shows solid integration.
In the analysis of the strategic, operational or implementation issues, the response
should clearly identify which specific strength, weakness, threat or opportunity point is
being considered (i.e. it should be explicit, not implicit). For example, in the analysis of
the strategic alliance with TC option, listing as a pro that it guarantees variable-price
contracts is not a link to contracting problems because it does not indicate that the
alliance would address CDLs problems with fixed-price contracts.
Some specific guidelines for linking and some examples of valid integrative statements
are as follows:
A link to a stakeholder preference must indicate whether the alternative does or
does not meet a specific stakeholders preference (e.g. an alliance with TC is in

CMA Canada 55
line with Belanger and Manros desire to reduce risk by seeking out strategic
partnerships), or whether the alternative will or will not dilute shareholdings (e.g.
the FIL merger will dilute the shareholdings, which goes against the current
shareholders wishes). Credit for links to stakeholder preferences is limited to a
maximum of two links.
A link to a strength must indicate how the option or issue being discussed would
strengthen or use a strength (e.g. CDL can use Smelkins US contacts if it
expands to the US market).
A link to an external opportunity must indicate how to take advantage of the
opportunity (e.g. sales to the US market would qualify for the SRED tax credit,
which would help offset the costs associated with establishing a US sales
office).
A link to a threat must 1) use the threat as justification for not doing something
(e.g. the general feeling against foreign outsourcing may hinder expansion
efforts into the US market), or 2) indicate how the option or issue being
discussed would address a threat (e.g. Merging with FIL would allow CDL to
better compete with CEMs).
(b) Linkages Between Strategic Issues; Between Strategic Issues and
Operational/Integration Issues; and Between Operational/Integration Issues
(BOX 6)

Here, integration should be demonstrated by links between two or more strategic
issues, between strategic issues and operational/integration issues, and between two
operational/integration issues. A link to a weakness must address how to solve the
weakness. Using a weakness as a con against a strategic alternative when it is not a
reasonable reason for rejecting the option is not a link (e.g. CDLs problem of the lack of
consultation between sales and design staff is not a reasonable reason for rejecting the
option to expand into the US market and, therefore, is not a link).
Some examples of appropriate links are as follows:
Merging with FIL would reduce CDLs dependency on the telecom sector.
Because FIL has been dealing with US customers, merging with FIL could help
CDL increase sales of design services in the US.
Hiring a designated accounting professional to replace Mulk, who is not
qualified, as the controller and applying the percentage of completion method of
revenue recognition throughout the year would alleviate the problem of
fluctuations in monthly financial results.

56 CMA Canada
FOR BOTH BOX 5 AND BOX 6:
The link should make sense and be consistent with case facts.
The link should be made in the context of attempting to solve a problem or
analyze a strategic alternative (note, describing historic cause and effect issues
within the situation analysis is not a link as this does not attempt to solve a
problem).
Each link must be explicitly stated and not simply implied.
Each link must be clear and specific, not general or vague.
Integration can be shown in the quantitative analysis. For example, calculating
the proceeds that would be received from selling shares to TC would be a link
from the TC alternative to the implementation issue of financing, or calculating
the effect of an option on CDLs ability to achieve the bank convenants would be
a link from the strategic option to the implementation issue of financing.
The overall ranking value should reflect the quantity, quality and variety of the
links that are identified in the response.
Links may be made anywhere in the candidates response. However, valid links
in the situation analysis are rare; in these cases, the two points being linked must
be explained clearly, not implied.
No links are allowed to the current financial assessment points in the situation
analysis.
No links are allowed between the FIL merger option and the Product X15
strategic issue.
No links are allowed between an independent analysis of the options to diversify
and accept the FIL merger offer, or between the options to downsize and to
accept the TC alliance offer.
Only one link is allowed to each situation analysis point.
Only two links are allowed to stakeholder preferences: one to shareholders for
the dilution of the shareholdings, and one to any of the personal preferences of
the individuals.
Only three links are allowed to the implementation issues of financing and
equity control: one to bank covenants, one to the Magee share purchase option,
and one to any of the other financing options.


CMA Canada 57
JUDGMENT (BOX 7)
This section evaluates the judgment demonstrated in the response as it relates to the
following:
1) What is important and relevant in the case.
2) The consideration of both pros and cons as well as quantitative analysis of the
various issues/opportunities.
3) The quality of both the quantitative and qualitative analysis.
4) Recommendations regarding which solutions best help to resolve the problems.
5) How these recommendations can be implemented to maximize the pros and
overcome the cons.
6) Feasibility of the recommendations.
The assessment of the level of judgment demonstrated in a response is guided by the
answer to the following question: Will this report be useful to CDLs board of
directors?
In this case, the company has been incurring losses over the past two years. The recent
bankruptcy of a major customer has resulted in a large bad debt and CDL being unable
to meet the banks covenants for a line of credit. The major stakeholders (board of
directors, shareholders, and senior management) have various preferences for turning
the company around and the shareholders do not wish their shareholdings to be diluted.
For this case, judgment is demonstrated by recommending the course of action that
would have the best chance of returning CDL to profitability in light of the companys
financing constraints and the challenges presented by the changing markets and
competitive environment.
The overall ranking value for BOX 7 should be based on an overall assessment of the
judgment capabilities demonstrated in the response, with the greatest weight being
placed on the assessment of the conclusions and recommendations.
As a general guideline, the ranking value for section (c) is the starting point for
evaluating judgment and is weighted more heavily than sections (a) and (b) in the
overall assessment for BOX 7. After assessing section c), the ranking value would be
increased or decreased according to whether the response is especially weak or
especially strong in sections (a) and (b). Usually, a response that does not include
analyses of the bank covenants and financing of the recommended strategy would not
receive an adequate or strong ranking value for judgment overall.

58 CMA Canada
(a) Issues: Demonstration of Appropriate Emphasis on What is Important in the
Case, in Terms of Organization of Strategic Issues, Strategic and Operational
Issues, and Major and Minor Issues

In a strong response, appropriate emphasis would be placed on strategic,
implementation and operational matters, and there would be some indication that
the issues have been prioritized.
Lack of consideration of major weaknesses and important operational and
implementation issues would not reflect strong judgment. The most important
operational issues are the problems arising from the contracting problems (e.g.
not billing for all legitimate chargeable time required to complete a project).
Overemphasis on minor issues would not reflect strong judgment.
(b) Analysis: Using the Information Provided in the Case to Analyze, Both
Quantitatively and Qualitatively, the Various Alternatives and Issues in the
Case

Analysis should not be one-sided. Both the pros and cons of an alternative
should be considered. In either the analyses of the alternatives or the
implementation plan, some consideration of how the disadvantages of the
chosen alternatives would be overcome would be further evidence of strong
judgment.
All issues require qualitative analysis, and certain issues require quantitative
analysis. Both over and under-emphasis on quantitative analysis are considered
in the evaluation of judgment. There are numerous opportunities to provide
detailed quantitative analyses in this case. Note that quantitative analysis of the
current financial assessment of CDL is not evaluated in BOX 7. Only the
quantitative analyses related to the strategic and operational/implementation
issues are considered.
The quality of both the quantitative and qualitative analyses is important in
evaluating judgment and receives the heaviest weighting in section (b). The
analyses must be relevant and make sense. The quantitative analyses should be
consistent with the case facts and should not contain serious errors or
unreasonable assumptions. The qualitative analysis should not be superficial and
should be tied to CDLs situation.
Another aspect of judgment is that the case information was read and
understood correctly, and used effectively in the analyses of the various issues.
Providing general discussions that could be applied to any case (i.e. discussions
and recommendations that are not specifically tied to the case facts, such as
highly theoretical discussions about performance evaluation) would be evidence
of inadequate judgment.

CMA Canada 59
(c) Conclusions/Recommendations: Reaching Conclusions and Making
Recommendations That Are Relevant, Logical, Consistent With the Analyses,
Convincing to the Reader, and Feasible in the Situation

Section (c) on the conclusions and recommendations is given the most weight when
assessing judgment. In evaluating section (c) and the overall judgment demonstrated in
the response, the answers to the following questions should be considered:
Are the recommendations
logical?
feasible?
consistent with the analysis?
convincing?
For the response to be feasible and convincing, it should present a strategic plan
to turn around the profitability of the company and should prove that the plan will
achieve the following:
1) a net book value, excluding intangibles, of $2.0 million
2) a current ratio of at least 1.5 to 1
3) sufficient cash flows to finance the recommended actions.
The specific sources and uses of funds should be considered (sell shares to Bud
Magee, issue bonds to G Holdings Limited, issue shares to TC, bank line of
credit, bank loan) as well as the effect on the bank covenants.
Conclusions and recommendations may appear anywhere in the response.
Where they appear should not be considered in assessing judgment.
Responses can demonstrate good integration in the analyses, but can then
provide conclusions that are not consistent with the analyses. This is evidence of
weak judgment. Providing recommendations with no supporting explanations or
analyses also demonstrates weak judgment.
More weight is given to the quality of the recommendations and conclusions
regarding the strategic issues than the operational issues.
A weak response would provide recommendations without considering how CDL
could finance the implementation of the recommendations.
A weak response would provide recommendations with no supporting analysis or
recommendations that are not consistent with the analysis, or recommendations
that are not useful in solving the major issues facing CDL.

60 CMA Canada
WRITTEN COMMUNICATION (BOX 8)
In evaluating written communication, the following two components are considered:
(a) format, and (b) language and style. There are no specific marks assigned to these
components or the elements within these components. However, very weak
performance in any aspect of organization, language, and style may be so distracting
that it can significantly affect the overall ranking value for BOX 8.
(a) Format

Layout
The response should follow the layout demonstrated by CMA Canada in its published
Entrance Examination preparation materials, so this aspect is evaluated to a very high
standard. The responses should be formatted as formal reports, containing the following
physical elements: executive summary, table of contents, introduction, body (analysis,
recommendations, implementation plan), conclusion, and appendices or exhibits at the
end.
The table of contents need not include page numbers, but should make some specific
references to the issues in the case (e.g. listing the specific strategic issues, including
the descriptive titles for the exhibits). Little credit is given to a generic table of contents
that could be used for any case report.
The executive summary should be a report in short (a summary of major
environmental considerations, as well as a summary of strategic and operational issues
and recommendations). The introduction should lay out the scope and purpose of the
report (e.g. This report will illustrate the steps used to determine the best strategy for
bringing CDL back to profitability. It will provide a detailed analysis of CDLs current
situation, identify and analyze various strategic alternatives and issues in light of CDLs
internal and external environments,...). If the executive summary does not present a
summary of issues and recommendations, but is really an introduction, no credit for
providing an executive summary should be given. In the case where a covering letter or
memo (not required) is provided that contains all the elements of either an introduction
or an executive summary, it should not be given credit for either.
The conclusion need not be long, but should provide closure to the report.
The exhibits or appendices often will include a point-form SWOT analysis and should
contain the detailed quantitative analyses of the various strategic issues. The results of
these analyses should be summarized in the body of the report, with references made
to the exhibits. In some responses, the qualitative assessment of the pros and cons of
the strategic alternatives will be provided in exhibits. This is only acceptable if the main
points pertaining to each option are discussed in the body of the report.

CMA Canada 61
Organization
In this section, the ability to use the organization of the report as a communication tool
is evaluated. For example, the various sections and subsections of the report should be
clearly labelled with headings and subheadings to help the reader understand the flow
of the arguments (e.g. Advantages, Disadvantages, Recommendations,
Marketing, etc.). Headings should be explanatory, such as Merge with FIL rather
than Alternative 1.
Each point should be clearly separated with paragraph breaks or bullet points to help
the reader identify the points supporting an argument. Clear references to exhibits
should be made in appropriate places in the body of the report to help the reader
understand the source of the numbers and supporting data. As well, lists should be
provided where appropriate (with descriptive titles or introductory explanations) to help
the reader understand how the points relate to each other.
(b) Language and Style

Beyond the structure used to present the report, there is also the matter of how words
are used to communicate. A strong response should contain the various attributes
indicated below, but the fact that the response was produced under the constraints of
examination conditions should be considered in evaluating these attributes. Thus, it is
not generally a one strike and youre out approach. Rather, the general ability to
maintain a reasonable level of communication skills throughout the response is the
focus of the evaluation. To be awarded a strong score in this section, the response
should have the following attributes:
Professional Tone, Tact, Audience-Focused
The response is expected to reflect a business tone, as opposed to a colloquial style. In
addition, the response should not contain any tactless comments such as insulting or
negative characterizations of the management of CDL. Certainly, constructive criticism
offered in a tactful way is quite acceptable. Tact is really an issue of taste and all
aspects of a response should demonstrate good taste. The report should reflect
language consistent with Jana Sonn (independent consultant) being the writer of the
report and members of the board of directors of CDL being the receivers of the report.
Grammar, Spelling, Sentence Structure, Punctuation
Committing only a few spelling/grammar/sentence structure/punctuation mistakes is
certainly forgivable in evaluating communication skills. The subject of a sentence or
point should be clear. Verbs should be used to convey actions. When the general use of
the English or French language is so weak as to become distracting, the assessment
can quickly move from adequate to weak. For example, the overuse of point form,
especially when only brief phrases are provided (no clear subject or verb), can make the
message being conveyed difficult to understand rather than making the point easier to
follow.

62 CMA Canada
Note: Candidates are expected to be fluent in English or French. Answers that appear
to be written by candidates who are not fluent in English or French (i.e. neither is their
first language) are to be evaluated no differently than the rest.
Clear & Concise Expression, Logical and Coherent Flow
Global judgment is to be applied upon completing a reading of the report. With regard to
expression, is it clear what the response is trying to convey? With regard to flow, are the
arguments easy to follow? Does the ordering of the discussion make sense? Does one
section naturally flow to the next? Is it free of excessive repetition (e.g. repeating case
facts and/or general theory as opposed to applying it specifically to CDL)? Is closure
brought to the analysis of the issues and to the report, generally?
Audit Trail
In a quantitative analysis or within a qualitative discussion, clearly labelling what a
number represents in terms of what it is and how it was calculated helps the reader
follow the analysis. References to exhibits or other sources of information in making an
argument also help the clarity and flow of a report. As well, the supporting logic behind
the conclusions and recommendations should be clear.

CMA Canada 63
Appendix A
Situation Analysis

Note: The listed numbers correspond to the section numbers on the second page of the
marking worksheet. Also note that this is not an exhaustive list of the valid points that
can be made in the responses.
Internal Environment
1 a) Mission/Vision
Currently, CDLs mission statement is, To provide high-quality electronic
designs to the Canadian electronics industry at competitive, but profitable,
prices.
The current mission statement does not include the US market; CDL is
currently providing design services to the US market.

