FINANCE AND ECONOMICS 22 CASES

001. The Rise and Fall of All Terrain Vehicles (ATV)

Case Type: industry analysis; finance & economics.
Consulting Firm: NERA Economic Consulting first round job interview.
Industry Coverage: automotive, motor vehicles.
Case Interview Question #00569: Our client Polaris Industries (NYSE: PII) is a manufacturer of snowmobiles, ATV (All Terrain Vehicle), and
neighborhood electric vehicles. Headquartered in Medina, Minnesota, USA, the company had total operating income of $220 million on revenue of
$2.0 billion in fiscal year 2010.
For this case, your consulting team is doing market research work for the ATV division of Polaris Industries. The Head of ATV division wants to
understand the cyclicality of the ATV business. He has some historical information about the industry wide sales of ATVs from 1980 till year 2007:
see the chart below (Figure 1). The client wants to know the exact reasons for the cyclicality of ATV business. Specifically:

Why did the ATV sales fall in 1980?

Why did ATV sales then flat out around 2000s?
Why did they rise in the 2000s?
What will happen after year 2007?

Additional Information: (to be given to you if asked)

ATV, or All Terrain Vehicle, also known as a quad, quad bike, three-wheeler, or four-wheeler, is defined by the American National Standards
Institute (ANSI) as a vehicle that travels on low-pressure tires, with a seat that is straddled by the operator, along with handlebars for steering
control. As the name implies, it is designed to handle a wider variety of terrain than most other vehicles.

ATV is primarily an off-road vehicle used for recreational purposes. It has 4 wheels, and is typically a little smaller than a motorcycle and people
ride it like a motorcycle.
Users It is very popular among kids and adults, or ages 15 to 50.
Notes to the Interviewer:
Dont allow the candidate to open the case with a framework. Instead, dive straight into the case. This presents a more uncommon challenge: having
to think on ones feet constantly. There are hundreds of reasons why annual ATV sales have fluctuated so much. The candidate should be able to
brainstorm ideas and conduct a conversation with the interviewer to identify which reasons make the most sense and which ones do not.

The interviewer should allow the conversation to float to different areas, challenging the candidate as he or she analyzes different factors. This is
largely a discussion case, but the interviewer should keep the discussion focused and should press the candidate constantly.
Possible Answer:
This Industry Analysis type of case tests a candidates understanding of macro-economics and how the economic cycles impact industry wide sales.
In the 1980s: initially ATVs were 3 wheelers and they had a lot of safety concerns. So the U.S. government essentially banned them. That explains
the drastic fall.
In the 1990s: 4 wheeler ATVs became popular as they were safer. People wore helmets. ATVs were restricted to off-road trails. This caused the
stabilization of sales.
2000 2007: The U.S. economy was going through a housing market bubble. People had a lot of credit available. They used the money to buy
ATVs, and also other luxury products or recreational goods. So the rise in sales number.
Year 2007: A credit crunch in the housing and financial market.
After 2007: ATV sales will likely fall again and stabilize somewhere in the halfway mark by year 2011 or maybe 2012.
Note:
The U.S. economy went through several cycles between 1980 and 2000. The dot-com bubble was around year 2002.
ATV user demographics the user population remained about the same.
ATV prices grew with inflation

002. Peter Pan Bus Lines Resumes Daily NYC-Boston Service

Case Type: improve profitability; finance & economics.
Consulting Firm: L.E.K. Consulting first round summer internship interview.
Industry Coverage: transportation.
Case Interview Question #00607: Our client Peter Pan Bus Lines is a long-distance bus transportation company headquartered in Springfield,
Massachusetts, United States. The company operates daily intercity bus service between Boston and New York City. They operate with buses leaving
every hour from 7AM to 10PM,inclusive (meaning buses leave at 7AM and 10PM and all other hours in between), from both Boston and NYC.

There are 3 questions that you should answer for this case:
1. What is the minimum number of buses the company needs to operate?
2. What are some ways the Peter Pan Bus Lines company can increase profits?
3. How would you value the Peter Pan company?
Suggested Approach:
This is an analytical case asking the candidate three specific questions to answer in succession. Below is a rough outline for solving each of the three
questions.
1. The candidate should realize that a bus leaves the first shift from NYC & Boston at 7AM and will be able to make the return trip at 11AM. This
pattern repeats. So, you only need 4 buses from both locations, for a total of 8 buses.
2. The interviewer was looking for brainstorming potential solutions here. The candidate should give a list of recommendations to increase profits.
The profitability framework Profits = Revenues Costs could be used to guide your discussion.
3. In valuing the company, the interviewer is looking for the broad approach, not the actual number. The candidate should first walk through a P&L
(profit and loss) and then the method for a FCF (free cash flow) valuation.
Additional Information: (to be given to candidate if requested)
The following facts are to be disclosed during the course of the case.
It takes about 4 hours to make a one-way trip from NYC to Boston.
For the sake of simplicity, we will assume that the bus can leave right away to make the return trip, meaning passengers loading and unloading
time is negligible.
One-way ticket costs $15 and there is no round trip packages.
There are 40 seats per bus, and assume that every bus is operating at full capacity (no empty seat).
Possible Solution:
Interviewer: So, how would you approach figuring out the number of buses required?

Candidate: First I would need to know how long the trip takes between NYC and Boston. I believe it takes roughly 3-4 hours, is this correct?
Interviewer: Yes, you can assume 4 hours.
Candidate: What about the time it takes to unload and load passengers and refuel before making the return trip?
Interviewer: Lets assume thats negligible.

Candidate: OK. So assuming the first bus leaves NYC at 7am, it can return from Boston at 11am, then leaves NYC again at 3pm, and so on. Ive drawn a
diagram (see Figure 1 below) to help outline how this would work. We need 4 buses from each location leaving at 7, 8, 9, and 10am. The 11am bus in
each location will be the next trip for the 7am bus that arrives there. Thus we need 8 buses in total.

