Philippine Christian University

FAITH. CHARACTER. SERVICE

Taft Ave. cor. Pedro Gil St., Malate, Manila Philippines

GRADUATE SCHOOL OF BUSINESS MANAGEMENT

MASTER OF BUSINESS ADMINISTRATION

FINANCIAL MANAGEMENT
MBA 215

CASE STUDY:
Case 14-1: CAMELLA & PALMERA HOMES, INC.

PREPARED AND SUBMITTED BY:

HARSEY JOY I. PUNZALAN, RRT
SOFIA CRISTINA B. RAMOS, RRT

SUBMITTED TO:
PROF. FAUSTINA RANA
CASE BACKGROUND
On July 4,1995, Many B. Villar chairman of C & P Homes incorporation was
contemplating the prospects of success of the initial public offering of the stocks of
his company. There was a favorable reception to the offer. Yet he was concerned
about the magnitude of the offer which, at P7.2 billion, what is the largest IPO ever
buy a privately held business in the Philippines. One aspect that concerned him was
the likely comparison of C&P homes with another real estate company that went
public in the previous year, Megaworld. He thought that the IPO reduce the
company's asset base. He wondered how C&P homes compared with Megaworld in
profit margins and financial leverage. He requested one of his managers, Rick Mapa,
to calculate the following financial indicators for his review:
 Break-even point
 Operating leverage
 Financial leverage
Villar then requested an analysis and interpretation of these indicators. He
requested to Rick Mapa that he relate the results to the difference in the way the two
companies operated and their respective strategies in addressing their markets.
CAMELLA & PALMERA HOMES, INC.
C & P Homes was the largest private low-cost housing developer in the
Philippines. The company estimated that it had sold over 45,000 homes since it
started operation in 1977. The company sold low-cost houses under the brand name
Camella and Palmera. In 1994, the company sold 10,761 homes at an average price
of P292,000 each. C&P homes sold most of its houses prior to the start of
construction and usually within six months from acquisition of the site.
The company grew fast in recent years because of the great need for low-cost
housing and the relative economic prosperity. In the past, low-cost homes were
financed through government mortgage lending and limited mortgage loans from
private banks. In 1987, the government unified the guidelines for all government
lending for housing and increase its funding of these programs. The move further
accelerated the growth of low-cost housing.
The strategy of C & P homes was to offer houses that were of good value to
home-buyers. This way, it hoped to become profitable and to establish leadership in
the industry. The specific elements of this strategy you were to focus on low-cost
housing, selective land acquisition, and the achievement of economies through large
scale construction activities and efficient mortgage processing. The focus on locals
housing enabled C&P homes to deliver the right products to its customers at the right
price. The other three elements of the strategy were meant to make C&P homes the
lowest cost producer of homes. It selectively acquired land that it could immediately
develop and sell. It did not engage in speculation. By conducting construction
projects simultaneously, the company-controlled construction costs and spread
common marketing expenses over many housing units. Efficiency in the processing
of mortgage financing documents further reduced costs. The company's construction
projects were undertaken by independent contractors under its supervision. It sold
the homes through independent brokers.
MEGAWORLD PROPERTIES AND HOLDINGS, INC.
Megaworld Properties and Holdings was founded by Andrew L. Tan in 1989.
Megaworld became known in a short time as a developer of large-scale, urban
projects, emphasizing high-rise residential and office and master-planned townhouse
communities. The company’s resources included a special team of local architects,
engineers and designers and foreign experts of international renown like the America
architectural group Skidmore, Owings and Merill and the London-based structural
engineering consultancy group Ove Arup and Partners.
Megaworld focused on existing and established urban centers. It undertook its
own development and redevelopment work to produce high-quality housing and
offices to accommodate urban consumers belonging to the higher income groups. In
the medium-term future, the company intended to develop low-cost housing units
equivalent to 20% of the total cost of its projects in order to comply with the
government’s requirement for socialized housing under Republic Act. No. 7279.
Megaworld’s strategies led to its current activities like acquisition of land,
development of high-quality structures, joint venture agreements with landowners
where it was the developer-financier, and sourcing of funds from financial institutions
under joint venture agreements.
CASE ANALYSIS
Ric Mapa gathered the financial information from the annual reports of C & P
Homes and Megaworld. To ensure comparability of figures, he selected a year,
1993, in which both companies submitted audited financial statements. He thought
that the cost of units of real estate or housing were entirely variable while the selling,
general and administrative expenses were entirely fixed costs. On this basis, he
planned to calculate the break-even sales of both companies and the operating
leverage. Likewise, he stimated the interest expenses of the two companies.

a. Calculate the break-even sales, operating leverage, and financial leverage

of C & P Homes and Megaworld.

b. Interpret your results. Do the figures reflect the differences in the

strategies of the two companies?

c. Specify the key points of your report to Villar. Was C & P Homes, strategy
more successful than Megaworld’s?
 COMPARATIVE REVENUES AND COST OF C & P HOMES AND MEGAWORLD
1993 (IN MILLION PESOS)

C & P HOMES MEGAWORLD

SALES 2,894.5 600.1
COST OF UNITS SOLD 1,597.6 386.5
SELLING, GENERAL
ADMINISTRATIVE 436.1 42.0
EXPENSES
ESTIMATED INTEREST 175.2 49.2
EXPENSES
see annex a-c.