1 b) Preferences

Smelkin Does not want to lose anyone from his current design team
Feels that the current team is capable of returning CDL to
profitability
Blanger and
Manro
Downsize further
Reduce risk by seeking out strategic partnerships
Accept the TC proposal
Bunburger and
Carles
Shift the focus of the sales effort from Canada to the US
Set up a full-time sales office in the US
ISO certification
Manton Change focus to become a product company (diversify)
Merge with FIL
Shareholders Avoid diluting their shareholdings

2. Internal Analysis

Key Success Factors

Offer competitive prices
Offer high quality of services
Build long-term relationships with customers
Offer broad base of capabilities; offer wide-range of complex, expert services


64 CMA Canada
Internal Strengths

Customer service:
Wide skill set & range of services gives CDL an advantage over CEMs and
independent contractors (flexibility)
Delivers complete service on time, remains accessible to clients, maintains
flexibility
Offers expert services, e.g. proof-of-concept consultation, system simulations

Contacts:
CDL has a larger network of contacts than independent contractors
Smelkins contacts in Northeastern US, especially Boston

Alliances with CEMs

CDL owns design & other engineering tools & equipment advantage over
independent contractors

Good reputation among the top 5 electronic design services companies in
Canada

Residual knowledge/design team:
Good employees increasing value of residual knowledge
Excellent design team; well educated; loyal; weaker employees weeded out
Independent contractors used to complement design team when necessary

Team environment offer pleasant work environment for employees to foster
teamwork

Management:
Committed management group senior staff own shares
Good management team; meets every two weeks
Smelkins recruitment skills; sufficient management of resums
Smelkins good relationship with the board of directors BOD; finds BOD useful
for discussing ideas

HR policies:
Promotes from within, encourages professional development, mentors young
engineers, nurturing employer-employee loyalty
Chargeable employees receive time off in lieu of overtime pay
Employment contracts

Some employees have experience in industrial design in addition to electronic
design


CMA Canada 65
Offers fixed-price contracts to compete against overseas competitors who use
variable-price contracts

Use of 22 knowledgeable independent sales agents across Canada and 3 in the
US; do not compete against CDL

Targeted advertising and promotion efforts use of website

Located in high-tech city close to the US border and the third largest US high-
tech market

Security System:
Security badge system controls access to office
Employment contracts cover confidentiality and ownership of intellectual
property

Insured; no legal action against CDL to date never made an insurance claim

Bank relations with same bank since incorporation; bank line of credit of up to
$1 million given credit for up to 75% of receivables

Good quality project documentation processes

Maintained its market share in 2004 & 2005

Capacity capacity is available to take on new projects [can be considered as a
strength or a weakness]

The company has outlasted several local competitors

Qualifies as a CCPC; eligible for SRED refundable tax credit give credit under
opportunities

Revenues from US companies grew from 2% in 2004 to 5% in 2005 get
referrals from Canadian subsidiaries give credit under financial assessment

External Environment
3. External Opportunities

Downsizing by companies (i.e. companies no longer willing to hire large numbers
of full-time staff), means more business
Plentiful supply of quality engineers at a good price
International telecom markets are predicted to grow faster than US market
Global electronics is a growth sector
US market predicted to grow

66 CMA Canada
US market is large
Intellectual property protection is an issue in dealing with overseas competitors
Growth in sales of voice-over Internet protocol (VOIP) technology and flat screen
monitors
Canadian government supports ICT sector wants to establish Canada as a
leading information economy
SRED tax credit available for qualified expenditures includes own use projects
and projects for customers outside Canada
Advances in EDI allows convenient, timely and economical movement of design
files
Web browsing & Internet security software expanding
Suppliers of the software design tool lowered prices after the end of the boom
Canada one of the top 5 foreign suppliers to US telecom industry
Foreign currency exchange rates give Canadian suppliers an advantage over US
suppliers give credit under threats can be either
Outsourcing dynamic of electronics industry and industries that use electronics
provide a great need for electronic design providers give credit under threats
can be either
Lower salaries in Canada than in high-tech areas of the US gives Canadian
suppliers an advantage over US suppliers give credit under threats can be
either
Few North American electronic design suppliers are ISO certified give credit
under operational issues (box 16)
Intellectual property concerns about overseas design competitors gives North
American design companies an advantage

4. External Threats

Competition:
Canadian domestic competition:
o Internal design groups main source of competition
o Other design services companies; 3 close to CDLs location, but 2 went
out of business
o Spin off service businesses of electronic design tool companies
o Independent contractors
Large contract electronic manufacturers (CEMs), at cost
Overseas electronic design suppliers in low-cost countries like India, China &
Eastern Europe, e.g. IED Inc.; new large Indian competition taking business
away from CDL
Competition in personal computer industry & telecom industry increasing;
putting downward pressure on pricing

Markets:
Canadian electronic design industry weakening; sale of electronic equipment
in Canada still decreasing

CMA Canada 67
ICT industry in Canada is shrinking; telecom industry is continuously shifting
Anti-foreign outsourcing feeling in the US [can be considered as an
opportunity or a threat]
The weakening of the US dollar / strengthening of the Canadian dollar
reducing the benefit of US dollar revenues and hurting CDLs customers that
are exporters [can be considered as an opportunity or a threat]
Outsourcing dynamic of electronics industry and industries that use
electronics electronic design providers depend on this dynamic [can be
considered as an opportunity or a threat]
Higher engineer salaries in high-tech areas of the US could lure away best
Canadian engineers [can be considered as an opportunity or a threat]
US customers favour ISO certified suppliers give credit under operational
issues (box 16)

5. Financial Assessment (see Appendix B for calculations)

Sales down 19%
Losses in 2004 and 2005; larger loss in 2005 than 2004, even before write off of
MCC bad debt
Company achieving the target $100/hour, based on booked hours, but number of
unbilled hours is increasing (4,500 in 2003 to 11,222 in 2005) and the revenue
per hour worked is decreasing (from $97.39 in 2003 to $92.60 in 2005).
For 2003 ten largest projects, actual average hourly rate was $93 versus average
desired booked rate of $102; actual hours were greater than booked hours for 7
out of 10 projects.
Sales to US up from 2% to 5%; failure to obtain much US business only 5% of
sales in 2005
Salaries as a % of sales is higher in 2005 than in 2000 and 2003, the companys
two best years
Many other costs (overhead) have not been cut given reduced revenues
Poor performance or poor negotiating on some fixed price jobs; only 2 of 7 large
fixed-price projects in 2003 were on target
Bankruptcy of Multi-Comm Corp. negative impact on the balance sheet
Liquidity has dropped after the bankruptcy
Bank line is at risk of being cancelled due to MCC bankruptcy (NBV of
$1,580,756 is less than the $2 million limit, and current ratio of 1.43 is less than
the 1.5 limit stipulated in the bank covenant)

Internal Operational Issues and Weaknesses

11. Contracting Problems
Lack of consultation between sales and design staff
Deliverables are not always clearly defined in contracts
Necessary engineering change orders (ECOs) are not obtained; for fixed-
price contracts, some customers request additional work without paying extra

68 CMA Canada
Some fixed price contracts are highly unprofitable and should have been
negotiated as variable-price contracts

12. Marketing/Sales
The benefits of increasing the marketing and sales efforts may not be
sufficient to justify the costs (additional travel, advertising and promotion)
Independent sales agents are not bringing in enough business (41% of
revenue instead the 50% expected)
Issue of potential conflict of interest of one of the independent sales agents
Over reliance on ICT and telecom sector

13. System/Time Tracking
Errors in filling out time sheets sometimes cause errors in billings
Not all chargeable hours are being billed to customers some projects
require more hours than booked in the contract engineers not recording
unproductive time

14. HR/Management/Governance /Performance Evaluation
Salaries lagging behind market employees leaving and potential for more
employees to leave
Problems with the executive incentive system Joy receives a commission
on new business when she has little influence on sales
VP Operations (Prudence Joy) has a background in operations, not finance,
IT or administration, yet is responsible for theses functions
Controller (Annette Mulk) is not a designated professional accountant
Carles rarely turns down work need to at least consider the contribution
margin of the contract

15. Financial Accounting
The percentage-of-completion method of accounting is used only at year end;
inconsistent monthly results, full of peaks and valleys
Poor collection practices could have suspended work on project Belleville
once payment not received when due this would have minimized the losses
Lack of controls over credit card expenditures

16. Operations
The company is not ISO certified

Financing and Equity Control

18. Funding Sources (other than Magee)
Long-term bank loan/increase line of credit
TC proposal choice to sell shares for $850,000 versus swap shares
G Holdings Limited (Ralph Manton) is willing to advance $1 million in the form
of 5-year convertible bonds; bonds convertible into 400,000 voting shares

CMA Canada 69
Bank covenants must be met or can lose line of credit from bank; 1) maintain
a net book value of $2 million; 2) maintain a current ratio of at least 1.5 to 1

19. Funding Sources - Magee
Bud Magee is interested in investing $420,000 in CDL common shares if
there is a viable turnaround plan and share price is no more than $3.50


70 CMA Canada
Appendix B
Financial Assessment

Key financial ratios:
2005 Adjusted 2005 2004 2003
Current ratio 1.43 1.79 3.11 3.20
Quick ratio 1.41 1.77 3.07 3.16
Working capital $637,831 $1,162,631 $1,480,701 $1,552,896
Net book value $1,580,756 $2,105,556 $2,804,329 $2,911,154
Debt-to-equity ratio 0.93 0.70 0.25 0.24
Net income (loss)/Sales -8.7% -5.0% -0.9% 2.0%
Salaries, comm. & benefits/Sales 79% 79% 76% 74%

Required increase in net book value: $2,000,000 - $1,580,756 = $419,244

Statistical analysis:
2005 2004 2003
Chargeable hours theoretical capacity (e.g.
for 2005, 89 x 40 hr/wk x 52 weeks)
185,120 ? 208,000
Actual hours worked by employees 148,666 156,240 168,000
Utilization 80.3% 80.8%
Hours available for other projects (theoretical) 36,454 40,000

Booked hours reflected in contracts 140,422 151,280 167,500
Less subcontractor hours 2,978 3,002 4,000
Employee booked hours 137,444 148,278 163,500
Unbilled employee hours 11,222 7,962 4,500

Revenue $14,042,197 $15,127,990 $16,751,275
Average revenue per booked hour $100.00 $100.00 $100.00
Actual hours worked on contracts 151,644 159,242 172,000
Average revenue per hour worked $92.60 $95.00 $97.39

Jobs by customer type:

2005 2003
Number Revenues % Number Revenues %
Telephone service 21 $ 561,688 4% 42 $ 614,255 4%
Telecom hardware 38 7,582,787 54% 68 9,807,693 59%
Computer chip 22 2,668,017 19% 18 2,478,444 15%
Consumer electronics 37 1,825,486 13% 46 2,450,780 15%
Defence 2 280,844 2% 1 188,000 1%
Transportation 22 702,110 5% 18 748,522 4%
Aerospace 3 140,422 1% 2 178,999 1%
Other 32 280,844 2% 26 284,582 2%
Total 177 $14,042,197 100% 221 $16,751,275 100%

CMA Canada 71
Appendix C
Tellcall Corp. Proposal

Annual revenue from TC $4,000,000
Price per booked hour $90
Number of booked hours required 44,444

Annual revenue from TCs competitors $3,500,000
Average price per booked hour $100
Number of booked hours required 35,000

Assuming salaries, commissions and benefits, subcontractors, and commissions of
independent sales agents are all variable costs, the variable cost percentage to revenue
is as follows:

2005 2004 2003
Salaries, comm. & benefits $11,039,208 $11,544,004 $12,405,122
Subcontractors 178,680 180,120 240,147
Independent sales agents 287,865 310,124 332,071
Total $11,505,753 $12,034,248 $12,977,340

Percent of sales 81.9% 79.5% 77.5%
Booked hours 140,422 151,280 167,500
Cost per booked hour $81.94 $79.55 $77.48

Revenue from TC $4,000,000
Variable cost (44,444 x $81.94) 3,641,741
Contribution margin $ 358,259

Revenue from TCs competitors $3,500,000
Variable cost (35,000 x $81.94) 2,867,900
Contribution margin $ 632,100

Therefore, to be indifferent to accepting versus not accepting the TC proposal, contracts
from referrals by TC would have to generate $632,100 - $358,259 = $273,841 in
contribution margin, which would approximate $273,841/(1 - .819) = $273,841/.181
= $1,512,934 in additional revenue.

Market value of TCs shares in a share swap ($10 x 85,000) $850,000
Cash offered for CDLs shares $850,000


72 CMA Canada
Appendix D
FIL Proposal

Value of CDLs shares:
Book value after bankruptcy $1,580,756
Value of unrecorded intangible assets 4,000,000
$5,580,756
Number of shares outstanding 1,471,000
Estimated value per share $3.79

Cost per share that Bud Magee is willing to pay $3.50

Share value implied in TC offer ($850,000/200,000) $4.25

Using $3.50 per share as the estimated fair market value of CDLs shares, the implied
cost of the acquisition is as follows:
Cash $1,000,000
1 million CDL shares @ $3.50 3,500,000
$4,500,000

Value of FIL:
Book value $ 290,941
Differential between book value and fair market value
of tangible capital assets ($214,792 - $200,000) (14,792)
Estimated intangible assets 4,900,000
$5,176,149

Key Financial Ratios FIL:
2005 2004
Current ratio 1.46 1.44
Working capital $76,149 $74,263
Net book value $290,941 $290,082
Debt-to-equity ratio 0.57 0.58
Net income as a % of revenue 9.2% 10.2%
Production, salaries, subcontractor costs as a % of revenue 73.5% 70.6%

CMA Canada 73
Appendix D (contd)

Product X15 Analysis:
Estimated cost to complete electronic design using subcontractors rate of $60 per hour:
(25,000 hours x $60) + $50,000 out-of-pocket costs = $1,550,000

Estimated cost to complete electronic design using opportunity cost of $90 per hour:
(25,000 hours x $90) + $50,000 out-of-pocket costs = $2,300,000

Present value of revenue if price is set between $81 and $100:
Year 1 = 500,000 x $1 licensing fee x .909 = $ 454,500
Year 2 = 1,000,000 x $1 licensing fee x .826 = 826,000
Year 3 = 3,000,000 x $1 licensing fee x .751 = 2,253,000
$3,533,500

Present value of revenue if price is set between $51 and $80:
Year 1 = 1,000,000 x $1 licensing fee x .909 = $ 909,000
$7,818,000

74 CMA Canada
Appendix E
Analysis of Equity Control and Bank Covenants

The following scenarios are used in the two charts below:
Current Adjusted after bankruptcy
1 Sell shares to Magee only
2 Sell shares to Magee and accept Mills (FIL) offer
3 Accept Mills (FIL) offer only
4 Accept TC offer only
5 Accept Mills offer and assume G Holdings Limited converts the bonds
6 Accept all offers

Number of Shares (in thousands) and Smelkins Percentage Interest:
Current 1 2 3 4 5 6
Smelkin 1,000 1,000 1,000 1,000 1,000 1,000 1,000
G Holdings Limited 150 150 150 150 150 550 150
Other original shareholders* 321 321 321 321 321 321 321
Bud Magee 120 120 120
Mills (FIL) 1,000 1,000 1,000 1,000
TC 200 200
Total 1,471 1,591 2,591 2,471 1,671 2,871 2,791
Smelkins share (% of total) 68.0% 62.9% 38.6% 40.5% 59.8% 34.8% 35.8%
* Assuming other than Smelkins options were exercised in 2004

Bank Covenants (CR 1.5; NBV $2 million):
Current 1 2 3 4 5 6
Current ratio 1.4 1.6 1.7 1.4 2.0 1.4 2.2
Net book value excluding
intangibles (in millions)
$1.6 $2.0 $2.3 $1.9 $2.4 $2.9 $3.1

Supporting Calculations:
Current Current ratio = $2,110,885/$1,473,054 = 1.4; NBV = $1,580,756.
1 Current ratio = ($2,110,885 + $420,000)/$1,473,054 = 1.6;
NBV = $1,580,756 + $420,000 = $2,000,756.
2 Current ratio = ($2,110,885 + $420,000 + $242,750)/($1,473,054 + $166,601) =
1.7; NBV = $1,580,756 + $420,000 + $290,941 - $14,792 = $2,276,905.
3 Current ratio = ($2,110,885 + $242,750)/($1,473,054 + $166,601) = 1.4;
NBV = $1,580,756 + $290,941 - $14,792 = $1,856,905.
4 Current ratio = ($2,110,885 + $850,000)/$1,473,054 = 2.0;
NBV = $1,580,756 + $850,000 = $2,430,756.
5 Current ratio = ($2,110,885 + $242,750)/($1,473,054 + $166,601) = 1.4;
NBV = $1,580,756 + $290,941 - $14,792 + $1,000,000 = $2,856,905.
6 Current ratio = ($2,110,885 + $420,000 + $242,750 + $850,000)/($1,473,054 +
$166,601) = 2.2;
NBV = $1,580,756 + $420,000 + $290,941 - $14,792 + $850,000 = $3,126,905.

CMA Canada 75
Sample Response Successful Attempt #1

To: CDL Board of Directors

From: Jana Sonn, CMA

Date: June 16, 2005

Re: Strategic Direction for CDL

Please find enclosed the requested report which provides a strategic direction for CDL.

Jana Sonn

76 CMA Canada
Table of Contents

Executive Summary
Introduction
Situation Analysis
Strategic Mission
Owner/Management Preferences
Internal Environment Strengths
Weaknesses
External Environment Opportunities
Threats
Financial Analysis
Strategic Issues
Option #1 Form a Strategic Alliance with Tellcall Corp
Option #2 Engage in a Merger with Form Innovations Limited
Option #3 Set up a Sales Office in America
Option #4 Issue Shares to Bud Magee
Recommendations
Implementation
Action Plan
Operational/Business Issues
Conclusion
Exhibits
1 Financial Analysis
2 Tellcall Corp Analysis
3 FIL Merger Analysis
4 Cost of Sales Office in America
5 Impact of Issuing Shares to Bill Magee

CMA Canada 77
Executive Summary

Clear Design Limited (CDL) is an electronic design firm competing primarily in the
Canadian market. They emphasize the customization of their designs, which is
achieved through a highly skilled workforce.