Interviewer: Good. So now can you brainstorm some ways to increase profits for this bus company?
Candidate: Yes, but first I want to know a few additional points about the client company. Are we currently operating at full capacity? Additionally
what is the competition like?
Interviewer: Yes, assume all buses are 100% filled. Additionally we are in a highly competitive market and raising prices would be unwise.
Candidate: OK. So in brainstorming ways to raise profits, profits = revenues costs, I want to think about ways to increase revenues, reduce costs, or
both.
First with revenues, we can possibly add additional services such as selling snacks or magazines on the buses or in the terminal.
We could also add more departures to the schedule, however Im not sure people would be interested in taking buses that arrive later than 2AM.
Finally we can think about an acquisition to boost profits. Potentially with an acquisition we might be in a better position to increase prices
because well have more pricing power.
Interviewer: Thats all very good. What about the cost side?

Candidate: Well, first with the acquisition case I mentioned before we have potential to reduce overall costs given operational synergies such as
equipment, repairs, and cost of other services we offer. Besides that, we can look at our buses and potentially upgrade our fleet to more fuel-efficient
vehicles, or vehicles that will have a longer useful life or require fewer repairs. We would have to do cost-benefit analysis on such options. Also I
would want to review other cost areas such as marketing, labor, and so forth, to see whether we can reduce those.
Interviewer: Thats good. Now before you tell me how to value the company, starting with revenues can you walk through the major components of
the profit and loss statement (P&L) starting with revenues?
Candidate: Sure, after revenues would be all gross costs including fixed costs & variable costs. Subtracting these costs would give you EBITDA
(earnings before interest, taxes, depreciation and amortization). Now we can use this metric to value the company via comparable multiples if we
know of any other recent transactions with bus companies. However, I assume this isnt common so we will need to proceed further and value the
company using free cash flows (FCF).
Interviewer: Very good observation. How do you get to free cash flows from EBITDA?
Candidate: Well, first we need the Net Income number. We subtract out any depreciation and amortization to get EBIT. Finally we apply the
companys tax rate to get net income. Now assuming there is no interest expense, we can use net income to get to FCF. If there is interest expense we
need to get Net Operating Profit after tax which removes the tax effected interest expense from net income.
Note: here the interviewer can interject and ask what would make up depreciation and amortization (D&A) depreciation on buildings and buses,
amortization on other potential acquired intangibles like goodwill.
Interviewer: Very good. Lets assume no interest expense here and start with Net Income.
Candidate: OK, so FCF = Net Income Net Fixed Assets Net Working Investment.
The first term Net Fixed Assets, or change in net fixed assets, is Capital Expenditures (e.g. new buses or real estate we purchased) minus
Depreciation on any property, plant and equipment (PP&E).
The other term Net Working Investment represents working Current Assets (Necessary cash, Accounts receivable, Inventory, other current assets)
Automatic Sources (Accounts payable, anything accrued, other non-interest bearing liabilities).
Interviewer: Excellent. Thank you.
003. Which Cowboy Will Walk Out Alive From a Truel?

Case Type: math problem; finance & economics.

Consulting Firm: Cornerstone Research first round job interview.
Industry Coverage: Agriculture, Farming, Aquaculture.
Case Interview Question #00557: There are three cowboys: Cowboy A, Cowboy B, and Cowboy C. They are standing in an equilateral triangle in a
truel (a three-person duel). Each cowboy has one gun and one bullet and they all must shoot each other at the same time. Whoever Cowboy A
shoots has a 100% chance of dying. Whoever Cowboy B shoots has a 60% chance of dying. Whoever Cowboy C shoots has a 40% chance of dying. So,
which cowboy is most likely to walk out alive?
Note to Interviewer:
As the interviewer you should not allow the interviewee to apply any framework for this math, probability and game theory related case. Just jump
straight into the case and present the questions successively as the candidate answers each one. Try to throw the candidate off pace by not allowing a
framework and changing the scenarios. It should feel very different for the candidate, but a well-practiced one will roll with the punches and take a
hold and drive the case.
Question #1: Which cowboy is most likely to walk out alive?
Possible Answer:
Calculate the probability of each cowboy dying:
Cowboy A: (60% + 40% ) / 2 = 50%
Cowboy B: (100% + 40% ) / 2 = 70%
Cowboy C: (100% + 60% ) / 2 = 80%
Thus, Cowboy A is the most likely to walk out alive.
Question #2: In the previous situation, the cowboys didnt know each others probabilities. Now assume that the cowboys know everyones
probabilities; then who is the most likely to walk out of there alive?
Possible Answer:
In this scenario, each cowboy will try to eliminate the stronger one of the rest two, in order for himself to survive.
Cowboy A will shoot Cowboy B because Cowboy C has higher chance of dying than B
Cowboy B will shoot Cowboy A because Cowboy C has higher chance of dying than A
Cowboy C will shoot Cowboy A because Cowboy B has higher chance of dying than A
Therefore, Cowboy C is the most likely to walk out alive.

Question #3: What is the relationship between parts 1 and 2? What exactly caused the change in the most likely to survive?
Possible Answer:
There is an inverse relationship between the probability of survival and the amount of information known. Being a better shooter makes the cowboy
a more likely target, and thus hurts his probability of survival. The key drive is the availability of information.