I. VIEWPOINT
 Manny Villar
II. TIME CONTEXT
 July 4, 1995
III. DEFINITION OF THE PROBLEM
 C & P Homes wanted to know whether the figures showed that the
company had the better strategy.
IV. OBJECTIVES
MUST:
 To evaluate the attractiveness of C&P Homes to the public.
 To assess the quality of the project to persuade the higher income
groups to invest in the company.
WANT:
 To ensure that the C&P Homes have a good value for homebuyers.
 To strengthen the company’s leadership in the industry.
V. AREAS OF CONSIDERATION
Strengths:
1. C & P Homes was the largest private low-cost housing developer in the
Philippines.
2. C & P homes sold most of its houses prior to the start of construction
within six months from acquisition of the site.
Weaknesses:
1. Megaworld focuses on development and redevelopment housing and
offices to accommodate urban consumers.
 2. Megaworld intended to develop low-cost housing units to comply with
the government’s requirement for socialized housing.
Opportunities:
1. With the Republic Act. No. 7279, C&P Homes can go to high-end
market.
2. The company-controlled construction costs and spread common
marketing expenses over many housing units.
Threats:
1. 20% of the budget of lending housing owners must be committed to
Republic Act. No. 7279.
2. Megaworld can also be engage in low-cost housing because of the
Republic Act. No. 7279

VI. ALTERNATIVE COURSES OF ACTION

ACA 1: HIRE A CONSULTANT THAT WILL ADVICE ABOUT THE
C & P HOMES INC., STRATEGIC PLANS

ADVANTAGES DISADVANTAGES

Conducted several meetings between C & P
officers and representatives of its various
creditors
Strategic plan was reached which had a good
chance of being approved by the creditors
Foreign representatives would even fly to
Manila just for the sole purpose of attending
these strategic planning meetings
It would require the creditors to take a hit,
i.e., suffer some losses

ACA 2: CONDUCT A MARKET RESEARCH

ADVANTAGES DISADVANTAGES

Research is expensive that need huge costs

Improve the sales of C&P Homes.
to shoulder.
Market research takes time and need proper
More customers/investors will have their interest
research with the right questions and
in the company
audience
ACA 3: REDUCTION OF EXPENSES TO IMPROVE FINANCIAL PERFORMANCE

ADVANTAGES DISADVANTAGES
 Lack of income or cash deficiencies will not
Verify if low strategic performance led to poor keep you from competing at the same level
financial results. as your competitors.

Improve company performance or grow the Financial failures can often threaten the
business including financial components. company existence.

ACA 3: MONITORING THE PROGRESS OF C & P HOMES

ADVANTAGES DISADVANTAGES

Your end goals and market position will

Allows the organization to accurately reflect the
affect the specific decisions you want to
operational activities and priorities.
make

You might want to consider assessing your

Reviewing your performance can help you check business cash flow, working capital, cost
your business goals and plan effectively for base and growth. Other key financial ratios
improving the business. are efficiency ratios, sales growth, liquidity
ratios and financial leverage

VII. RECOMMENDATION
We recommend the market research for the C&P Homes, to be informed about the
consumers wants and needs and even their competitors.
 VIII. ACTION PLAN
OBJECTIVES ACTIVITIES TIMELINE BUDGET PERSON IN REMARK/STATUS
CHARGE
Strategic Proceed a 2-3 Php Chairman On-going planning
Planning in meeting with months 150,000- with Chairman/CEO
Low-cost other company 250,000 of the company
production
but quality
home
Securing all Legal business 6-12 Php 75,000- Legal To establish trust
the legal registrations months 120,000 Department and and confidence of
documents Accounting the other company
Well Advertisements 3-5 Php Marketing Growth and
developed, months 800,000- development of the
flexible, and 1,500,000 new venture
transparent
livestock
marketing
system
Development Conducting 2-5 years Php 200-400 Research and Strengthen
of new research and Million Development business reputation
innovations development into Team in the field of
restructuring Housing Project’s
plan
ANNEX A
C & P HOMES MEGAWORLD
(IN MILLION PESOS) (IN MILLION PESOS)
SALES 2,894.5 600.1
COST OF UNITS SOLD 1,597.6 386.5
SELLING, GENERAL
CONTRIBUTION 1,296.90 213.60
MARGIN
ADMINISTRATIVE 436.1 42.0
EXPENSES
EBIT 860.80 171.60
ESTIMATED INTEREST 175.2 49.2
EXPENSES
NET INCOME TAX 685.60 122.40

C & P HOMES MEGAWORLD

(IN MILLION PESOS) (IN MILLION PESOS)
FIXED COST 611.30 91.20
(ADMINISTRATIVE &
ESTIMATED INTEREST
EXPENSES)
CONTRIBUTION 1,296.90 213.60
MARGIN
BREAK-EVEN POINT 0.47 0.43
SALES 2,894.50 600.10
BREAK-EVEN SALES 1,364.34 256.22

C & P HOMES MEGAWORLD

(IN MILLION PESOS) (IN MILLION PESOS)
EBIT 860.80 171.60
NET INCOME TAX 685.60 122.40
FINANCIAL LEVERAGE 1.26 1.40

C & P HOMES MEGAWORLD

(IN MILLION PESOS) (IN MILLION PESOS)
CONTRIBUTION 1,296.90 213.60
MARGIN
EBIT 860.80 171.60
OPERATING 1.51 1.24
LEVERAGE
ANNEX B
Yes, the 2 companies reflect the differences in the strategies.
C&P Homes needed to sell 1,364.34 Million pesos while Megaworld needed
to sell 256.22 Million pesos to breakeven that is the amount of sales to equal the
fixed costs incurred regardless on the amount of sales. The financial leverage tells
us that the higher the degree of financial leverage, the more volatile earnings will be.
Thus, Megaworld is more volatile in earnings than C&P Homes. C&P Homes has a
higher operating leverage which means that the company has more business risk
because of high proportion of fixed costs.

ANNEX C
No, C&P Homes' strategy does not mean more successful than Megaworld
because it has a higher operating leverage than Megaworld which is more expose to
business risk.