Recently, industry competition has increased while market conditions have deteriorated.
CDL has the opportunity to merge with a small product development firm, form a
strategic alliance with an electronics manufacturer, engage in active sales in the US
market and to accept another investor.

This report recommends that the strategic alliance be turned down, the merger entered
with FIL, that a sales office be opened in Northeastern America and that the additional
investor be welcomed as a shareholder.


78 CMA Canada
Introduction

Clear Design Limited (CDL) currently faces several strategic opportunities. This report
will evaluate CDLs strategic direction and provide a recommended course of action.

To this end, a situation analysis including internal and external environment and
financial analysis, as well as recommendations and an implementation plan, including
operational issues that support the strategic recommendation, will be provided.

CMA Canada 79
Situation Analysis

Strategic Mission

CDL currently has a mission, however it is not comprehensive enough. Given its current
situation, the mission should be:

To provide high-quality, customized electronic designs to the North American
electronics industry, including but not limited to business, consumer, and
government, at competitive prices through the use of the most advanced
technology and a highly skilled workforce.

This mission may require further amendment depending on the strategic
recommendations.

Owner/Management Preferences

1) to create an enjoyable place for employees to work that fosters teamwork
2) to forge long-term relationships with clients
3) avoid share issuances which would dilute shareholdings
4) Belanger and Manro think CDL should downsize and enter strategic partnerships
such as with TC
5) Smelkin would not like to downsize
6) Bunburger and Carles would like to focus to the US market
7) Carles would like CDL to become ISO certified
8) Manton would like CDL to become a product company rather than service, and
potentially merge with FIL

Internal Environment

Strengths

- President & CEO, Smelkin has sales experience in Northeastern USA and extensive
contacts in Boston
- CDL has a strong reputation in the industry and in Canada for quality service
- CDL is willing to offer fixed price contracts on work
- CDL employs sales agents on contract across Canada and 3 in the US
- CDL is able to offer complex services in a variety of electronic design disciplines.
- CDL has a highly skilled, educated workforce
- management has a stake via ownership in the success of the company
- CDL has low employee turnover; therefore are able to retain residual knowledge
- CDL is located in a technology cluster so technology and labor is easy to find
- CDL is located close to the American border

80 CMA Canada
- CDL has access to $1,000,000 in credit from a bank based on 75% of North
American receivables under 30 days less claims
- CDLs VPs are experienced in the positions
- CDL is able to achieve its desired booked rate of $100
- CDL has not had legal action brought against it
- CDL allows its customers to retain their intellectual property
- CDL employees sign confidentiality agreements
- CDL employees are talented and creative and have hobbies that are work related.
- some employees have experience in industrial design as well as electronic
- CDL has reciprocal referral alliances with CEMs

Weaknesses

- approximately half of the CDLs revenues come from 1 industry (telecom) of the ICT
sector
- the Controller (Mulk), Project Coordinator (Mondred) and salespeople lack formal
training for their respective positions
- have historically had difficulty projecting the number of hours a fixed contract will
require resulting in a lower hourly rate than anticipated
- lack of communication between sales and designers leading to sales promising
things CDL designers feel they cant deliver
- credit card usage is becoming very large, monitoring is difficult and payment is being
made prior to verification
- interim reporting is inconsistent with year end and is not representative of operations
due to improper application of the percentage of completion method for recognizing
revenues
- time sheet tracking is being abused resulting in inaccurate tracking of chargeable
hours
- CDLs profitability has been decreasing
- CDL is in danger of breaking covenants with bank
- CDL is not keeping up with industry salaries and employees may leave as a result
- days in accounts receivable is too high
- contract sales agent may be engaging in unethical sales tactics
- lack of availability of long-term debt
- CDL is generally unable to retain the proprietary rights or intellectual property to their
work
- CDL is not eligible for the SRED credit performed on work for Canadian companies
- dont have much management experience outside design service

CMA Canada 81
External Environment

Opportunities

- electronic industry has been growing steadily for over 25 years
- ICT sector/telecom industry is recovering from a market crash in the early 2000s
- the American telecom industry continues to grow while the international industry
grows faster yet
- SRED tax credits are available for developmental work performed internally or for
foreign companies
- highly skilled labor is readily available
- electronic data transfer makes transferring electronic designs easy so proximity to
customers is no longer an issue
- companies are hesitant to perform design in house due to fixed costs and market
crash still fresh in memory
- CDL is located close to the American border, has sales agents and contacts there
- sales of electronic equipment is expected to grow in USA by 8%/year
- Northeastern states is third largest high-tech centre in USA
- salaries for electronic engineers and designers is cheaper in Canada than USA
- CDL could form a strategic alliance with Tellcall Corp (TC)
- produce X15 for Form Innovations Limited (FIL) on credit or enter into a merger with
FIL
- CDL could issue shares for capital, possibly to Bill Magee
- CDL could develop a sales office in America
- CDL is receiving business from American companies that are being referred to CDL
by Canadian subsidiaries

Threats

- electronic design industry is closely related to electronic manufacturing industry;
cyclical correlation
- independent contractors have lower overhead and can offer a more competitive rate
- overseas contractors/design companies are in North America, offer a wide variety of
services at competitive rates
- manufacturers offer design services at cost to obtain manufacturing business
- the industry could shift back to performing design in house
- wages are CDLs primary expense and are low now due to market conditions, must
not rise disproportionately to revenues
- high Canadian $ has strengthened which weakens manufacturing exports which
decreases demand for electronic design
- Canadian electronic design market is shrinking
- CDL has direct local competition
- telecom competition has increased, and the industry continues in a downward trend
- venture capital funding is generally not available to service businesses
- is a large regulatory and tax burden, administratively, for entering US market

82 CMA Canada
Financial Analysis

Covenants with Bank:

1) net book value, less intangibles, plus software must exceed $2,000,000
2) current ratio must remain at 1.5 to 1

Please refer to Exhibit 1 for all calculations.

Strengths

CDL has a very low debt/equity due to the lack of debt that they carry. This suggests
that they could have borrowing capacity should the need arise.

CDL has low fixed costs so they can respond quickly to changes in market conditions. It
also minimizes losses as a low contribution margin is required.

xpenses have remained stable, and CDL has historically had accurate
forecasting/budgeting.

Weaknesses

CDLs profitability has declined rapidly. With the MCC bankruptcy in consideration, CDL
is in violation of both of the above stated covenants, as demonstrated in Exhibit 1.

Days in A/R is increasing annually to twice CDLs target of 30 days. However, without
the MCC receivable, it is 45 days, the same as 2004, but as the bankruptcy was
unintentional the days in A/R was 60 days.

Staff utilization is decreasing and is now at 76%.

Actual effective hourly rate has also decreased to $92.60 which is below the target rate.

CMA Canada 83
Strategic Issues

STRATEGIC OPTION #1

Form a Strategic Partnership with Tellcall Corp (TC)

Pros

- could obtain $850,000 cash for 200,000 shares of CDL ($4.25/share)
- CDLs board could obtain representation from a CEM
- TC guaranteed $4 million of revenue for each of next 3 years
- have capacity to accept the TC job, if CDL didnt labor is easy to find
- TC will refer its customers to CDL
- deal has an NPV of $1,770,135 as calculated in Exhibit #2
- is not inconsistent with current mission
- option is favored by Belanger and Manro, Directors and shareholders
- would lead to satisfying both bank covenants of which CDL is in violation, as
calculated in Exhibit 2.

Cons

- against preference of shareholders to dilute CDL ownership
- TC contract of $90/hr is below CDL target of $100 and current average if $92.60
- CDL will not be able to keep jobs from competition of TC, which is $3.5 million/year
- TC profits and share prices are decreasing
- will lose TCs business if it does not accept the deal
- against management preference of forging long-term relationship with clients if CDL
is not able to conduct business with TC competitors
- no guarantee of revenues from TC after 3 years but still may not be able to deal with
TC competitors
- TC profitability is decreasing as well as share price so may not be so attractive long-
term
- is another service industry, not in American market


84 CMA Canada
STRATEGIC OPTION #2

Engage in a Merger with Form Innovations Limited (FIL)

Pros

- high potential for significant profits as calculated in Exhibit #3
- Manton supports merger with FIL
- would increase capacity utilization, capacity is currently available (Exhibit 1)
- FIL could provide an outlet for other CDL projects, such as those employees pursue
on personal time
- would allow CDL to retain intellectual property
- same design team members have experience in industrial design; FIL management
will remain intact
- can diversify from service industry which is shrinking in Canada into product industry
- will allow CDL to be eligible for SRED credits which reduces the cost (exhibit #3)
- could attract venture capital funding

Cons

- dont have $1,000,000 cash to invest
- would dilute shareholdings
- would not result in achievement/compliance with bank covenants (current ratio or net
book value)
- would have an opportunity cost to CDL of $2,550,000 (out of pocket plus labour
hours) which CDL cant afford, net cost of $780,000, as per Exhibit #3
- dont have much experience in product market
- financing may be hard to attract as market crash is still quite recent


CMA Canada 85
STRATEGIC OPTION #3

Set Up a Sales Office in USA

Pros

- American market is larger and growing faster than USA
- CDL has a labor advantage over American firms
- Smelkin has contacts in Boston and sales experience in Northeastern USA
- CDL has some sales agents in USA; commission to employees is less that to agents
- favored by Bunburger and Carles
- would make CDL eligible for the SRED tax credit, enhancing profitability (40% of
direct expenses)
- CDL is located close to American border
- would not impact CDLs ability to obtain short-term financing from bank (North
American A/R)
- electronic data transmission will ease distance problem
- receiving referrals to American firms from Canadian subsidiaries

Cons

- increased exposure to currency fluctuation risk in US$ sales
- not included in CDLs original mission (American market)
- sales agents have not been as successful as CDL would have hoped
- CDL is not currently ISO certified, which US companies prefer
- sales force is having difficulty arranging deliverable contracts, is not making proper
ECOs and causing current profitability (effective rate) to be less than the booked
rate
- would significantly increase regulatory and tax burden

86 CMA Canada
STRATEGIC OPTION #4

Issue shares to Bud Magee

Pros

- cash injection of $420,000
- as per exhibit 5, restores current ratio and net book value covenants within bank
criteria, preventing default
- will increase book value per share
- exceeds what management is providing themselves in options ($1.50/share)
- is willing to invest for long-term
- is not demanding seat on board of directors

Cons

- dilutes shareholdings (new ownership) which is not favored by some current
shareholders
- value of per share deal is less than that offered by TC ($3.50 vs. $4.25 for TC)
- is below current market value/share, as calculated in exhibit #5.


CMA Canada 87
Recommendations

Option #1 Form a Strategic Alliance with Tellcall Corp.

CDL should not enter an alliance with Tellcall Corp. It is of short-term benefit, it is not
consistant with CDL wanting long-term relationships with clients in that it will force them
to discontinue business with some customers, and TC future success is uncertain.

Option #2 Engage in Merger with FIL

CDL should merge with FIL. The potential for profit is outstanding. This will allow CDL to
diversify from a service company into products. Costs will be mitigated by the SRED tax
credit, assuming CDL returns to profitability. Venture capital funding should be obtained
for the project.

Option #3 Set Up Sales Office in America

CDL should establish a sales office in America. Expense is low and potential for payoff
is large as the American market is larger and growing. CDL has a labor cost advantage
it cant pass up. Geographical proximity, and Smelkin experience in Northeastern US
and contacts is Boston are assets that should be exploited. CDL can become ISO
certified.

Option #4 Issue Shares to Bill Magee

This should be done as well. It will alleviate the immediate bank covenant problems and
allow CDL to give unrestrained consideration to other operations.

Revised Mission Statement

With consideration to the aforementioned recommendations, it would be appropriate for
the company mission to be as follows:
To provide high-quality, customized electronic designs to the North American
electronics industry, including business, consumer, and government, at
competitive prices through the use of the most advanced technology and a highly
skilled workforce. In addition, the development of new innovative profitable
products will be invented for license to manufacturers.

88 CMA Canada
Implementation

Action Plan

Short-term

1) Shares should be issued to Bill Magee to prevent violation of bank covenants.
2) Venture capital should be sought to assist in merger with FIL. This should be
undertaken by Annette Mulk.
3) Sales office should be opened in US. Billy John Carles should lead this exercise and
it should be staffed by a combination of experienced CDL employees and local sales
people familiar with local industries/companies. The target should initially be
Northeastern US.

Long-term

1) Longer-term debt sources should be secured to prevent credit crises such as at
present.
2) Depending on initial American results, sales offices should be established in
California and Texas, as well as other suitable locations to establish a presence in
those markets.

Operational/Business Issues

Sales Contracts Issues

There exists a lack of consultation between the sales and design staff, which is causing
CDL to not meet customer expectations. Customer service and satisfaction is key to
CDL obtaining repeat business, which is a management objective, and maintaining a
good reputation in the industry, a key success factor. To remedy this situation, senior
engineers should review and approve all sale proposals to ensure CDL has the
resources to complete the project as suggested. This senior engineer would then be
responsible for carrying out the project, ensuring its success.

The same process should be followed for engineering change orders (ECOs), which
should be regarded as an amendment to the original contract and charged for
accordingly. This will be especially important to ensure the success of the new
American sales office.

Interim Reporting

Interim reports should be prepared in a manner consistent with year end reports. This
currently is not the practice and is causing misleading interim reporting. Percentage of
completion rather than progress billings should be used for interim reporting to ensure
that management has the best, most accurate information available for decision making.

CMA Canada 89

ISO Certification

CDL should pursue ISO certification to become more attractive to American customers.
Prudence Joy should spearhead this.

Credit Card Usage

Credit card transaction volume is enormous and payments are being made prior to
expense verification. This is a lack of expense control and could potentially result in late
payment fees or payment for personal/erroneous expenses. In the sales department,
Carles will have to enforce that expenses are filed in a timely manner. Managers or their
designates should verify all material transactions prior to payment. Late payment fees
should be allocated to the appropriate department rather than overhead to encourage
accountability, as well as results through an annual performance review.

Time Sheet

Employees are incorrectly filling out timesheets, resulting in erroneous billing to clients
as well as undercharging for billable hours. Any time an employee spends on a project
should be billed. If it proves to have been inefficient, this will be detected in the post-
completion review that is performed with employees when a project is finished, to
prevent inefficient behaviour in future projects. Non-chargeable hours should be
allocated to an appropriate overhead account to receive a fair evaluation of staff
utilization, or fair billings to clients. Cam Mondred or a human resources delegate
should spearhead the training initiative.

Accounts Receivable (A/R)

A more conscious effort should be made to collect A/R in a timely fashion. This would
reduce bad debt, identify MCC default situations sooner, and reduce CDLs short-term
financing need. This could be achieved by offering an early payment discount, more
strict late penalties or fewer credit sales. A 30 day turnover should be achieved to
ensure that CDL can obtain maximum bank credit from its A/R, and to discourage
opportunity for bad debts. Mulk is responsible to ensure the days in A/R is reduced.

Nesther Inc. Sales Agent

A sales agent is suspected of soliciting business from his other employers customer
list. This is unethical and should be ceased. CDL should end its relationship with this
agent, and inform Nesther Inc. of his suspected actions. Contracts with agents should
include a clause to prevent such conflicts of interest. A new sales agent in this territory
should be formed. Carles should oversee the resolution of this sales related issue.


90 CMA Canada
Employee Wages

Compensation should be reviewed to ensure that CDL is treating its employees fairly in
light of recent employees quitting. CDLs mission and key success factors include
having the most skilled employees and retaining their residual knowledge. However,
market conditions should not be grossly exceeded as wages are CDLs primary
expense and dictate overall profitability.

CMA Canada 91
Conclusion

CDL is facing some important strategic issues that alter the current company in a
significant manner. However, I am confident that, should the recommendations and
implementation plan contained in this report be followed, CDL will achieve future
business prosperity.