Question #4: Can you provide a business example of when having asymmetric information can lead to different outcomes?
Possible Answer:
There are almost countless examples. An excellent candidate should brainstorm several and describe the relation to each. Some examples are:
international trade, corporate mergers and acquisitions, insider trading, contract bargaining, government negotiations, new market entry, etc.
A = 60% & 40% of dying if shot by cowboys B or C
B = 100% & 40% of dying if shot by A or B
C = 100% & 60% if shot by A or B
Therefore, A has d highest possibility of surviving if shot by either B or C
The possible answer to Question #1 provided here is wrong. To see why, imagine that every cowboy has a 100% chance of killing whomever they
shoot. According to the formulas provided, this would mean the probability that every cowboy dies is 100%. But that cant be the case, since its
possible for two cowboys to shoot eachother, in which case the third cowboy would live.
To calculate the correct answer, you can use the following formula, called the law of total probability: Pr(B dies) = Pr(B dies | A shoots B and C
doesnt shoot B)*Pr(A shoots B and C doesnt shoot B) + Pr(B dies | A doesnt shoot B and C shoots B)*Pr(A doesnt shoot B and C shoots B) + Pr(B
dies | A shoots B and C shoots B)*Pr(A shoots B and C shoots B) + Pr(B dies | A doesnt shoot B and C doesnt shoot B)*Pr(A doesnt shoot B and C
doesnt shoot B). If we assume that each shooter will shoot the other two with equal probability, and that the shooter make their decisions
independently, then this formula becomes Pr(B dies) = 100%*25% + 40%*25% + Pr(B dies | A shoots B and C shoots B)*25% + 0%*25%. The easiest
way to calculate Pr(B dies | A shoots B and C shoots B) is to recognize that Pr(B dies | A shoots B and C shoots B) = 1 Pr(B lives | A shoots B and C
shoots B) = 1 Pr(B lives | A shoots B)*Pr(B lives | C shoots B) = 1 (1 100%)*(1 40%) = 100%. So we now have Pr(B dies) = 100%*25% +
40%*25% + 100%*25% + 0%*25% = 25% + 10% + 25% + 0% = 60%.
004. How to Analyze Economics of Electricity Market in Argentina?
Case Type: finance & economics; industry analysis.
Consulting Firm: Analysis Group first round job interview.
Industry Coverage: energy industry.
Case Interview Question #00525: You are a consultant on a project to study the economics of the electricity market in the South American country
of Argentina. The current population of Argentina is around 41 million. The electricity market in Argentina has three types of electricity plants: coal
fired, oil fired and gas fired. The table below summarizes the economics of each type.
Type of power plant based on fuel source
Coal Oil Gas
Cost per unit of electricity

35

75

Price per unit of electricity

50

100 175

Annual market supply available (units of electricity) 10

15

125
25

The market operates on a Marginal Price basis That is, the price of all units of electricity sold will be equal to the price of the last unit sold. For
example, if the market demand equals 50 units then the price of all 50 units sold will be $175 per unit irrespective of it is coal fired, oil fired or gas
fired. How would you analyze the electricity market in Argentina?
Possible Answers:
This industry analysis case tests the candidates economics fundamentals and quantitative skills. The candidate just needs to answer the following
questions.
Question #1: Draw a demand curve for a demand range 0 to 50 units.

Possible Answer:
See Figure 1, the demand curve for electricity market in Argentina.
Question #2: Who makes the most profits ($) when the market demand is 35 units?
Possible Answer:
At demand = 35 units the market price per unit will be $175 per unit. From the calculations done in the table below, the oil fired power plants will
make more profits.
Type of power plant

Coal

Oil

Gas

Cost per unit

35

75

125

Price per unit

175

175

175

15

10

Capacity sold at demand = 35 units 10

Profits

(175-35) * 10 = 1400 (175-75) * 15 = 1500 (175-125) * 10 = 500

Question #3: Assuming no further capacity addition, within what demand ranges
(1) Coal fired plants make more $ profits than others?
(2) Oil fired plants make more $ profits than others?
(3) Gas fired plants make more $ profits than others?
Possible Answer:
a. Coal fired plants are the most profitable for all values of demand between 1 and 25 units.
b. Oil fired plants are the most profitable when demand is between 26 and 50 units
c. Gas fired plants are never the most profitable. They make the least dollar profits among the 3 in the given demand range
Calculations: Profits in dollars
Plant type

Coal

Oil

Gas

Demand = 1 10

(50-35) * 10 = 150

(100-75) * 15 = 375

Demand = 11 25 (100-35) * 10 = 650

Demand = 26 50 (175-35) * 10 = 1400 (175-75) * 15 = 1500 (175-125) * 25 = 1250

Question #4: What are the implications of this kind of market conditions for your client who is in this market?
Possible Answer:
A new competitor who may enter the market can change the market economics depending on what type of power plant the new player sets up and
how much capacity it installs.
It is important to forecast demand accurately and if required diversify the portfolio with a combination of different types of power plants.
005. Mail Order Cataloger Service Merchandise Profit Declines
Case Type: improve profitability; finance & economics.
Consulting Firm: Booz & Company first round job interview.
Industry Coverage: retail.
Case Interview Question #00500: Our client Service Merchandise is a mail order cataloger (company who publishes and operates mail order
catalogs) and retailer chain of catalog showroom stores carrying fine jewelry, toys, sporting goods, and electronics. Mail order is a term which
describes the buying of goods or services by mail delivery. A mail order catalog is a publication containing a list of general merchandise from a
company who buys or manufactures goods, and then markets those goods to prospective customers.
During the 1970s, Service Merchandise was the nations top mail order catalog retailer. At its peak, the company achieved more than $4 billion in
annual sales. As the company expanded, it began to open showrooms nationwide, mostly in the vicinity of major shopping malls. Recently, however,
the client has been experiencing declining profit per catalog. Give me five different possible causes.