92 CMA Canada
Exhibit #1

Financial Analysis

2005 2004
Current ratio (CA/CL)
1.79
1,473,054
2,635,685
=

3.11
701,633
2,182,334
=
Net book value 2,105,556 2,804,329

Days in A/R
days 61 365 x
14,042,197
2,340,366
=

days 45 365 x
15,127,990
1,867,653
=
Actual hourly rate
92.60 $
151,644
14,042,197
=
95 $
159,242
15,127,990
=
2005 chargeable hours

89 employees x 40 hrs/week x 52 weeks/year
= 185,120

2005 staff utilization % 76
120 , 185
422 , 140
hours chargeable
hours billed
= =

Debt/equity
0.01
2,105,556
22,288
= 0.001
2,804,329
22,288
=

MCC consideration
2005
Current ratio
0.97
1,473,054
600,000 2,635,685
=

Net book value 2,105,556 - 524,800 = 1,580,756


CMA Canada 93
Exhibit #2

TC Analysis

Implicit CDL share value = e $4.50/shar
200,000
850,000
=

Charged hours/year = year / hours 444 , 44
hour / 90 $
revenue 000 , 000 , 4 $
=

Current capacity = 89 employees x 40 hours/week x 52 weeks = 185,120

TC use of CDL = capacity of % 24
120 , 185
444 , 44
=

NPV analysis

Cash injection $ 850,000
TC contracts 7,361,082 4,000,000 x PV/FA 3 yrs 10% x 0.74
Lost competition contracts (6,440,947) 3,500,000 x PV/FA 3 yrs 10% x 0.74
$1,770,135

Net equity amount: 2,105,556 - 524,800 + 850,000 = 2,430,756

New current ratio = 1.96
1,473,054
850,000 600,000 2,635,685
=
+


94 CMA Canada
Exhibit #3

FIL Merger Analysis

Price range $81-100 $51-80
Gross revenue, undiscounted 450 million 800 million
License expense 3.5 million 10 million
Gross profit 446.5 million 790 million

Total FIL assets 4,900,000 intangible
457,542 tangible
5,357,542 total

Effective purchase price 1,000,000 cash
Value of $1,000,000 shares 4,250,000
5,250,000

$4.25 per share is chosen value as this is what TC is offering

CDLs costs 2,500,000 labor (25,000 hrs x 100 hr)
50,000 out of pocket costs
2,550,000 opportunity cost

average labor cost = approx $50/hr

CDL real cost of project = $1,250,000 25,000 hrs x $50/hr
50,000
1,300,000
less: SRED tax credit (40%) 520,000
Net cost $ 780,000

CMA Canada 95
Exhibit #4

Cost of Sales Office in US

full cost, as per Carles $200,000


96 CMA Canada
Exhibit #5

Impact of Issuing Shares to Bud Magee

Current ratio = 67 . 1
054 , 473 , 1
000 , 420 000 , 600 685 , 635 , 2
=
+

Net book value = 2,105,556 524,800 +420,000 = 2,000,756

# shares to be issued = 000 , 120
share / 50 . 3 $
000 , 420 $
=

total value/share = share / 15 . 4 $
000 , 471 , 1
000 , 000 , 4 556 , 105 , 2
shares #
angible int value book
=
+
=
+


CMA Canada 97
Markers Comments
Successful Attempt #1

General Comments

This response demonstrates the extent and quality of an acceptable response that is
achievable, given adequate preparation, in a four-hour examination-writing period. The
response is clear, concise, and adequately takes into consideration the importance of
the Multi-Comm Corp. bankruptcy in terms of meeting the required bank covenants.
Those preparing to write Part 2 of the Entrance Examination should not use this
response as a template, but rather study the comments below, which indicate areas
where this response excels and areas where there is room for improvement.
Overall, this response provides sufficient evidence that the examination writer has a
good understanding of the strategic planning process and a sufficient level of analytical,
integration, judgment and written communication skills for an entry-level CMA
candidate. There appears to be a good foundation on which to build the candidates
skills through the Strategic Leadership Program.
Strategic Thinking 1
st
Decile

The response demonstrates a good understanding of the overall strategic process of
solving a business problem situation analysis, strategic alternative analysis, strategic
recommendations, and implementation plan although it is not successful at
addressing the internal weaknesses and operational issues in terms of how they should
be resolved to support the chosen strategy.
The response recognizes that CDL currently has a mission statement, states that it is
not comprehensive enough to guide the company (but does not indicate how it is
deficient), and offers a more appropriate current mission statement. Subsequent to the
strategic analysis and recommendations, a new mission statement is provided that
adequately incorporates the recommendations (i.e. referring to the North American
market as well as the new focus on both electronic design and development of
products).
The situation analysis attempts to make good overall use of the case facts presented in
both the Backgrounder and the Additional Information, although many points from the
Additional Information (e.g. VOIP technology increasing, CDL having good
documentation practices, US anti-foreign trends growing) are overlooked. Overall, a
good balance of strengths, weaknesses, opportunities and threats for CDL is
recognized, as well as the preferences of the stakeholders in the case. The situation
analysis also includes a strong financial assessment of the organization. The adverse
effect of the bankruptcy of Multi-Comm Corp. on both CDLs net book value and current
ratio is calculated, as well as other significant ratios and performance measures.

98 CMA Canada
The analyses of the strategic options are done well. The available strategic alternatives
are clearly identified and the evaluations of the alternatives make adequate use of the
strengths and opportunities that are presented in the situational analysis. However,
many of the identified threats are not used in the analysis of the various alternatives
(e.g. various sources of competition, downward trend in telecom industry) and only one
of the weaknesses (over-concentration in the telecom sector) is addressed.
The following recommendations are stated clearly and are consistent with the analyses:
(1) do not form a strategic alliance with Tellcall Corp., (2) merge with FIL, (3) set up a
US sales office, and (4) issue shares to Bud Magee.
The implementation plan is quite thorough in its approach. It offers a solid guide to
action for CDL both in the short and long terms. The discussion of the operational
issues would be stronger, however, if it reflected the strategic recommendations (e.g.
given the recommendation to expand its focus in the US market, obtaining ISO
certification would help CDL compete in the US more effectively although this is
inferred in the response, the connection is not clearly stated).
Overall, the response demonstrates a reasonable attempt at applying the strategic
planning process in a systematic manner. It contains a good situation analysis, the
alternatives are evaluated using some of the information identified in the situation
analysis, the recommendations are clear, concise and flow from the analyses
performed, and the implementation plan attempts to address some of the issues that will
need to be rectified in order for the strategic recommendations to be realized.
Analysis 1
st
Decile

The breadth of analysis of the strategic, operational and implementation issues is good.
Most of the strategic options and operational issues, as well as some of the
implementation issues, are identified in the response.
The depth of analysis of the strategic alternatives is also good. For each alternative
identified, numerous pros and cons are clearly stated. As well, appropriate quantitative
analyses are attempted for the strategic alternatives, as well as the option of selling
shares to Bud Magee. Of special note is that the quantitative analyses of the Tellcall
and Bud Magee options include their effect on the current ratio and net book value (i.e.
the companys ability to meet the two bank covenants), which is an important
consideration in this case. The analysis of the FIL option would be stronger if it similarly
included calculation of its effect on CDLs ability to meet the bank covenants.
The depth of analysis of the operational issues is quite good. Not only is an issue
identified, but its impact on the company is stated prior to a recommendation being
made. This is a strong approach. As well, the response provides recommendations on
the majority of issues identified as weaknesses in the situation analysis. This
demonstrates good processing skills.

CMA Canada 99
Integration 1
st
Decile

The response clearly demonstrates an effort to provide recommendations that would
allow CDL to meet the most pressing issues at hand the bank covenants for the line of
credit and the decreasing market/increasing competition for electronic design services
in Canada. The quantitative analyses of the strategic options appropriately focus on
whether the bank covenants would be met. As well, some of the strengths, opportunities
and threats that are identified in the situation analysis are used effectively in the
analyses of the strategic alternatives. There is strong integration demonstrated in the
analysis of setting up a sales office in the US, where the pros and cons are clearly
linked to various points earlier identified in the situation analysis (e.g. location, Smelkins
contacts, growing US markets).
There is an effort to consider some of the operational issues in the analysis of the
strategic options (e.g. CDL is not currently ISO certified, which US companies prefer).
However, there is no real evidence of integration between strategic alternatives or
between operational issues.
Judgment 1
st
Decile

Appropriate emphasis is placed on both strategic issues and operational issues. The
important issue of meeting the bank requirements is adequately analyzed in most of the
options put forth. Less important issues are not overemphasized in this response,
demonstrating good prioritization.
The quality of the analysis of the issues is good overall. The analyses in the response
include a good balance of both pros and cons for each strategic alternative. As well, the
balance between quantitative and qualitative analyses is appropriate, taking into
account the limited examination writing time.
The quality of the qualitative analysis is above average. The analysis of most
alternatives makes good use of the case information. However, there is no mention of
the financing option offered by Ralph Manton (i.e. issue $1 million of convertible bonds
to G Holdings Limited), which is an important consideration pertaining to the FIL merger.
The quality of the quantitative analysis, given the limited examination time, is
acceptable. The calculations of the current ratio and net book value for the Tellcall
proposal and the Magee financing option are reasonable, as is the comparison of the
price versus value of FIL. However, some errors are observed in some of the other
quantitative analyses. For example, in the attempt to calculate the net present value of
the Tellcall proposal, the difference in the cost of employee time is not considered, and
an incorrect tax rate is applied. As well, in the analysis of the FIL merger alternative, the
potential gross profit calculation appears to inappropriately assume that the gross
revenue less license expense would be the gross profit realized by the merged
company the merged company would actually receive the license fees as revenues,
not the potential retail revenue.

100 CMA Canada
In general, the conclusions and recommendations in the response flow naturally from
the analyses and the recommended strategy appears logical.
Overall, the response adequately addresses the main issues currently facing CDL. The
desires of the stakeholders are taken into consideration before a recommendation is
made (although not resolved) and the issue of meeting the covenants is adequately
solved. Overall, the recommendations are convincing, consistent with the analyses, and
feasible.
Written Communication 1
st
Decile

All elements of a well-formatted report are present. The table of contents is sufficiently
detailed and customized to the case. The executive summary, while omitting the major
operational recommendations, contains the strategic recommendations being presented
in the report. The introduction contains the purpose and scope of the report. The body
of the report is well organized and makes good use of headings, subheadings and lists,
where appropriate.
The language and style used in the response are appropriate for a report written under
time-restricted examination conditions. However, there are issues with audit trails on
some of the quantitative analyses provided in the exhibits. As well, at times it is not
possible to understand a point being made in the analyses of the strategic options
because the point form used is too brief (e.g. the following pro for the Tellcall alternative
is not clear: CDLs board could obtain representation from a CEM).
Overall, the response demonstrates most of the characteristics of a professional report.

CMA Canada 101
Sample Response Successful Attempt #2

To: Board of Directors, CDL

Please find the requested report attached.

102 CMA Canada
Table of Contents

Executive Summary
Introduction
Situation Analysis
Strategic Mission
SWOT Analysis
Management Preferences
Financial Analysis
Strategic Alternatives
Alternative #1 Alliance w/ Tellcall
Alternative #2 Acceptance of Share Swap
Alternative #3 Merger w/ FIL
Alternative #4 US Sales Office
Strategic Recommendations
Implementation
Operational Issues
Appendices
Appendix A: Financial Ratios
Appendix B: Contribution Margin of TC Alliance
Appendix C: Effect on Current Ratio
Appendix D: FIL Merger
Appendix E: Summary of Financing

CMA Canada 103
Executive Summary

CDL has been an immensely successful company through its competitive pricing, high
quality services, and attention to customer relationships and satisfaction. However,
recent economic trends in the electronics industry have brought about pressures on
profitability and difficulty obtaining financing due to a general lack of confidence after the
tech bubble burst in 2000.

CDL is faced with a number of alternatives involving further entrenching itself in the
telecom industry, diversifying into product markets, and expanding to the US market.

Operational issues include those surrounding sales and marketing efforts, changes in
ownership resulting from business combinations, financing activities, and
control/accounting issues.

Recommendations:

1. Accept Tellcall proposal (in exchange for cash)
2. Accept FIL merger
3. Open US sales office
4. Finance through
- Bond issue
- Magee investment

104 CMA Canada
Introduction

This report examines CDLs current situation and makes a number of strategic
recommendations. To this end, this report includes a situation analysis, analysis of
strategic alternatives, strategic recommendations, and operating recommendations to
support the implementation of those strategic recommendations.

CMA Canada 105
Situational Analysis

Strategic Mission

The company currently has a mission statement that addresses the following
characteristics about the companys goals:

Who Canadian electronics market
What high quality electronic designs

However, the mission statement does not include how the company goes about
achieving these.

A mission statement could read:

To provide high quality electronic designs to the Canadian electronics industry at
competitive prices by maintaining close relationships w/ customers and being
flexible to their needs.

106 CMA Canada
SWOT Analysis

Strengths

- competes on the basis of high quality services, competitive prices, and broad
capabilities (KSF)
- among top 5 design co.s in Canada
- delivers complete designs on time, remains in contact with customer and remains
flexible to customer needs (KSF)
- provides wide variety of expert services due to depth + breadth of technical expertise
- provides tertiary services (e.g. proof of concept, models, simulations)
- design/engineering tools, software, expertise
- promotes teamwork through positive work environment
- good office location (good security, close to US, in high tech area)
- intangible property worth $4 million

Management Team
- well educated (Smelkin, engineer; Bates/Carles, computer science; Joy, commerce;
Mondred, tech)
- good/diverse skill set
- Smelkin has extensive contacts (some in US)
- Smelkin has experience in design, sales/marketing
- Smelkin is a persuasive recruiter
- Smelkin has entrepreneurial spirit
- Joy has operations background
- Carles has sales, business development experience
- Mondred has aptitude for project management
- Mulks work is accurate, she is well liked
- management team meets regularly to discuss progress
- managers are owners giving them a vested interest

Board of Directors (BOD)
- Bunburger has telecom experience
- Manro has legal expertise
- meets regularly to discuss strategy

Sales/Marketing
- offers fixed and variable pricing
- offers discounts to help secure long-term relationships
- capable salespeople, good technical knowledge
- good relationship w/ potential clients
- 22 agents in Canada, 3 in US
- large network of connections
- variety of promotion strategies (trade shows/publications, web site, personal selling)
- access to independent sales agents
- strategic alliances w/ CEMs


CMA Canada 107
Human Resources
- well educated, diverse, + passionate (hobbies) staff
- low employee turnover, high loyalty
- encourages internal development
- management motivated by stock options
- all employees have formal contracts
- contracts contain non-competition + confidentiality clauses
- employees receive lieu time for overtime worked
- performance reviews conducted after each project
- less expensive salaries for tech workers in Canada
- same design team members have experience in industrial design

Operations
- residual knowledge retained by employees
- code names assigned to projects to protect intellectual property
- access to outside experts - $60/hr
- adequate insurance coverage no claims or law suits to date
- high speed cable connection
- office relocation is cost-effective (compared to Silicon Valley)
- work is well documented + organized


108 CMA Canada
Weaknesses

- Mulk does not have finance/accounting education
- Joy responsible for IT and Accounting
- CDL dependent on outsourcing dynamic of electronics industry
- dependent on telecom/telephone services for revenue (54% + 4%) = 58%
- intellectual property usually returns to client
- lack of consultation between sales + design employees
- deliverables are not clearly defined in contracts
- fixed price contracts sometimes lead to inflated costs (cost overruns)
- variable contracts are not billed over the maximum chargeable hours leading to lost
profitability
- monthly revenue/income fluctuates greatly due to recognition of sales at billing
- sales people neglect to report credit card charges
- credit card charges are paid without verification
- potential for fraud + errors in timekeeping system of chargeable employees
- CDL not ISO certified
- lack of desire of shareholders to dilute their ownership through share issuance
- Carles and Joy rewarded with 1% bonus, but not other senior managers due to org.
structure
- salaries are below market levels
- Carles rarely turn down work to fill capacity without considering profitability
- not all chargeable hours were reflected in revenue
- ethical issue regarding unproductive hours charged to clients
- potential conflict of interest to Nesther independent sales agent
- project Belleville A/R write-off (risk of losing line of credit)