Possible Approach:
Try to be focused and structured: I started to give 5 answers. I probably should have been a bit more organized with my answers because I sounded
like I just mentioned anything that came to mind. Based on the interviewers background (PhD in Economics), I expected an economics related case.
As it turned out, the case went into economics later on. I used the MR = MC equation to structure my case at the later stage.
Prioritize the issues and filter out unneeded information: I started the case with Marginal Cost (MC) first, since that was easier to estimate. I then
moved on towards figuring out the MR (Marginal Revenue) equation. I needed information on the demand and the revenue by customer groups.
Additional information sought: I asked for MC information for catalogs and MR information for customers.
I used a graph to illustrate the MR-MC lines (they love Price-Demand graphs).
Possible Answer:
Interviewer: (Interviewer drew a chart showing declining profitability/catalog over the past 4 years) Can you provide with 5 possible causes for this
decline?
Candidate: (I used a clipboard and drew up five bulleted numbers (1-5) and provided the following five possible causes)
Starting to target unprofitable customers
Items in catalog have lower margin
People are not ordering from catalogs
Shipping Costs could be higher
Products are not popular among customers
Interviewer: (It turns out that they are sending catalogs to customers who order less) How should the client company determine who to send to and
whom not?

Candidate: In a competitive industry such as mail order catalogs, MR = MC (Know the background of the interviewer, I thought this would be a good
place to start). Lets start with the marginal costs. Do you have any information on this?
Interviewer: Marginal cost = $3
Candidate: I will need some information on Marginal Revenues. I would like to rank customers in deciles based on the revenue each provides.
Interviewer: The interviewer had actually done a regression and gave me the equation of the curve: MR = 50 2 * customer percentile. Customer
percentile: Profit by customers ranked. This was based on the customer database of the client.

Candidate: Solving for MC = MR. Gives the percentile as the answer.

006. Philadelphia Orchestra to Increase Revenues from Ticket Sales
Case Type: increase sales or revenues; finance & economics
Consulting Firm: NERA Economic Consulting first round job interview.
Industry Coverage: entertainment & performing arts.
Case Interview Question #00469: The client Philadelphia Orchestra is a symphony orchestra based in Philadelphia, Pennsylvania, United States.
Founded in 1900, the Philadelphia Orchestra is one of the Big Five American orchestras (the other four: New York Philharmonic, Boston Symphony
Orchestra, Chicago Symphony Orchestra, and Cleveland Orchestra). The orchestras home is the Kimmel Center for the Performing Arts, where it
performs its subscription concerts, numbering over 130, in Verizon Hall.
The Philadelphia Orchestra is currently exploring the possibilities of increasing their ticket sales. So far, they have relied heavily upon corporate
donations and government grants for revenues, and they would like to increase the proportion of revenues obtained from ticket sales. How would
you help them to accomplish that goal?
Possible Answer:
This is an increasing revenues/sales type of mini business cases, with the emphasis being on whether the candidate is able to focus in quickly on the
single main point of the case: supply demand curve. If the candidate does not immediately jump to it, ask him or her to draw the supply-demand
curve after some quick discussion. The following conversation is one of the many possible discussions.
Candidate: I would like to start by looking at different sources of revenues. Since you have outlined the problem as one of revenues alone, I am
proposing not to get into the costs side of the profitability equation until later.
Interviewer: Good. Explain what you will look at.
Candidate: Well, the way I look at it, revenues are a function of ticket price and the volume of the tickets sold. We can look at either, or both of these in
turn.
Interviewer: There is not much to be done with the volume. The tickets are always sold out.
Note to Candidate: At this point it was clear that the case giver wanted this to be a price driven case. The interviewer did not want to discuss other
ideas such as merchandising, CDs, tours, etc. as a source of revenue, as can be evidenced below.
Candidate: Well, in that case, let us focus on the prices then. How are the tickets priced now?
Interviewer: Yes, lets examine the prices. Draw me a demand curve for the tickets.

Candidate: (Thinking aloud is OK at this point) Well, I think, without having done a careful study of the customer segmentation, my rst guess is that
the customers for a symphony are not very price sensitive, which means that there is probably plenty of room for price movement with little effect on

quantity. Right?
Interviewer: Right. What does it mean for the demand curve itself?
Candidate: Kind of steep (see figure 1).
Interviewer: Good. Now, what about the supply curve?
Candidate: I dont think the supply will vary at all. No matter what the price is, there are x number of seats available at any given time.
Interviewer: Very good. Lets look at the supply demand curve that you have drawn now. What if I tell you that they are priced at P1 now?
Candidate: Well, since the equilibrium price seems to be at P, I see there is definitely some scope for price increase.
Interviewer: Good. There were other aspects of this case, but lets stop here for now. How do you think you did?
Note to Interviewer:
Obviously, this is a simple case to test candidates understanding of basic economic theory, in particular supply demand curve, and of course you can
lengthen it if you wish. Once the candidate correctly identifies the supply demand curve, you can stop the case.
007. How Much to Ask for a 5 Year Oil Field Lease?

Case Type: pricing & valuation; finance & economics.