CMA Canada 109
Opportunities

General:

- abundance of skilled labour after tech industry layoffs
- tech companies unwilling to hire and outsource
- government interested in developing Canada as info economy

Electronics Industry
- growing due to
- increased applications
- decreasing prices/costs of manufacturing
- outsourcing derived from
- lack of in-house design capabilities
- in-house design at capacity
- redesign of existing products
- outsourcing can be less expensive
- EDI facilitates exchange of designs
- relationships of Canadian/US subsidiary/parent companies
- markets for flat-screen monitors and VOIP technology increasing
- US electronics + Internet equipment markets expected to grow

ICT/Telecom Industry
- because of the high reliance on telecom, changes in this industry affect CDL
- US equipment spending rebounded in 2003
- Canada is in top 5 imports to US market
- international market expected to grow faster than US.
- telecom services market up $2.5 billion 2000-2002
- some intellectual property rights issues w/ co.s outside North America

Specific:

- alliance w/ Tellcall
- finance Tellcall through stock swap
- merger w/ FIL
- establish US sales office


110 CMA Canada
Threats

- tech industry is cautious after bubble burst
- venture capitalists unwilling to support service organizations
- USD fluctuations (any foreign currency)
- more design service competition from Europe/Asia
- weakened design industry in Canada
- travel costs of distant clients

ICT/Telecom Industry:
- suffered some of the heaviest blows after the bubble burst
- state of continuous technical + economic shift
- Canadian capital expenditures fell in 2002 to $6.3 billion
- ICT manufacturing revenues down 18.3 billion 2000-2002 (expected to continue)
- ICT manufacturing down 1.2 billion 2000-2002 (R + D) expected to continue
- increasing competition
- personal computer market increasing competition
- Canadian sales of electronics expected to decrease
- some resistance in the US to foreign outsourcing

Competition from:
- companies w/ in-house design capabilities
- CEMs who offer one-stop shopping
- Canadian design competitors (3 local)
- independent designers
- design tool developers
- inexpensive, overseas (e.g. IED) particularly from India
- new Indian competitor


CMA Canada 111
Management Preferences

- Belanger/Manro desire further downsizing
- Smelkin hesitant to downsize wants to keep the current workforce
- Bunburger and Carles want to shift attention to the US markets
- Manton supports product diversification

112 CMA Canada
Financial Analysis

- Mulk requires auditor assistance in applying % of completion method to match
revenue/costs
- % of completion not used for interim reporting
- SRED credits primarily from US business
- non-chargeable hours charged to overhead
- good budgeting process
- clean audit reports
- sharp decrease in current ratio 2005 over 2004 to 1.7 (approaching bank limit of 1.5)
appendix A
- profit losses are significant - 7.8% in 2005, and 1.4% in 2004 appendix A
- in both 2004 + 2005, the value of the unbilled chargeable hours would have been
significant enough to erase the losses experience before tax appendix A

Annual Capacity = 89 x 40 hrs x 52 weeks = 185,120 hrs.
- usage fell from 86% to 82% in 2005 (appendix A)

Line of credit available provided current ratio is above 1.5 maximum of $1 million
based on 75% of North American receivables

2005 A/R 2.3 million = 1.7
max $ 1 million

CMA Canada 113

Alternative 1

Alternative: Strategic Alliance With Tellcall

Pros:
- past work with TC has been on budget ($100/hr)
- guaranteed contribution of 856K (appendix B)
- CDL has required expertise and positive relationship w/ TC to complete this work
- variable pricing helps mitigate losses due to cost overruns if all chargeable hours are
properly billed
- CDL has offered discounts before to secure long-term clients
- offer reflects the value of CDLs intellectual property
- guaranteed outsourcing for 3 years
- increase in TC revenue of factor of 4 ($1 million $4 million)
- telecom services industry has grown recently
- leverages CDLs ability to protect intellectual property
- tremendous increase in current ratio (appendix E)

Cons:
- increases CDL dependence on telecom industry
- BOD likely not in favour of increasing no. of members due to dilution of control
- requires decrease in booking rate of $10/hr leading to minimum loss of $440K
(appendix B)
- cannot accept contracts from TC competitors loss of $3.5 million in revenues
- CDL does not gain access to the intellectual property legally
- Bunburger and Carles would rather shift focus to the US
- Manton would rather diversify
- Belanger/Manro want to downsize


114 CMA Canada
Strategic Alternative 2

Alternative: If the TC Alliance is Accepted, Must Decide Whether to Accept Swap
of Shares

Pros:
- increase of TC shares in the future could lead to larger cash available in the future
- provides opportunities for dividends in the future

Cons:
- does not provide immediate cash of $850K
- market value of TC shares is falling
- appreciation of TC shares could lead to capital gains
- immediate cash would help the current ratio increase to 2.37 appendix C
- inflow of cash offsets A/R write off of Belleville
- lack of cash flow reduces current ratio to (4,586 - 850)/1,473 = 2.5 (appendix E)
- cash helps finance office expansion to US


CMA Canada 115

Alternative: Merger with FIL

Pros:
- FIL has had success w/ products in the past
- CDL has existing alliances w/ CEMs to manufacture
- decreases weakness from lack of intellectual property
- pricing based on % of revenues avoiding problems associated with both field +
variable pricing
- leverages existing relationship w/ FIL
- addresses Mantons desire to enter product market
- product is PC based + PC market is growing worldwide
- bond issuance covers upfront cash
- excess capacity exists (appendix D)
- enormous estimated contribution of $16.1 million (appendix D)
- share issue to Magee pays bond interest for 5 years
- bond issue exchanges increase in current assets for increase in LT debt improves
current ratio by $1,000K (appendix E)
- helps offset risk of increasing dependence on telecom through TC alternative
- helps address preventing offshore competition from increasing their power
- offset 820K loss generated by Belleville

Cons:
- requires upfront cash of $1 million
- bond requires annual coupon payments of $60K (appendix D)
- requires issuing 1,000,000 shares 68% increase in shares (appendix D)
- default on bond results in dilution of ownership through share issuance
- FIL current ratio 1.45 (appendix D) which is below bank mandate of 1.5


116 CMA Canada
Strategic alternative 4

Alternative: Setup Full-Time Sales Office in US

Pros:
- CDL has a reputation for high quality and competitive prices that could be exploited
in the US
- Bunburger and Carles support this initiative
- Smelkins US connections could be exploited to develop business
- Carles is experienced in business development
- ability to leverage more fully referrals to US business from Canadian subsidiary
companies
- US markets are expected to grow
- helps capitalize on North America wanting to protect intellectual property from
offshore competitors
- financed by Magee $420K

Cons:
- CDL is not currently ISO certified which could hinder their success
- they already have an office in close proximity to the US
- some sales agents are already in the US
- additional independent sales reps could be recruited to accomplish the task
- increased travel costs of remote office
- US dollar hugely depreciated
- some resistance in the US to foreign outsourcing

CMA Canada 117
Strategic Recommendations

It is recommended that CDL accept the alliance offer from TC and finance this using the
offer to receive cash in exchange for the share issue. Although this offer increases
CDLs dependence on the telecom industry, the arrangement provides a guaranteed
contribution of $440K each year by guaranteeing revenue streams.

In addition it is recommended that CDL accept the merger offer from FIL. This
opportunity can be fully financed by the bond issue, which does not affect the current
ratio and provides diversification into the product market to help mitigate the risks
associated with the design business.

The establishment of a US sales office can be accomplished with little capital
investment and has large market potential with the growth opportunities in the US
market.

These recommendations carefully consider the effect on profitability (all positive) and on
the current ratio to ensure continued bank financing.

In light of the strategic recommendations made, the companys mission should be
revised to:

To provide high quality electronics designs and products to the North American
electronics industry at competitive prices while ensuring a high degree of
customer satisfaction.

Implementation

- notify all parties of agreement acceptance
- begin to assess the organizational requirements of the business combinations
recommended
- ensure that a transition plan is implemented effectively
- acquire recommended financing as soon as possible to finance transition


118 CMA Canada
Operational Issues

Sales/Marketing
- coordination between sales + design staff is necessary to ensuring customer
satisfaction
- regular consultation meetings should be implemented to discuss emerging contracts,
address pricing and deliverables to ensure appropriateness + profitability

Human Resources
- Mulk should ensure she is well versed in both the theory + application of appropriate
accounting policies such as % of completion of revenue recognition to properly
prepare interim statements for more accurate reporting
- errors in the processing of credit card expense reports + payroll time sheets can be
costly
- appropriate monitoring controls need to be in place to ensure accuracy + validity
- the current org. structure keeps Joy responsible for IT and finance and it appears
only direct reports of Smelkin were rewarded w/ 1% bonus, which may seem unfair
to the other senior managers. The structure should be modified so Mondred, Mulk,
Bates report directly to Smelkin + an appropriate and uniform compensation
package designed for all senior managers.

ISO Certification
- ISO certification can have significant benefits to promote sales, especially with the
establishment of a US office
- although resources are currently scarce, the feasability of ISO should be
investigated in the future

Dilution of Ownership
- the strategic recommendations involving financing from Magee and the consolidation
with FIL and TC require additional issuance of shares. Managers should be
adequately informed of the necessity of the sacrifices in the interest of the profitable
growth.

Salaries
- competitive salaries are essential to retaining top quality employees, an important
element in CDL
- the current salaries of CDL need to be assessed against market to see if
adjustments are necessary keeping in mind the necessity to control costs

Charging Unproductive Hours to Clients
- if discovered by a client, this could have a negative impact on the relationship
- a clause should be added to contracts indicating that these will specifically be
charged to avoid any miscommunication

CMA Canada 119
Financing
- difficulty in obtaining financing is a particular weakness for CDL

The following two situations create financing issues in themselves:

Project Belleville $(850K)
Bond interest (60K x 5) $(300K)
Office Expansion US $(200K)

In order to finance these unusual situations, the $800K received from Tellcall should be
used as an offset to $850K to avoid loss in line of credit.

The investment of $420K from Magee should be used to pay the bond interest and
finance half of the office expansion.

120 CMA Canada
Appendix A: Financial Ratios

Current Ratio

2005: 8 . 1
473 , 1 $
635 , 2 $
= 2004: 1 . 3
701 $
182 , 2 $
=

Profit Margins (before tax)

2005: )% 8 . 7 (
042 , 14 $
) 091 , 1 $(
= 2004: )% 4 . 1 (
127 , 15 $
) 213 $(
=

No. of Chargeable hours Not Billed

2005: 151,644 - 140,422 = 11,222 2004: 159,242 - 151,280 = 7,962
x 100/hr x 100/hr
= $1.1 million = $800K

Capacity usage:

2005: % 9 . 81
120 , 185
644 , 151
= 2004: % 0 . 86
120 , 185
242 , 159
=


CMA Canada 121
Appendix B: Contribution Margin of TC Alliance

Annual Revenues $4,000,000

Salaries are largest variable
cost - % based on 2005 $(3,144,000)

% 6 . 78
197 , 042 , 14 $
208 , 039 , 11 $
=

Contribution Margin $ 856,000

Loss due to reduced booking rate

hrs 000 , 44
90 $
000 , 000 , 4 $
=
x $10 $(440,000)


122 CMA Canada
Appendix C: Effect on Current Ratio

2005: 37 . 2
473 , 1
850 $ 635 , 2 $
=
+


CMA Canada 123
Appendix D: FIL Merger

Current excess capacity: 185,120 - 148,666
= 36,454 sufficient

Bond interest payment:

$1,000,000 x 0.6 = $60,000 annually

Increase in # of shares: 1,451,000 + 20,000 options = 1,471,000

% 68
000 , 471 , 1
000 , 471 , 1 000 , 471 , 2
=

FIL current ratio:

2005: 46 . 1
601 , 166 $
750 , 242 $
=

Licensing: CM assume 5% of revenues

Year 1: 50M x .05 = 2.5 PVIF
10%, 1
x (1-.36)
Year 2: 100M x .05 = 5.0 PVIF
10%, 2
x (1-.36)
Year 3: 300M x .05 = 15.0 PVIF
10%, 3
x (1-.36)

Total revenue = $2.3 + $4.1 + $11.3 = $17.7 million

Investment = (25,000 hrs x $100/hr + $50,000) x (1-.36) = $1.6 million

Contribution of $16.1 million

124 CMA Canada
Appendix E: Summary of Financing

Current Assets (2005) $2,636K

Cash from Tellcall $ 850K
Improvement in A/R (Tellcall) 500K
($4 million - $3.5 million)
$1,350K

FIL:
Bond $1,000K

Belleville w/o $ (820)K

Magee: $ 420K

Net $4,586K

Current Liabilities $1,473K

Current Ratio (Revised) 3.1


CMA Canada 125
Markers Comments
Successful Attempt #2

General Comments

This response provides another example of the extent and quality of an acceptable
response that is achievable, given adequate preparation, in a four-hour examination-
writing period. This response clearly strives for a recommendation that would be a good
strategic fit for CDL, and would address both the companys current financial difficulties
and the declining Canadian markets for electronic design.
Note that, although the final grades for both this and the previous example are in the top
decile for the candidate population, there are several differences in their approaches,
analyses and recommendations. However, both exhibit a good understanding of the
strategic planning process and a sufficient level of higher-order cognitive skills (analysis,
synthesis, and evaluation, as defined by Blooms Taxonomy of Educational Objectives)
for an entry-level CMA candidate.
st
Decile

The response demonstrates a good understanding of the overall strategic process of
solving a business problem. It recognizes that CDL currently has a mission statement
and attempts to develop a preliminary statement outlining the companys target market
(who), design focus (what) and methodology for achieving its goals (how). Given that
CDL presently provides design services in both the Canadian and US markets, the
revised mission statement could be improved by changing the target market from
Canada to North America. Subsequent to the strategic analysis and recommendations,
a new mission statement is provided that adequately incorporates the recommended
strategic direction.

The situation analysis presented in this response is in-depth and clearly utilizes the
information provided in both the Backgrounder and the Additional Information. A good
balance of strengths, weaknesses, opportunities and threats for CDL is provided, and
the preferences of the stakeholders are clearly identified. The financial analysis offered
in the response is reasonable; however, it could be improved by calculating the effect of
the Multi-Comm Corp. bankruptcy on CDLs current ratio and net book value. These
calculations would be very useful in understanding what CDL requires to avoid losing its
bank line of credit.
The analyses of the various strategic options are done well. The available strategic
alternatives are clearly identified and the evaluations of the alternatives make adequate
use of the strengths, weaknesses, opportunities and threats that are presented in the
situation analysis. However, the use of a few more of the opportunities would strengthen
the analyses.

126 CMA Canada
The following recommendations are stated clearly and are consistent with the analyses:
(1) accept the alliance with Tellcall, (2) accept the merger proposal from FIL, and
(3) establish a US sales office.
The implementation plan and the discussion of the operational issues are not very
strong. Although there is an attempt to address a few implementation issues (financing,
dilution of ownership, ISO certification) among the operational issues, the
implementation plan presented fails to offer a solid guide to action for CDL both in the
short and long terms. A stronger response would more clearly outline for management
the tasks and timelines required for the successful implementation of the strategic
recommendations. As well, the operational recommendations would be more effective if
more of the issues were analyzed in light of the strategic recommendations.
Overall, with the exception of the implementation plan, the response demonstrates a
reasonable attempt at applying the strategic planning process in a systematic manner. It
contains a good situation analysis, the alternatives are evaluated using some of the
information identified in the situation analysis, and the recommendations are clear,
concise and flow from the analyses performed.
Analysis 1
st
Decile

The breadth of analysis of the strategic, operational and implementation issues is good.
Most of the strategic options and operational issues are identified in the response as
well as some of the implementation issues.
The depth of analysis of the strategic alternatives is also good. For each alternative
identified, numerous pros and cons are clearly stated and the financing issues are
discussed. There is an attempt to determine the effect of the strategic recommendations
on CDLs current ratio. However, the effect on the net book value (i.e. the other bank
covenant) is not addressed anywhere in the response. A better approach would be to
calculate the current ratio and net book value under each alternative, and then show the
combined effect of the strategic recommendations on these ratios.
The depth of analysis of the operational issues is acceptable for a time-pressured
examination, but not strong. Many of the issues are simply listed and recommendations
made without explaining the ramifications of the issue, or the cause and effect of the
recommendation. For example, the recommendation is made to ensure that Mulk is well
versed in percentage-of-completion accounting; however, the discussion of the issue
does not indicate how to proceed (e.g. provide additional training) or describe clearly
what the impact of the recommendation will be (i.e. for more accurate reporting is quite
vague; a better cause and effect explanation would be that additional training and the
application of the percentage of completion method throughout the year would lead to
less fluctuations in the monthly reported revenue, allowing for more accurate projections
for management).