Consulting Firm: Cognizant Business Consulting (CBC) first round job interview.
Industry Coverage: Oil, Gas & Petroleum Industry.
Case Interview Question #00463: You, a strategy consultant working at Cognizant Business Consulting (CBC), have been hired by a wealthy client
who owns a big oil field in Texas, and he does not know what to do withit. The price of the oil is at present $100 per barrel, and it has been that way
for quite a while. Currently it costs $110 per barrel to lift the oil. Recently a major oil company has just bid on his plot of land for a 5 year oil lease.
What should he do? How much should he ask for the 5 year oilfield lease?
Possible Answer:
This is a mini business case that tests the candidates understanding of basic financial theory and simple option pricing model. Since MBA candidates
are expected to have taken a fundamental corporate finance course, this case question is a fair game.
The interviewer should feel free to let the candidates wander all over the map, but he or she must arrive at the following conclusion: one does not
price the oil reserve purely based on the existing price to lift and rene the oil. Rather, the oil company is bidding to have the option to lift the oil in
the future. This then gets into option pricing theory, Black-Scholes, etc. The underlying asset in this case is the oil itself, and the volatility component
of the Black-Scholes model comes from the volatility of the oil prices. The strike price of the option is the cost of lifting the oil from the ground.
008. Brazil to Withdraw from International Tin Cartel
Case Type: finance & economics; industry analysis.
Consulting Firm: Cornerstone Research 2nd round job interview.
Industry Coverage: mining & metals production; international trade.
Case Interview Question #00347: The International Tin Council (ITC) was an organization which acted on behalf of the principal tin producers in
the world to buy up surplus tin stocks to maintain the price at a steady level. The organization was established in 1956, following on from the work of
the International Tin Study Group, which was established to survey the world supply and demand of tin.
Essentially ITC is a tin mining cartel consisting of four biggest tin producing countries: Indonesia, China, Brazil, and Russia. Every year the four
governments get together to decide how much tin to produce according to demand forecasts, and allocate the production quota evenly among them.
Now, Brazil is thinking about withdrawing from the cartel. The President of Brazil comes to you for advice. What would you tell her?
Possible Answer:
This case is to test your understanding of basic microeconomics concepts. I need to determine if it is more profitable for Brazil to mine according to
the guidelines of the cartel, or on their own.
Candidate: What are the relative production costs of each of the countries?
Interviewer: Brazil and Russia have a 10% cost advantage over Indonesia and China (Alternatively, you may be asked how you would find out the
production costs of each country).
Candidate: What volume does each country produce and sell, historically?

Interviewer: Last year, Brazil and Russia both produced twice as much as Indonesia and China (you may get actual numbers, but very often you will
get broad generalizations like these).
Candidate: What is the demand curve facing the producers?
Interviewer: A basic downward sloping demand curve (drawn as such on a piece of paper).
I wanted to derive the price implied by the supply and demand curves. The KEY to this question is to derive the world supply curve. The basic concept
is from ECON 101: supply curve is the sum of marginal cost (MC) curve of all producers. Here we only have four producers.
Based on what I found out from my questions, I know that the supply curve will be a step function and can compare the price with Brazils marginal
cost. Based on Brazils cost position on that supply curve, I can decide whether Brazil will be better off producing on their own.
Recommendations for Client:
I recommended that Brazil go it alone, based on their favorable cost position, and the fact that the remaining countries did not have enough volume to
open the flood-gates in an attempt to punish me for leaving the cartel.
Interviewees Comments:
My answer was right on, but I did not mention the possibility of non-cartel producers who could fill the world supply or the effect of other substitute
products of tin such as aluminium, synthetic polymer, plastics, etc.
Notes:
Game theory suggests that cartels are inherently unstable, as the behaviour of members of a cartel is an example of a prisoners dilemma. Each
member of a cartel would be able to make more profit by breaking the agreement (producing a greater quantity or selling at a lower price than that
agreed) than it could make by abiding by it. However, if all members break the agreement, all will be worse off.
There are several factors that will affect the firms ability to monitor a cartel:

Number of firms in the industry

Characteristics of the products sold by the firms
Production costs of each member
Behaviour of demand
Frequency of sales and their characteristics

009. CarMax to Tighten Car Loans & Auto Finance Policy

Case Type: math problem; new business; finance.

Consulting Firm: Capital One 2nd round job interview.
Industry Coverage: automotive, motor vehicles; retail; financial services.
Case Interview Question #00334: Our client CarMax (NYSE: KMX) is a used car retailer and dealership headquartered in Richmond, Virginia, USA.
Their business has been stagnating in recent years. They are located in a low to middle-income area and in the past have only sold cars to customers
who are willing to pay 100% of the cost up-front or can obtain bank financing. In order to boost sales, CarMax is considering offering car loans to
customers that the dealership itself will finance.
To be eligible for a loan, customers must undergo a complete credit check (which we assume to be accurate). The credit check rates potential car
buyers on a scale of 0 to 100, where 0 corresponds to a 0% chance of paying off the loan and 100 corresponds to a 100% chance of paying the loan in
full. Each loan only lasts 1 year in which payments are made monthly and the entire loan will be paid off in 1 years time. Buyers ultimately fall into
two categories, those that pay off the loan entirely, and those that default.
The Question: What should be the cutoff level where CarMax decides to give potential buyers the loan? What issues might cause you to alter this
cutoff-level?
Additional Information: (to be given to you when asked)
Average cost of a used car to CarMax: $6,000.
Average price of car sold to customer: $7,000.
Minimum down payment for all customers: $1,000.
Average loan defaulter makes three months of payments before defaulting.
Possible Answer:
Although this case looks like a typical starting a new business/service case, I did not really use any framework because this case is more of a
question of establishing where the break-even marks would lie. I did all the calculations on the average.
Candidate: So what is the average cost of each car and how much does our client CarMax sell them for?
Interviewer: The dealerships average cost per car is $6,000. We sell them for an average of $7,000.
Candidate: What is the minimum down payment? Do all customers default at an amount relative to their credit report (i.e. a potential buyer with an
80 credit rating will pay the down-payment and 80% of the remaining loan)? How much do we make on the loans?
Interviewer: The minimum down payment is $1,000 regardless of credit rating. The average default is after three months. Assume we make nothing
on the loans; they are only used to entice in additional customers.
At this point, I stated to crank through some of the math. We make a profit margin of only $1,000 on each car. For this to be worthwhile we must
make more on additional cars sold and paid for in full than what we lose in loan defaulters.

Net profit to the dealership for a good loan: $7,000 $6,000 = $1,000.
Total loss to the dealership for a default: $6,000 (average cost of car) $1,000 (down payment) $1,500 (three months payment before default) =
$3,500.