CMA Canada 127
Integration 1
st
Decile

The response clearly demonstrates an effort to provide recommendations that would
allow CDL to meet the most pressing issues at hand the bank covenants for the line of
credit, the decreasing market available for electronic design in Canada, and the
overdependence of CDL on the telecom industry. To assist in making the strategic
recommendations, many of the strengths, opportunities and threats that are identified in
the situation analysis are used effectively in the analyses of the strategic alternatives.
There is very strong integration demonstrated in the analysis of the US expansion
alternative, where the pros and cons are clearly linked to various points identified in the
situation analysis (e.g. location, shareholder preferences, growing US markets).
There is an effort to integrate the strategic alternatives by summarizing the financing of
the three recommended alternatives and calculating the collective effect on CDLs
current ratio in Appendix E of the response. In the analysis of the strategic options,
several of the operational issues are addressed; however, there is no evidence of
integration between operational issues. A better effort to address the operational issues
in light of the strategic recommendations or other operational issues would have more
strongly demonstrated integrative thinking.
Judgment 1
st
Decile

Appropriate emphasis is placed on both strategic issues and operational issues. Less
important issues are not over emphasized, demonstrating good prioritization. As well,
the financing of the various options is adequately addressed as an operational, not a
strategic, issue.
The quality of the analysis of the issues is good overall. With the exception of the
alternative to merge with FIL, a good balance of both pros and cons is provided for each
strategic alternative. As well, the balance between quantitative and qualitative analysis
is appropriate, taking into account the limited examination writing time. A good attempt
at overcoming the issue of resistance to shareholder dilution is made in the response,
given the strategic recommendation of growth and the recommendation to finance the
growth through issuing shares to Bud Magee, Tellcall Corp, and Marcus Mills of FIL.
The quality of the qualitative analysis is above average. The analysis of most
alternatives makes good use of the case information.
The quality of the quantitative analysis, given the limited examination time, is adequate,
but not strong. In Appendix C of the response, the calculation of the current ratio uses
the unadjusted current assets (i.e. before adjusting for the effects of the MCC
bankruptcy). In Appendix D of the response (FIL merger), an assumption that the
licensing contribution margin would equal 5% of the retail revenues is used. This
assumption is inappropriate the case clearly indicates that the revenue from licensing
would equal $1.00 per unit. As well, the analysis of the strategic options fails to examine
each of the two covenants. Although the feasibility of the recommended strategy is

128 CMA Canada
proven in terms of the current ratio and financing (see Appendix E of the response), a
stronger report would also incorporate a calculation of the estimated net book value.
In general, the conclusions and recommendations in the response flow naturally from
the analyses and the recommended strategy appears logical.
Overall, the response adequately addresses the main issues currently facing CDL. The
desires of the stakeholders are taken into consideration before a recommendation is
made and the issue of meeting the current ratio covenant is adequately solved. Overall,
the recommendations are convincing, consistent with the analyses, and feasible.
st
Decile

Most elements of a well-formatted report are present. The table of contents is
sufficiently detailed and customized to the case. The executive summary is well done,
clearly outlining both the strategic and operational recommendations for management.
The introduction, while outlining the scope for management, does not clearly state the
purpose of the report (e.g. to give CDL a plan for the future given the current pressing
issues of lack of funds and declining markets). The body of the report is well organized
and makes good use of headings, subheadings and lists where appropriate. However,
there is no conclusion presented to effectively wrap up the discussion at the end of the
report.
The language and style used in the response are appropriate for a report written under
time-restricted examination conditions. However, there are a few issues with clarity in
the report. For example, strategic alternative #2 is confusing. The header states that the
discussion will be about a share swap, but the points made are about both the swap
and the issue for cash, and the sale for cash is never clearly identified for the reader.
There are also minor issues with spelling and grammar throughout the report.
Overall, the response demonstrates the majority of the characteristics of a professional
report.

CMA Canada 129
Sample Response Unsuccessful Attempt

Date: June 16, 2005

To: CDLs Board of Directors


Subject: Strategic Directions of Clear Design Limited


130 CMA Canada
Table of Contents

Executive Summary

Introduction

Mission Statement Analysis

Internal Strengths and Weaknesses
External Opportunities and Threats
Financial Narrative

Alliance with Tellcall Corp.
Merger with FIL
Sales office in the US

Recommendations

Implementation Plan

Business Issues

Conclusion

Appendices
A Swot analysis
B Financial Analysis of CDL
C Financial Analysis of Alternatives


CMA Canada 131
Executive Summary

Clear Design Limited (CDL) has been a profitable company for years due to it excellent
service and great leadership. However, in the past two years, due to certain variables,
revenues have dropped.

CDL should merge with FIL in the near future as well as set-up a full-time sales office in
the US. This will allow growth and increased revenues.


132 CMA Canada
Introduction

The purpose of this report is to analyze the internal and external environment of CDL. It
contains various analysis and alternatives as well as recommendations. It also includes
a plan to implement the recommendations.

CMA Canada 133
Analysis of Mission Statement

On May 1, 1999, the President and CEO of CDL, Rick Smelkin developed the following
mission statement:

To provide high-quality electronic designs to the Canadian electronics industry at
competitive, but profitable, prices.

Objectives:
- build long-term relationships with customers in order to obtain repeat business
- compete on basis of broad capabilities as well as competitive prices.
- create pleasant work environment.
- deliver service on-time
- provide a variety of expert services.

With the objectives in mind, the new mission statement should say:

To provide high-quality, on-time electronic design and broad expert services to the
North American industry at competitive prices.


134 CMA Canada

Internal Strengths and Weaknesses
(the following is a brief narrative, however additional points can be found in Appendix A)

Strengths:

CDL is led by a well-educated and experienced President (Rick Smelkin). He has been
successful in recruiting a talented work force due to his extensive contact network.
Together, he and his team have emerged CDL as one of the top five electronic design
firms in Canada. They have managed to do so by offering great customer service and
being flexible to the customers needs. In addition, they have some good internal
controls in place such as requiring expense claims to be approved by Carles and
assigning code names to their projects for confidentiality purposes.

Weaknesses:

In the past, CDL was running quite smoothly. However, certain constraints have caused
them to neglect certain internal control procedures. Due to a lack of credit card
reconciliation, and too many charges to match, this has often been neglected and the
charges have been paid without checking. The Vice-President, Prudence Joy appears
to have too many responsibilities. All of the chargeable employees and the project
coordinators report to her, and she is also responsible for three different functions
(contract admin., finance, IT). If products do not perform as required, CDL could face
lawsuits. They also are not able to offer manufacturing services and must out-source
them to contract electronics manufacturers.


CMA Canada 135

External Opportunities and Threats
(the following is a brief narrative, however additional points can be found in Appendix A)

Opportunities

The electronics industry in Canada and around the world has been growing steadily
over the last 25 years. In addition, international telecom markets are predicted to grow
at exceptional rates, surpass the US market. The Canadian government also wants to
establish Canada as a leading information economy and may offer financial aid to help
those Canadian companies in the field.

Threats

Although a couple of local competitors have gone out of business, there are still
numerous competitors internationally. These competitors include a large Indian
company that has been quoting very low rates in an effort to attract business. The
Canadian dollar has also increased in value causing the Canadian electronic design
industry to weaken. This has also threatened many Canadian exporters of electronics.


136 CMA Canada
Situational Analysis Financial Narrative

(the following is a discussion of the financial analysis of CDL. Additional information can
be found in appendix B)

Over the last 2 years, CDLs current ratio has decreased dramatically indicating a
reduction in its ability to pay of its debt as quickly as before. It is however still adequate
to effectively pay off its debt.

Both profit margin on sales and the debt to equity ratio reflect the decrease in revenue
of the past 2 years.

Asset turnover ratio indicates an excellent usage of assets to generate sales.

Receivable turnover ratios are fair and show that the collection period has increased by
10 days (to 55 days) in the last year.


CMA Canada 137

Alternative 1 Strategic Alliance with Tellcall Corp.

PROS:

guaranteed to recieve at least $4 million of business per year for the following three
years. ($12 million App. B)
option to swap shares (result in $550000 gain for CDL (App B)).

CONS:

Tellcall Corp. is a large public company.
CDL not able to accept any contracts from TCs main competitors (loss of $3.5
million per year).
Business based on variable price of $90 ($333,777 opportunity cost (App. B)).
If staff levels are downsized further, CDL would not have the capacity to match last
years revenues.

Conclusion:

TC appears to be an attractive alternative due to the $550,000 gain if share were
swapped and the additional revenue over the next 3 years. However, this additional
revenue is based on $90 per hour and would also not allow CDL to accept any contracts
from TCs competitors. Due to the complications with forming an alliance with a public
company, among the other disadvantages, CDL should not persue this alternative.


138 CMA Canada
Alternative 2 Merger with Form Innovations Limited (vertical integration)

PROS:

G Holdings willing to advance $1 million of 5-year, 6% convertible bonds.
FILs current ratio for 2005 and 2004 are within banks covenant of 1-1.5 (1.46 and
1.44 respectively (App B)).
Contract for project X15 would be able to recieve funding.
Appointing Marcus Mills VP of products could allieviate some of Prudence Joys
responsibilities.
Sales of X15 are potentially huge.
After swap of cash and shares, CDL gains $200000 (App. B)

CONS:

FIL currently operating at full capacity.
Life-cycle of product X15 is would be less than 5 years with years 4 and 5 being
very uncertain.

Conclusion:

FIL appears to be profitable and has a good ability to pay off its liabilities according to
its current ratio (App. B). The terms of the merger seem fair and would allow Prudence
Joy to be relieved of some of her responsibilities. Due to the benefits, CDL should
persue this alternative.


CMA Canada 139
Alternative 3 setting-up a full-time sales office in the US

PROS:

$100 hourly rate considered a bargain.
Profitable industry (ex. 2005 contract for a customer in Silicone Valley was among
the most profitable).
Weak US dollar benefits firms operating inside US as opposed to Canadian firms
exporting to the US.
Believed that an additional $2 million in business can be obtained.
Attract Bud Magees investment of $420000.

CONS:

Need to seek ISO certification to become attractive in the new market
Need to obtain funding ($200000 per year)
Reduction of tax credit from not being a CCPC anymore.

Conclusion:

Setting-up a full time sales office in the US is very attractable. Although it would cost
around $200000 per year this would be funded by Bud Magees investment. It would be
more cost-effective due to the value of the US dollar dropping to design within instead of
exporting to the US. The budgeted rate of $100US is seen as a bargain and would
attract more business. This is an alternative that CDL should persue.


140 CMA Canada
Recommendations

I recommend that CDL persue the alternative of merging with FIL. They will be able to
receive a $1 million advance from G Holdings and would benefit from the initial
exchange of cash and shares. The merger would also relieve Prudence Joy of some of
her responsibilities as Marcus Mills would be appointed the 3
rd
VP.

I also suggested setting-up a full-time sales office in the US. Adequate funding would be
supplied and due to the rate being seen as a bargain. I believe sales would increase
exceptionally. Due to Smelkins extensive contacts in Northeastern US, this may be a
great location to consider.

CDL should not persue an alliance with Tellcall Corp. They would offer $4 million in
business per year (3 years) but at a rate of $90 per hour. Although this sounds attractive
CDL would not be able to deal with TCs main competitors and therefore result in an
estimated loss of $3.5 million per year.


CMA Canada 141
Implementation Plan

CDL should merge with FIL within the next 1-2 months. This would allow enough time to
assess the current staff and decide what changes are necessary.

Within the next 6-12 months CDL should look into setting up a full-time sales office in
the US. This would allow enough time for a location selection an acquisition of an office,
preferrable in the Northeastern US as Rick Smelkin has an extensive network of
contacts there.

142 CMA Canada
Business Issues

Internal Control

Greater controls of credit cards must be put in place. The accounting department does
not have enough time to match all the charges before payments are due and
subsequently are neglecting to do so. Credit card limits must be reduced for those who
dont require a large limit and more time must be allocated to credit card reconcilliation.

Communication

A lack of consultation between sales and design employees causing salespeople to
promise more than can be offered. Time must be spent on a method of formulating
quotes as opposed to just simply basing them on similar past projects.

Employee Turnover

In the past, CDLs employee turnover has been very low but is now increasing due to a
lack of monetary rewards. Increased job enrichment must be applied as well as an
increase in wages to loyal employees and others who deserve it.

Ethics

It was reported that an independent sales agent who holds a full-time job at Nesther Inc.
is suspected of soliciting business for CDL from companies that compete with Nesther
Inc. Due to this conflict of interest, CDL should terminate business with the agent or
speak to him about the matter to avoid any possible charges or lawsuits.


CMA Canada 143
Conclusion

If CDL follows the recommendations contained in this report, it will allow them to gain a
greater market share and expand operations.


144 CMA Canada
Appendix A SWOT Analysis

Strengths

Smelkin has a large contact network
able to recruit talented people
Offer two types of contract pricing 1. Variable
2. Fixed
Endeavour to deliver, complete service on time, remain accessible to the client
throughout the project, and maintain flexibility in accommodating the clients needs.
Well-known in Canada. Believed to be one of the top five electronic design services
company in the country.
Rick Smelkin, President and CEO, is well educated and experienced in the field.
Management meets every two weeks to discuss CDLs progress.
Board of Directors meets quarterly.
Expense claims must be approved by Carles.
good internal control.
Various sales agents working on behalf of CDL 22 in Canada 3 in USA
Projects given a code name and divided into sub-projects
good internal control
provides confidentiality
Employees are well educated.
Employment contract includes a non-competition covenant.
Great location of CDLs office.
Excellent insurance coverage.
Good advertising and promotion (website, brochure, trade shows).
Relationship with same bank since incorporation.

Weaknesses

VP, Prudence Joy, has too many responsibilities:
chargeable employees and project coordinators report to her.
responsible for contract administration.
responsible for finance
responsible for information technology function.
Venture capital firms unwilling to invest in CDL.
prefer product, software or Internet where the payoff potential is much
greater.
Open to lawsuits if products do not work as designed.
All salespeople are issued credit cards.
increases time spent on credit card reconcilliation
has been neglected.

CMA Canada 145
Companies auditor is a sole-practicioner
bais in order to keep CDLs business.
Lack of consultation between sales and design employees.
Losing some employees due to lack of monetary rewards.
Not able to provide manufacturing services.
contracted-out

Opportunities

Electronics industry, in Canada and around the world has been growing steadily
over the last 25 years.
Canadian government wants to establish Canada as a leading information economy
offer grants and subsidies.
Sales of flat screen monitors have surged dramatically
ISO certification makes firms more attractive.
Bud Magee interested in investing $420,000 in CDL common shares if criteria is
met.

Threats

Numerous competitors in Canada and Internationally.
Independent contractors attractive alternative.
Canadian dollar has strengthened
weakening Canadian design industry.
Large Indian competitor has been quoting very low rates.
Opening sales office in US would increase tax burden.


146 CMA Canada
(2005)
(2004)
(2004)
(2005)
(2004)
(2005)
(2004)
(2005)
(2004)
(2005)
(2004)
(2005)
Appendix B Financial Analysis

Current ratio =
s liabilitie current
assets current
=
1473054
2635685
= 1.79

701633
2182334
= 3.11

Profit Margin on Sales =
Sales Net
Income Net
=
14042197
) 698773 (
= 0.05

15127990
) 136826 (
= 0.01

Debt to Equity Ratio =
equity Total
debt Total
=
2105556
22288
= 0.01

2804329
22288
= 0.01

Asset Turnover =
assets total
sales net
=
3600898
14042197
= 3.9

3528250
15127990
= 4.3

Receivable Turnover =
s recievable trade . avg
sales net
=
2 / ) 1867653 2340366 (
14042197
+
= 6.67

2 / ) 1861253 1867653 (
15127990
+
= 8.11

Recievable turnover in days =
turnover . rec
365
=
67 . 6
365
= 55 days

11 . 8
365
= 45 days

CMA Canada 147
(2005)
(2004)
Appendix C Financial Analysis of Alternatives


$4M per year x next 3 years = $12 million x .7
4M/100 bud. rate = 40000 hrs
4M/90 proposed rate = 44444 hrs
44444 hrs unfavourable
x 100 bud. rate = $4.44M

= $444,444 discount on regular rate x .751 (3 yrs, 10% cost of capital)
= $333,777 opportunity costs.

share swap = 200000 CDL x $1.50 = $300000 CDL
85000 TC x $10 = $850000 TC
$550000 additional revenue for CDL.