This means that we need to have 4 good loans for every 1 bad loan to turn a profit/not lose money. If 4/5 of loans must be good, then a credit rating
of 80 should be our cutoff. At this point I drew the following graph for the interviewer to illustrate my point and to discuss other issues to consider:
I would probably be tempted to raise the cutoff above 80, at least in the beginning. This is for two reasons:
(1) We are not sure how successful our client will be with this process, so it would be better to start more conservatively and if successful, ramp up
the operation.
(2) At the 80 cutoff we are working very hard for diminishing profits, where at the 90 cutoff the potential rewards are much higher.
Alternative solution and other possible issues to consider:
Another possible solution would be to lower the cutoff level for higher risk loans but raise the minimum down payment required. This would
change our risk profile.
Look at the cash flow situation of the client. If a few unexpected bad loans in a row would bankrupt our client, then we may want to raise the
cutoff.
Examine expected economic conditions looking forward. If we sense that the economy will be poor in the future, we also may want to increase the
cutoff point.
The use of warranties or add-ons, paid at the time of purchase, that force customers to pay more up-front would also allow us to lower the cutoff
levels. For example, it we allow a customer to purchase a two-year warranty for $1,000 that is paid for in full at the time of purchase, it reduces
our overall risk exposure.
Avg Cost of car = 6000
Avg Price of car = 7000
Avg min down payment = 1000

Term of loan = 12 months

Avg defaulter defaults after making 3 payments
Costs: Car cost, Loan Financing, Operations
Assume financing costs & operating costs for the loan program = 0
Assume 0% interest on loans
Assume X% default:
Total revenue = 1000 + (X/100)*(500*3) + {(100-X)/100}*(500*12)
Total Cost = 6000
Breakeven => 6000 = 1000 + (X/100)*(500*3) + {(1-X)/100}*(500*12)
500,000 = 1500X + 600,000 6000X
100,000 = 4500X
X = 22.22%
Therefore, with a 22.22% default rate, minimum score = 77.77%
010. Capital One Auto Finance to Revamp Loan Issuing System
Case Type: new business; math problem; finance.
Consulting Firm: Capital One 2nd round job interview.
Industry Coverage: financial services; banking.
Case Interview Question #00329: Capital One Financial Corp. (NYSE: COF) is a McLean, Virginia, United States-based bank holding company
specializing in credit cards, home loans, auto loans, banking, and savings products. Based in Plano, Texas, Capital One Auto Finance (COAF) is the auto
loans division of Capital One. It is thelargest Internet auto lender, as well as one of the top US auto lenders overall.
The COAF division has a loan-issuing operation that requires the following steps:
The car loan application is generated at a branch office.
A complete applicant background check is performed at the branch office.
The application and background check are sent to a loan processing office.
The background check is updated and verified (this takes much less time than original check).
The car loan is either approved or denied.
Recently, Capital One Auto Finance division is considering getting rid of the first background check and only relying on the loan processors check to
speed the process. If the loan processor does the whole check with the proposed new software system, the check takes one additional hour per
application at the processors office. Should Capital One Auto Finance implement the revised new system or not? Why?

Additional Information:
The average profit margin for a good loan (i.e., loans which are repaid) is $0.20 per dollar loaned.
The average marginal loss for a bad loan (i.e., loans which are not repaid) is $0.50 per dollar loaned.
50% of the applicants pass the first background check.
90% pass the second background check.
Possible Answers:
What I would like to do first is to calculate the annual profits of the original system and compare those to the annual profits of the proposed new
systems. With that in mind, I would ask the interviewer how many auto loan applications are filled out per year in Capital One Auto Finance division.
What followed were a series of questions designed to help calculate the annual profits of the two systems. For the sake of brevity, the actual questions
have been left out. The following facts, however, were revealed:
1. General:
Number of auto loan applicants is roughly ~100,000 per year.
Average value per car loan is $10,000.
Given: Average profit margin for a good loan: $0.20 per dollar loaned.
Given: Average marginal loss for a bad loan: $0.50 per dollar loaned.
2. Original system:

Default rate under the original system: 10%.

Processing costs under the original system: $100/application.
Given: Acceptance rate under the original system: 45%.
50% of the applicants pass the first background check.
90% pass the second background check.
3. Proposed new system:

Default rate under the proposed system: 5% (estimated).

Processing costs under the proposed system: $60/hour.
Processing time per application under the proposed system: 1 hour.
Expected acceptance rate under the proposed system: 40%.
Additional costs for the new program: $50/application.
4. Based on the information provided, the following profit calculations could be made for both the original system and the proposed new systems.

A. Original System:
Revenues:

Dollars loaned: 100,000 applications * 45% loans per application * $10,000 per loan = $450MM.
Revenues per dollar loaned: (90% Good * $0.20 10% Bad * $0.50) = $0.13.
Total revenues: $450MM * 0.13 = $58.5MM.
Costs: $100 processing fee per application * 100,000 applications = $10MM.
Profit: $58.5MM $10MM = $48.5MM.
B. Proposed New System:
Revenues:
Dollars loaned: 100,000 applications * 40% loans per application * $10,000 per loan = $400MM.
Revenues per dollar loaned: (95% Good * $0.20 5% Bad * $0.50) = $0.165.
Total revenues: $400MM * 0.165 = $66MM.
Costs:
Processing fee: $60/hour * 1 hour/application * 100,000 applications = $6MM.
Additional costs: $50/application * 100,000 applications = $5MM.
Total costs: $11MM.
Profit: $66MM $11MM = $55MM.
Recommendations for Client:
At first glance, it seems that Capital One Auto Finance should progress with the proposed new system. There are additional costs, however, that the
auto loan division should consider, such as costs associated with retraining employees, system installation costs, and so on. That said, there might be
additional benefits, as well. For example, a faster loan processing speed may help the company get more business.