Alternative 2

FIL current ratio =
s liabilitie Current
assets Current
=
166601
242750
= 1.46

current ratio =
s liabilitie Current
assets Current
=
167643
241906
= 1.44

FIL valued @ 4 900 000
+ 1 000 000 (cash exchange)
+ 1 500 000 (1000000 CDL shares x $1.50)
7,400,000

CDL assets 3 600 898 difference $200000 favourable
Unrecorded
intang. assets 4 000 000
7 600 000

148 CMA Canada
Markers Comments
Unsuccessful Attempt

General Comments

Although some professional skills are exhibited in this response, it represents an
unsuccessful attempt. The response contains the elements of a strategic approach to
solving a business problem; however, it does not demonstrate an understanding of how
to apply the strategic planning process systematically and effectively. The depth of
analysis is weak and little of the information contained in the situation analysis is used in
the analysis of the strategic alternatives. This results in recommendations that are not
sufficiently supported by case fact.
The quantitative analyses are particularly deficient and it appears that the case facts are
not always understood. Two important issues are not identified in the response: (1) the
current situation with the bankruptcy of Multi-Comm Corp. and the related cancellation
of the Bellville project, which will result in a violation of the bank covenants, and (2) the
declining market for electronic designs in Canada, which is forcing CDL to consider
changing its current focus. By recommending a share issue, the financing requirements
are met, but there are no calculations to support the conclusion that the recommended
strategy will result in CDL being able to meet the bank covenant targets.
Overall, this response demonstrates a need for additional preparation in examination
case writing techniques and further study of the systematic application of the strategic
approach to solving business problems. A better foundation of higher-level cognitive
skills is required before the candidate is ready for entry into the Strategic Leadership
Program.
th
Decile

The response demonstrates an attempt to follow a strategic approach in solving the
case, but it is not well developed.
The current mission statement is identified and a revised mission statement that
incorporates the identified company objectives is provided. However, the response does
not include a critique of the current mission statement identifying where it is insufficient
(e.g. the current statement mentions only the Canadian market, when CDL currently
also targets the US market, albeit to a minor extent). Also, there is no attempt to revise
the mission statement subsequent to the completion of the strategic analysis. A stronger
approach would be to revisit the mission to ensure that the strategic recommendations
are reflected in the statement to help guide future decision making by management.
In solving the business problem, the response appropriately begins with a situation
analysis. Some good case information is brought forward in this analysis; however,
there is also evidence that either some of the case materials are not comprehended or
the purpose of the situation analysis is not understood. For example, the willingness of

CMA Canada 149
Bud Magee to invest funds in the company is identified as an external opportunity this
is a valid financing option specific to CDL. External opportunities are factors in the
environment that are not specific to CDL and that the company can exploit by pursuing
various strategic options. These would include growing markets, available technology
and available resources.
The situation analysis identifies a more than adequate number of strengths, although it
is clear that the majority of the information came from the Backgrounder. Many points
from the Additional Information are not included (e.g. strong documentation processes,
maintaining market share). Few weaknesses are identified, which is inappropriate given
the number of issues presented in the case. As well, the number of opportunities and
threats identified in the response is not adequate.
The response contains an attempt at a financial assessment of CDLs current situation.
However, this analysis is based on the financial statements prior to the MCC
bankruptcy. A stronger report would calculate the net book value and current ratio after
recognizing the loss resulting from the cancellation of project Bellville and removing the
uncollectible receivable.
The situation analysis is appropriately followed with an analysis of several strategic
alternatives, and the following recommendations are clearly stated: (1) merge with FIL,
(2) establish a full time sales office in the US, and (3) do not pursue an alliance with
Tellcall Corp.

The implementation plan and the discussion of the operational recommendations are
barely adequate. The report offers a vague guide to action for CDL in the short term. It
could be strengthened by assigning roles to management to ensure successful
implementation and by offering longer term implementation guidelines. While a few
operational recommendations are offered to management, they could be improved by
analyzing the operational issues in light of the strategic recommendations. For example,
the employee turnover issue will become increasingly important if CDL opens a US
sales office, e.g. the competitive advantage in the US market of having lower costs from
lower Canadian wages will have to be weighed against the risks of losing the most
talented engineers.
Overall, this response represents an inadequate attempt to apply the strategic planning
process. Although the individual components needed to solve a business case are
present, they are not effectively applied to the case situation. The evaluation of the
strategic options makes little use of the information learned from the situation analysis.
There is no attempt to identify the issues of liquidity currently facing the organization, or
to quantitatively determine whether the recommended strategies would allow CDL to
meet its obligations or provide substantial future growth.

150 CMA Canada
Analysis 7
th
Decile

The breadth of the strategic issues identified and analyzed is good the major
alternatives facing CDL are identified in the response (i.e. alliance with Tellcall, merge
with FIL, expansion to US market). However, the depth of analysis of the strategic
alternatives is barely adequate. Given the wealth of information provided in the
Backgrounder and Additional Information, many more pros and cons should be
identified. As well, many of the points identified are quantitative in nature, pertaining to
the financial aspects of the alternatives; very little qualitative information from the case
is used in the strategic analyses.
The breadth and depth of the operational and implementation issues identified and
discussed are not sufficient. An attempt is made to provide recommendations that
address the operational issues that are identified; however, there simply are not enough
operational issues addressed in the response. As well, some of the recommendations
are vague (e.g. time must be spent on a method of formulating quotes) and offer little
to management by way of making effective change or implementing the recommended
strategy. For example, given that the response identifies the fact that US companies
want to deal with ISO certified organizations and ultimately recommends opening a US
sales office, neglecting to make a recommendation on whether CDL should become
ISO certified is inappropriate.
The depth of the quantitative analyses provided in the response is not adequate. There
is no attempt to calculate the impact that the strategic alternatives would have on CDLs
current ratio or net book value, which are clearly outlined as issues in the case material.
Instead, a calculation of FILs current ratio is offered and an inappropriate conclusion is
drawn. As well, much of the quantitative analysis provided for the strategic options is of
limited usefulness. For example, there is no attempt to calculate the potential future
earnings from a merger with FIL; instead, the analysis of this option mainly concentrates
on whether the terms of the merger are fair, which is quite short-sighted.
Overall, the response reflects insufficient depth of analysis of the important issues in the
case.
Integration 9
th
Decile

The situation analysis and the analysis of the strategic, operational, and implementation
issues are largely addressed in isolation of each other. Most of the points made in the
situation analysis are not utilized in the analyses of the strategic alternatives. The only
notable evidence of integrating the strategic alternatives to the identified strengths and
opportunities is the reference in the recommendations that Smelkins extensive contacts
in the Northeastern US make this a great location to consider opening a US sales office.
Preparation of a situation analysis is only one part of the process. For it to be helpful,
the points identified must be applied in deciding on a workable strategy for the
company. For example, if CDL merges with FIL, CDLs good reputation in Canada
(identified as a strength) could be useful in marketing the products created by the
merged company.

CMA Canada 151
There is no real evidence of integration between the strategic alternatives in this
response. There is some evidence of integrating the strategic alternatives to the
implementation issue of financing. However, the only notable example of integration
between a strategic alternative and an operational issue in this response is in the
analysis of Alternative 3 (US sales office), where one of the cons indicates the need to
seek ISO certification to become attractive in the new market. There is no effort to
consider the recommended strategic direction in addressing the operational issues, or
to integrate two operational issues.
Overall, there is very limited evidence of integration in the response. This is a serious
weakness in a strategic report.
Judgment 6
th
Decile

Appropriate emphasis is placed on both strategic issues and operational issues. Less
important issues are not over emphasized, demonstrating good prioritization. As well,
the financing options are appropriately considered in the analysis of the strategic
alternatives, rather than being considered as strategic issues by themselves.
The overall quality of the analyses in the response is less than adequate. The balance
of pros and cons provided for the various strategic options is inadequate largely due to
the limited analyses provided for the alternatives. Without sufficiently thorough
analyses, any recommendations made will not be seen as logical or convincing to
management.
The balance of the quantitative and qualitative analyses is weak, and there is evidence
of incorrect logic in the analyses. For example, in the quantitative analysis of Alternative
2 (FIL merger), the value of FILs intangible assets are added to the $1 million cash
exchange plus the assumed value of CDLs 1 million shares that must be given up. The
result is compared to the assumed value of total assets (both tangible and intangible) of
CDL. This analysis makes little sense. It would be more appropriate to compare the
value of the assets that CDL must give up (i.e. the cash and the estimated market value
of the 1 million CDL shares) against the estimated value of FILs tangible and intangible
assets. It would be even more appropriate to estimated the future gains of the proposed
merger by analyzing the potential profitability of product X15.
There is very little useful quantitative analysis provided in the response and the
seriousness of the potential effects of the MCC bankruptcy on CDLs immediate viability
is not recognized. In this case, it is critical that the solvency of the company be
immediately addressed. This mainly hinges on meeting the required bank covenants.
Therefore, it is important to calculate CDLs expected net book value and current ratio
under each alternative, as well as to determine how the alternative should be financed.
The lack of any such analyses exhibits weak judgment.
Overall, the response does not clearly and explicitly demonstrate that the
recommendations will fulfill the growth and liquidity requirements of the organization.
Although the strategic recommendations logically flow from the analyses, they are not

152 CMA Canada
well supported. As a direct result, the recommendations will not be convincing to CDLs
board of directors.
nd
Decile

All elements of a well-formatted report are present. The table of contents is sufficiently
detailed and customized to the case. The executive summary contains the strategic
recommendations being presented in the report, but does not include the major
operational recommendations. The introduction contains the scope of the report, but
fails to clearly outline the purpose, i.e. why the report is being written. The body of the
report is well organized and makes good use of headings, subheadings and lists where
appropriate.
There are some deficiencies in the language and style used in the response. At times,
statements are made that are vague or use inappropriate words. For example, Contract
for project X15 would be able to receive funding, is provided as a pro to going with the
FIL merger, but there is no explanation of where the funding will come from; therefore,
the statement is vague. Numerous spelling (e.g. persue), punctuation and sentence
structure errors (e.g. This would allow enough time for a location selection an
acquisition of an office,) are in evidence. Otherwise, the tone of the report is
appropriately professional, and tactful.
Overall, the response demonstrates a sufficient level of written communication skills
under examination conditions.

CMA Canada 153
Supplement of Formulae and Tables

Formulae

1. CAPITAL STRUCTURE

a) After-Tax Marginal Cost of Debt:

( )
k k T or
T I
F
b
=

1
1 ( )

where k = interest rate
T = corporate tax rate
I = annual interest payment on debt
F = face value of debt

b) Cost of Preferred Shares:
k
D
NP
p
p
p
=
where D
p
= stated annual dividend payment on shares
NP
p
= net proceeds on preferred share issue

c) Cost of Common Equity:

i) Cost of Common Shares (Capitalization of Dividends with Constant Growth
Rate):
k
D
NP
g
e
e
= +
1

where D
1
= dividend expected for period 1
NP
e
= net proceeds on common share issue
g = annual long-term dividend growth rate

ii) Cost of Retained Earnings:
k r
D
P
g
re e
e
= = +
1

where P
e
= market price of a share
r
e
= expected return on common equity

iii) Capital Asset Pricing Model:

( )
R R R R
j f j m f
= +
where R
j
= expected rate of return on security j
R
f
= risk-free rate
R
m
= expected return for the market portfolio

j
= beta coefficient for security j (measure of systematic risk)

154 CMA Canada
d) Weighted Average Cost of Capital:
k
B
V
k
P
V
k
E
V
k
b p e
=

where B = amount of debt outstanding
P = amount of preferred shares outstanding
E = amount of common equity outstanding
V = B + P + E = total value of firm

2. PRESENT VALUE OF TAX SHIELD FOR AMORTIZABLE ASSETS

a) Present Value of Total Tax Shield from CCA for a New Asset
Present Value =
CdT
d k
k
k
CdT
d+ k
k
k +
+
+
=
+
+
2
21
1 05
1 ( )
.

b) Present Value of Total Tax Shield from CCA for an Asset that is Not Newly
Acquired
Present Value = UCC
dT
d+k

c) Present Value of Total Tax Shield Lost From Salvage
( ) ( )
Present Value =
S
+k
dT
d+k
or
S
+k
dT
d+k
n n
n
1 1
1 n
, depending on cashflowassumptions

Notation for above formulae:
C = net initial investment
UCC = undepreciated capital cost of asset
S
n
= salvage value of asset realized at end of year n
T = corporate tax rate
k = discount rate or time value of money
d = maximum rate of capital cost allowance
n = total life of investment


CMA Canada 155
Table 1
Present Value of One Dollar Due at the End of n Years
( )
P
i
n
=
+
1
1

n 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
01
02
03
04
05
0.990
.980
.971
.961
.951
0.980
.961
.942
.924
.906
0.971
.943
.915
.888
.863
0.962
.925
.889
.855
.822
0.952
.907
.864
.823
.784
0.943
.890
.840
.792
.747
0.935
.873
.816
.763
.713
0.926
.857
.794
.735
.681
0.917
.842
.772
.708
.650
0.909
.826
.751
.683
.621
06
07
08
09
10
.942
.933
.923
.914
.905
.888
.871
.853
.837
.820
.837
.813
.789
.766
.744
.790
.760
.731
.703
.676
.746
.711
.677
.645
.614
.705
.665
.627
.592
.558
.666
.623
.582
.544
.508
.630
.583
.540
.500
.463
.596
.547
.502
.460
.422
.564
.513
.467
.424
.386
11
12
13
14
15
.896
.887
.879
.870
.861
.804
.788
.773
.758
.743
.722
.701
.681
.661
.642
.650
.625
.601
.577
.555
.585
.557
.530
.505
.481
.527
.497
.469
.442
.417
.475
.444
.415
.388
.362
.429
.397
.368
.340
.315
.388
.356
.326
.299
.275
.350
.319
.290
.263
.239
16
17
18
19
20
.853
.844
.836
.828
.820
.728
.714
.700
.686
.673
.623
.605
.587
.570
.554
.534
.513
.494
.475
.456
.458
.436
.416
.396
.377
.394
.371
.350
.331
.312
.339
.317
.296
.277
.258
.292
.270
.250
.232
.215
.252
.231
.212
.194
.178
.218
.198
.180
.164
.149
21
22
23
24
25
.811
.803
.795
.788
.780
.660
.647
.634
.622
.610
.538
.522
.507
.492
.478
.439
.422
.406
.390
.375
.359
.342
.326
.310
.295
.294
.278
.262
.247
.233
.242
.226
.211
.197
.184
.199
.184
.170
.158
.146
.164
.150
.138
.126
.116
.135
.123
.112
.102
.092