Interviewers Comments:
This case obviously tests your analytical skills. Do not attempt to answer this question without working through the calculations on a piece of paper.
If your math skills are poor, this strategy could easily backfire, making you look stupid. This case is relatively straightforward, but make sure that you
have all the information necessary to develop an answer.
011. Capital One Cross Selling Prepaid Phone Card?
Case Type: new product; finance & economics.
Consulting Firm: Capital One final round job interview.
Industry Coverage: telecommunications; financial services.
Case Interview Question #00256: Suppose you have just been appointed the manager of the Cross Sells team at Capital One (NYSE: COF). You and
your team are responsible for evaluating opportunities to market non-credit card products to our credit card customers. This usually involves
products from outside vendors that we can sell toour customers at a premium.
One potential cross-sell opportunity that is sitting on your desk right now is the Prepaid Phone Carda piece of plastic you can use to pay for long
distance telephone calls. Users of the card would call an 800 number, enter the cards PIN, and then enter the destination telephone number. The

outside vendor tracks card usage and minutes remaining. Your responsibility is to determine if the product will be profitable for Capital One and how
to maximize this profit.
First, take a few moments to determine what are the most important factors that will help you decide to accept or reject the Phone Card cross-sell.
Questions to Consider:
Following is a list of some of the most important questions to consider:
How much does each Phone Card cost Capital One?
Are there any other costs involved, such as a set-up fee?
Are there any constraints on how many minutes each Phone Card has?
Are there any constraints on how much we can sell the cards for?
How much do competitors charge for the Phone Cards?
How much do our cross-sell products usually sell for?
How many customers usually buy our cross-sell products?
What distribution channels are available for marketing the Phone Cards to our customers?
How much would this marketing cost?
Here are some other questions you might have thought of, but for simplicitys sake, we will not consider their implications during the remainder of
the case:
How does the Phone Card opportunity compare with other cross sells we are considering? Maybe the product is profitable, but theres another,
even more profitable product we could offer instead.
How do our customers feel about receiving cross sell offers? Are there any who have told us that they do not want to receive these offers? If so,
our market size may be somewhat limited.
Does offering a Phone Card to a credit card customer have any impact on their profitability as a credit card customer? If they buy the Phone Card,
we will charge the fee to their Capital One credit card, and if they carry a balance (i.e. dont pay off their bill every month), then we can earn
interest on the price of the Phone Card.
If a customer purchases a Phone Card, might that purchase indicate something about the customers credit risk that we wouldnt otherwise have
known? Maybe the customers who would want to buy Phone Cards are the ones whose phones have recently been turned off for non-payment! If
this is true, then offering this cross-sell would be even MORE attractive, since it would help us to identify these customers before they charge off
(i.e. default on their credit card debt).
Assumptions
Luckily, the vendor who wants to sell us the Phone Cards has already provided a lot of the information you need in an introductory e-mail. The e-mail
has several key points:

The phone card may be sold at any price, and other companies have sold the cards for up to $0.75 per minute.

The card may be sold with any number of minutes on it.

Capital One must pay $0.20 per minute sold.
Capital One must pay $2.00 per card sold for account set-up, which includes card materials, the vendors system programming, and postage.
The vendor notes that the Phone Card could be a good addition to Capital Ones cross sell program, which ordinarily offers products in the $5 to
$30 price range.
Question #1: Lets assume that Capital One has decided to sell 60-minute Phone Cards at a price of $30 each. How much profit do we make on each
card sold?
Possible Answer: Capital Ones profit per card is $16. For your reference, the equation is shown below:
Profit per card sold = (Revenue per card) (Expense per card) = $30 (($0.20/min * 60 min) + $2.00) = $16

Question #2: Does anything big seem missing from the above equation?
Possible Answer: The thing that we havent considered yet is marketing costs. (In reality, we havent considered several things, but the lack of
marketing expense has the biggest impact.) It will cost Capital One to tell our customers about the Phone Card offer, but we didnt include any of that
expense in the equation on the previous section.
Question #3: How should Capital One market this product?
Possible Answer: There are several different distribution channels we could use.
Statement Inserts Little slips of paper we put inside customers monthly statements, which they return to us when they mail us their payments.
Bangtails Slips of paper that are attached to the backs of the envelopes that customers use to mail in their payments. If they are interested in
buying the product, they can rip off the stubs and put them inside the envelopes.
Statement Messages A line or two of text typed on the remittance stub of each statement (the part a customer rips off and mails back with the
check). It might say something like, Check this box if you would like to purchase a Capital One Phone Card, good for 60 minutes of long distance
calling, for only $30!
Direct Mail We could send our customers a letter-separate from their monthly statement-describing the Phone Cards in detail.
Outbound Telemarketing We could place telephone calls to our customers describing the cards and asking them if they would like to purchase
one.
Question #4: Please take a few moments to think about the distribution channels above. How are they similar? How are they different? What factors
would be most important in determining which distribution channel you should use? In other words, what additional information would you need to
know about each channel to decide which is best? For the purposes of this case, you do not need to think about all the variables for every distribution
channeljust try to think of the two main variables that apply to all of them.
Possible Answer: The two most important factors you need to consider are cost and response rate.
Cost: It is easy to see that cost will vary a lot depending on what distribution channel you decide to use. For example, with outbound telemarketing,
you have to pay the salary of the telemarketer plus the cost of the call (or outsource the job to a professional telemarketing firm, which isnt cheap,
either). If you decide to use direct mail, you will need to pay the cost of printing the letter and other marketing materials, plus the envelope, plus the
postage. On the other extreme, if you decide to go with statement questions, then it costs us nothing-we already print statements anyway, and we
have automated scanners to capture the responses.