156 CMA Canada
Table 1 (contd)
( )
P
i
n
=
+
1
1

n 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
01
02
03
04
05
0.901
.812
.731
.659
.593
0.893
.797
.712
.636
.567
0.885
.783
.693
.613
.543
0.877
.769
.675
.592
.519
0.870
.756
.658
.572
.497
0.862
.743
.641
.552
.476
0.855
.731
.624
.534
.456
0.847
.718
.609
.516
.437
0.840
.706
.593
.499
.419
0.833
.694
.579
.482
.402
06
07
08
09
10
.535
.482
.434
.391
.352
.507
.452
.404
.361
.322
.480
.425
.376
.333
.295
.456
.400
.351
.308
.270
.432
.376
.327
.284
.247
.410
.354
.305
.263
.227
.390
.333
.285
.243
.208
.370
.314
.266
.225
.191
.352
.296
.249
.209
.176
.335
.279
.233
.194
.162
11
12
13
14
15
.317
.286
.258
.232
.209
.287
.257
.229
.205
.183
.261
.231
.204
.181
.160
.237
.208
.182
.160
.140
.215
.187
.163
.141
.123
.195
.168
.145
.125
.108
.178
.152
.130
.111
.095
.162
.137
.116
.099
.084
.148
.124
.104
.088
.074
.135
.112
.093
.078
.065
16
17
18
19
20
.188
.170
.153
.138
.124
.163
.146
.130
.116
.104
.142
.125
.111
.098
.087
.123
.108
.095
.083
.073
.107
.093
.081
.070
.061
.093
.080
.069
.060
.051
.081
.069
.059
.051
.043
.071
.060
.051
.043
.037
.062
.052
.044
.037
.031
.054
.045
.038
.031
.026
21
22
23
24
25
.112
.101
.091
.082
.074
.093
.083
.074
.066
.059
.077
.068
.060
.053
.047
.064
.056
.049
.043
.038
.053
.046
.040
.035
.030
.044
.038
.033
.028
.024
.037
.032
.027
.023
.020
.031
.026
.022
.019
.016
.026
.022
.018
.015
.013
.022
.018
.015
.013
.010


CMA Canada 157
Table 1 (contd)
( )
P
i
n
=
+
1
1

n 21% 22% 23% 24% 25% 26% 27% 28% 29% 30%
01
02
03
04
05
0.826
.683
.564
.467
.386
0.820
.672
.551
.451
.370
0.813
.661
.537
.437
.355
0.806
.650
.524
.423
.341
0.800
.640
.512
.410
.328
0.794
.630
.500
.397
.315
0.787
.620
.488
.384
.303
0.781
.610
.477
.373
.291
0.775
.601
.466
.361
.280
0.769
.592
.455
.350
.269
06
07
08
09
10
.319
.263
.218
.180
.149
.303
.249
.204
.167
.137
.289
.235
.191
.155
.126
.275
.222
.179
.144
.116
.262
.210
.168
.134
.107
.250
.198
.157
.125
.099
.238
.188
.148
.116
.092
.227
.178
.139
.108
.085
.217
.168
.130
.101
.078
.207
.159
.123
.094
.073
11
12
13
14
15
.123
.102
.084
.069
.057
.112
.092
.075
.062
.051
.103
.083
.068
.055
.045
.094
.076
.061
.049
.040
.086
.069
.055
.044
.035
.079
.062
.050
.039
.031
.072
.057
.045
.035
.028
.066
.052
.040
.032
.025
.061
.047
.037
.028
.022
.056
.043
.033
.025
.020
16
17
18
19
20
.047
.039
.032
.027
.022
.042
.034
.028
.023
.019
.036
.030
.024
.020
.016
.032
.026
.021
.017
.014
.028
.023
.018
.014
.012
.025
.020
.016
.012
.010
.022
.017
.014
.011
.008
.019
.015
.012
.009
.007
.017
.013
.010
.008
.006
.015
.012
.009
.007
.005
21
22
23
24
25
.018
.015
.012
.010
.009
.015
.013
.010
.008
.007
.013
.011
.009
.007
.006
.011
.009
.007
.006
.005
.009
.007
.006
.005
.004
.008
.006
.005
.004
.003
.007
.005
.004
.003
.003
.006
.004
.003
.003
.002
.005
.004
.003
.002
.002
.004
.003
.002
.002
.001


158 CMA Canada
Table 1 (contd)
( )
P
i
n
=
+
1
1

n 31% 32% 33% 34% 35% 36% 37% 38% 39% 40%
01
02
03
04
05
0.763
.583
.445
.340
.259
0.758
.574
.435
.329
.250
0.752
.565
.425
.320
.240
0.746
.557
.416
.310
.231
0.741
.549
.406
.301
.223
0.735
.541
.398
.292
.215
0.730
.533
.389
.284
.207
0.725
.525
.381
.276
.200
0.719
.518
.372
.268
.193
0.714
.510
.364
.260
.186
06
07
08
09
10
.198
.151
.115
.088
.067
.189
.143
.108
.082
.062
.181
.136
.102
.077
.058
.173
.129
.096
.072
.054
.165
.122
.091
.067
.050
.158
.116
.085
.063
.046
.151
.110
.081
.059
.043
.145
.105
.076
.055
.040
.139
.100
.072
.052
.037
.133
.095
.068
.048
.035
11
12
13
14
15
.051
.039
.030
.023
.017
.047
.036
.027
.021
.016
.043
.033
.025
.018
.014
.040
.030
.022
.017
.012
.037
.027
.020
.015
.011
.034
.025
.018
.014
.010
.031
.023
.017
.012
.009
.029
.021
.015
.011
.008
.027
.019
.014
.010
.007
.025
.018
.013
.009
.006
16
17
18
19
20
.013
.010
.008
.006
.005
.012
.009
.007
.005
.004
.010
.008
.006
.004
.003
.009
.007
.005
.004
.003
.008
.006
.005
.003
.002
.007
.005
.004
.003
.002
.006
.005
.003
.003
.002
.006
.004
.003
.002
.002
.005
.004
.003
.002
.001
.005
.003
.002
.002
.001
21
22
23
24
25
.003
.003
.002
.002
.001
.003
.002
.002
.001
.001
.003
.002
.001
.001
.001
.002
.002
.001
.001
.001
.002
.001
.001
.001
.001
.002
.001
.001
.001
.001
.001
.001
.001
.001
.001
.001
.001
.001
.001
.001
.001
.001
.001
.001
.001
.001
.001
.001
.001
.001

CMA Canada 159
Table 2
Present Value of One Dollar Per Year n Years at i%
( )
P
i
i
n
n
=

+
1
1
1

n 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
01
02
03
04
05
0.990
1.970
2.941
3.902
4.854
0.980
1.942
2.884
3.808
4.713
0.971
1.914
2.829
3.717
4.580
0.962
1.886
2.775
3.630
4.452
0.952
1.859
2.723
3.547
4.330
0.943
1.833
2.673
3.465
4.212
0.935
1.808
2.624
3.387
4.100
0.926
1.783
2.577
3.312
3.993
0.917
1.759
2.531
3.240
3.890
0.909
1.736
2.487
3.170
3.791
06
07
08
09
10
5.796
6.728
7.652
8.566
9.471
5.601
6.472
7.325
8.162
8.983
5.417
6.230
7.020
7.786
8.530
5.242
6.002
6.733
7.435
8.111
5.076
5.786
6.463
7.108
7.722
4.917
5.582
6.210
6.802
7.360
4.767
5.389
5.971
6.515
7.024
4.623
5.206
5.747
6.247
6.710
4.486
5.033
5.535
5.995
6.418
4.355
4.868
5.335
5.759
6.145
11
12
13
14
15
10.368
11.255
12.134
13.004
13.865
9.787
10.575
11.348
12.106
12.849
9.253
9.954
10.635
11.296
11.938
8.760
9.385
9.986
10.563
11.118
8.306
8.863
9.394
9.899
10.380
7.887
8.384
8.853
9.295
9.712
7.499
7.943
8.358
8.745
9.108
7.139
7.536
7.904
8.224
8.560
6.805
7.161
7.487
7.786
8.061
6.495
6.814
7.103
7.367
7.606
16
17
18
19
20
14.718
15.562
16.398
17.226
18.046
13.578
14.292
14.992
15.678
16.351
12.561
13.166
13.753
14.324
14.877
11.652
12.166
12.659
13.134
13.590
10.838
11.274
11.690
12.085
12.462
10.106
10.477
10.828
11.158
11.470
9.447
9.763
10.059
10.336
10.594
8.851
9.122
9.372
9.604
9.818
8.313
8.544
8.756
8.950
9.129
7.824
8.022
8.201
8.365
8.514
21
22
23
24
25
18.857
19.661
20.456
21.244
22.023
17.011
17.658
18.292
18.914
19.523
15.415
15.937
16.444
16.936
17.413
14.029
14.451
14.857
15.247
15.622
12.821
13.163
13.489
13.799
14.094
11.764
12.042
12.303
12.550
12.783
10.836
11.061
11.272
11.469
11.654
10.017
10.201
10.371
10.529
10.675
9.292
9.442
9.580
9.707
9.823
8.649
8.772
8.883
8.985
9.077


160 CMA Canada
Table 2 (contd)
( )
P
i
i
n
n
=

+
1
1
1

n 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
01
02
03
04
05
0.901
1.713
2.444
3.102
3.696
0.893
1.690
2.402
3.037
3.605
0.885
1.668
2.361
2.975
3.517
0.877
1.647
2.322
2.914
3.433
0.870
1.626
2.283
2.855
3.352
0.862
1.605
2.246
2.798
3.274
0.855
1.585
2.210
2.743
3.199
0.848
1.566
2.174
2.690
3.127
0.840
1.547
2.140
2.639
3.058
0.833
1.528
2.107
2.589
2.991
06
07
08
09
10
4.231
4.712
5.146
5.537
5.889
4.111
4.564
4.968
5.328
5.650
3.998
4.423
4.799
5.132
5.426
3.889
4.288
4.639
4.946
5.216
3.785
4.160
4.487
4.772
5.019
3.685
4.039
4.344
4.607
4.833
3.589
3.922
4.207
4.451
4.659
3.498
3.812
4.078
4.303
4.494
3.410
3.706
3.954
4.163
4.339
3.326
3.605
3.837
4.031
4.193
11
12
13
14
15
6.207
6.492
6.750
6.982
7.191
5.938
6.194
6.424
6.628
6.811
5.687
5.918
6.122
6.303
6.462
5.453
5.660
5.842
6.002
6.142
5.234
5.421
5.583
5.725
5.847
5.029
5.197
5.342
5.468
5.576
4.836
4.988
5.118
5.229
5.324
4.656
4.793
4.910
5.008
5.092
4.487
4.611
4.715
4.802
4.876
4.327
4.439
4.533
4.611
4.676
16
17
18
19
20
7.379
7.549
7.702
7.839
7.963
6.974
7.120
7.250
7.366
7.469
6.604
6.729
6.840
6.938
7.025
6.265
6.373
6.467
6.550
6.623
5.954
6.047
6.128
6.198
6.259
5.669
5.749
5.818
5.878
5.929
5.405
5.475
5.534
5.585
5.628
5.162
5.222
5.273
5.316
5.353
4.938
4.990
5.033
5.070
5.101
4.730
4.775
4.812
4.844
4.870
21
22
23
24
25
8.075
8.176
8.266
8.348
8.422
7.562
7.645
7.718
7.784
7.843
7.102
7.170
7.230
7.283
7.330
6.687
6.743
6.792
6.835
6.873
6.313
6.359
6.399
6.434
6.464
5.973
6.011
6.044
6.073
6.097
5.665
5.696
5.723
5.747
5.766
5.384
5.410
5.432
5.451
5.467
5.127
5.149
5.167
5.182
5.195
4.891
4.909
4.925
4.937
4.948


CMA Canada 161
Table 2 (contd)
( )
P
i
i
n
n
=

+
1
1
1

n 21% 22% 23% 24% 25% 26% 27% 28% 29% 30%
01
02
03
04
05
0.826
1.510
2.074
2.540
2.926
0.820
1.492
2.042
2.494
2.864
0.813
1.474
2.011
2.448
2.804
0.807
1.457
1.981
2.404
2.745
0.800
1.440
1.952
2.362
2.689
0.794
1.424
1.923
2.320
2.635
0.787
1.407
1.896
2.280
2.583
0.781
1.392
1.868
2.241
2.532
0.775
1.376
1.842
2.203
2.483
0.769
1.361
1.816
2.166
2.436
06
07
08
09
10
3.245
3.508
3.726
3.905
4.054
3.167
3.416
3.619
3.786
3.923
3.092
3.327
3.518
3.673
3.799
3.021
3.242
3.421
3.566
3.682
2.951
3.161
3.329
3.463
3.571
2.885
3.083
3.241
3.366
3.465
2.821
3.009
3.156
3.273
3.364
2.759
2.937
3.076
3.184
3.269
2.700
2.868
2.999
3.100
3.178
2.643
2.802
2.925
3.019
3.092
11
12
13
14
15
4.177
4.279
4.362
4.432
4.489
4.035
4.127
4.203
4.265
4.315
3.902
3.985
4.053
4.108
4.153
3.776
3.851
3.912
3.962
4.001
3.656
3.725
3.780
3.824
3.859
3.543
3.606
3.656
3.695
3.726
3.437
3.493
3.538
3.573
3.601
3.335
3.387
3.427
3.459
3.483
3.239
3.286
3.322
3.351
3.373
3.147
3.190
3.223
3.249
3.268
16
17
18
19
20
4.536
4.576
4.608
4.635
4.657
4.357
4.391
4.419
4.442
4.460
4.189
4.219
4.243
4.263
4.279
4.033
4.059
4.080
4.097
4.110
3.887
3.910
3.928
3.942
3.954
3.751
3.771
3.786
3.799
3.808
3.623
3.640
3.654
3.664
3.673
3.503
3.518
3.529
3.539
3.546
3.390
3.403
3.413
3.421
3.427
3.283
3.295
3.304
3.311
3.316
21
22
23
24
25
4.675
4.690
4.703
4.713
4.721
4.476
4.488
4.499
4.507
4.514
4.292
4.302
4.311
4.318
4.323
4.121
4.130
4.137
4.143
4.147
3.963
3.971
3.976
3.981
3.985
3.816
3.822
3.827
3.831
3.834
3.679
3.684
3.689
3.692
3.694
3.551
3.556
3.559
3.562
3.564
3.432
3.436
3.438
3.441
3.442
3.320
3.323
3.325
3.327
3.329


162 CMA Canada
Table 2 (contd)
( )
P
i
i
n
n
=

+
1
1
1

n 31% 32% 33% 34% 35% 36% 37% 38% 39% 40%
01
02
03
04
05
0.763
1.346
1.791
2.131
2.390
0.758
1.332
1.766
2.096
2.345
0.752
1.317
1.742
2.062
2.302
0.746
1.303
1.719
2.029
2.260
0.741
1.289
1.696
1.997
2.220
0.735
1.276
1.674
1.966
2.181
0.730
1.263
1.652
1.936
2.143
0.725
1.250
1.630
1.906
2.106
0.719
1.237
1.609
1.877
2.070
0.714
1.225
1.589
1.849
2.035
06
07
08
09
10
2.588
2.739
2.854
2.942
3.009
2.534
2.678
2.786
2.868
2.930
2.483
2.619
2.721
2.798
2.855
2.433
2.562
2.658
2.730
2.784
2.385
2.508
2.598
2.665
2.715
2.339
2.455
2.540
2.603
2.650
2.294
2.404
2.485
2.544
2.587
2.251
2.356
2.432
2.487
2.527
2.209
2.308
2.380
2.432
2.469
2.168
2.263
2.331
2.379
2.414
11
12
13
14
15
3.060
3.100
3.129
3.152
3.170
2.978
3.013
3.040
3.061
3.076
2.899
2.931
2.956
2.974
2.988
2.824
2.853
2.876
2.892
2.905
2.752
2.779
2.799
2.814
2.826
2.683
2.708
2.727
2.740
2.750
2.618
2.641
2.658
2.670
2.679
2.556
2.576
2.592
2.603
2.611
2.496
2.515
2.529
2.539
2.546
2.438
2.456
2.469
2.478
2.484
16
17
18
19
20
3.183
3.193
3.201
3.207
3.211
3.088
3.097
3.104
3.109
3.113
2.999
3.007
3.012
3.017
3.020
2.914
2.921
2.926
2.930
2.933
2.834
2.840
2.844
2.848
2.850
2.758
2.763
2.767
2.770
2.772
2.685
2.690
2.693
2.696
2.698
2.616
2.621
2.624
2.626
2.627
2.551
2.555
2.557
2.559
2.561
2.489
2.492
2.494
2.496
2.497
21
22
23
24
25
3.215
3.217
3.219
3.221
3.222
3.116
3.118
3.120
3.121
3.122
3.023
3.025
3.026
3.027
3.028
2.935
2.937
2.938
2.939
2.939
2.852
2.853
2.854
2.855
2.856
2.773
2.775
2.775
2.776
2.777
2.699
2.700
2.701
2.701
2.702
2.629
2.629
2.630
2.630
2.631
2.562
2.562
2.563
2.563
2.563
2.498
2.499
2.499
2.499
2.499

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