Response Rate: The percent of customers you solicit who decide to purchase the Phone Card will vary considerably as well. And as you might suspect,
cost and response rate are often positively correlated-the more a marketing effort costs, the more people respond to it, and vice versa. For example, a
lot of people might respond to a direct mail solicitation, but far fewer would respond to the statement question. After all, its hard to miss a letter in
your mailbox, but you could easily overlook a line or two at the bottom of your statement. Plus, if we send out a letter, we have a lot of room to
include persuasive text and beautiful photos discussing the benefits of the Phone Card, but if we decide to go with a statement question, we have only
two short lines of text to make the sale. Having more space and flexibility to promote the product would have a big impact on what percent of people
choose to buy it.
Additionally, there are lots of other factors you might have thought of that also deserve consideration. A few are outlined briefly below:
Time to Market: It takes a lot more time to use some of these channels than others. If we thought a lot of other companies were going to increase
their marketing of Phone Cards in the near future, we might decide to use a channel that gets us to market fastest.
Operational Impact: Going with one channel might take a few hours of a single persons time, whereas another channel might require us to
mobilize an entire department for a week. Although this sort of implication can be included in the cost consideration above, it is also valuable to
consider it separately.
Customer Perception and Preference: Some customers dont like receiving telemarketing calls from us, so we need to consider this when
formulating our marketing campaigns.
Question #5: The decision of which distribution channel to use is a very interesting one, but it is too lengthy to consider here. Lets assume that you
decide to use the statement insert channel. Each insert will cost you $0.04, which includes everythingall the way from the graphic designers time,
to the cost of printing them, to the cost of stuffing them in envelopes. And dont worryour postage costs wont go up. We already send all of our
customers statements anyway, and since we are very careful to make the inserts extremely lightweight, we wont incur any incremental postage costs
from marketing this product.
Assuming that we must sell 60-minute cards for $30, what response rate would be required to break even on the insert?

Hint: Breaking even means that you neither gain money nor lose money on a projectyour total profit is $0. The break-even point for a given
variable is a very useful figure in business, since it tells you the point when you start making (or losing!) money.
Possible Answers: There are a number of different ways you could have chosen to solve this break-even problem, but the answer is the same no
matter which way you do it.
Method 1: Assume that you mail 100 inserts, and then determine how many people would have to respond for the profit to equal zero.
Let R = the number of responders, net profit = 0 = (Revenue per card sold) (Expense per card sold) = $30*R [($0.20*60)*R + $2.00*R +
(100*$0.04)] = 30R 12R 2R 4, 16R = 4, R = 0.25 people per hundred, so R = 0.25%
Method 2: Same as method 1, except you dont assume a certain number of customers.

Let R = response rate, net profit = 0 = (Revenue per card sold) (Expense per card sold) = $30 [($0.20*60) + $2 + ($0.04/R)] = 30 12 2
(0.04/R), (0.04/R) = 16, 16R = 0.04, R = 0.25%
Method 3: Break even occurs when (Profit per piece mailed) = (Marketing cost per piece mailed).
Response rate R = (# of cards sold / # of pieces mailed), You can multiply any expression by (1/R)*R, or (# pieces mailed/ # cards sold)*(# cards
sold/# pieces mailed), since this expression is equal to 1. Recall from the assumptions that marketing cost per piece mailed = $0.04, so (Profit/piece
mailed)*(# pieces mailed/# cards sold)* (# cards sold/# pieces mailed) = $0.04.
After you cancel out pieces mailed from the first two elements of the equation above, you get the following equation: (Profit/card sold)*(# cards
sold/# pieces mailed) = $0.04.
This evaluates to (Profit/card sold) * R = $0.04, since R = (# cards sold/# pieces mailed). Recall from earlier in the case that the profit per card
(without marketing expense) is $16, therefore, $16R = $0.04, R = 0.25%
Any way you look at it, the answer is the sameif more than 0.25% of customers who receive the Phone Card offer decide to purchase a card, then
we will make a profit. If fewer than 0.25% of customers respond, then we will lose money.
Does 0.25% sound like a reasonable expectation? Although its impossible to tell in advance what the actual response rate would be, 0.25% sounds
achievable, so the Phone Card cross sell is definitely worth testing.
Final Note: Actual case interviews are dynamic, one-on-one interactions with an interviewernot just some problems laid out on paper. You are
encouraged to ask intelligent questions and engage in discussion around the problem. Were not just looking for great analytical skills
communication counts, too.
You may find that Capital Ones case interviews have a more quantitative focus than the cases given by other firms. This is intentionalCapital Ones
cases are examples of the sort of work people do at Capital One every day. By discussing actual problems taken from everyday work, job candidates
get a taste of what working at Capital One is really like.
012. Thermo Fisher Concerned By High Working Capital Requirement
Case Type: finance & economics.
Consulting Firm: Deloitte Consulting second round job interview.
Industry Coverage: healthcare: hospital & medical.
Case Interview Question #00254: Your client Thermo Fisher Scientific (NYSE: TMO) is a large medical equipment manufacturer and life sciences
supply company that was created in 2006 by the merger of Thermo Electron and Fisher Scientific. 46% of the companys sales are in life sciences, 20%
in healthcare, and 34% in industrial/environmental and safety.

The client has called you in because it feels its working capital requirements are much higher than those of its competitors. How would you help
Thermo Fisher solve its problem?
Additional Information:
This is a financial accounting case focused on a medical device company. The discussion should be conversational but exacting on details. There are
no handouts so the candidate should rely on the general data given/created by the interviewer. The basic objective of this case is to test knowledge of
the Balance Sheet and how it applies to business operations.
Note to Interviewer: Read this information well before you administer the case. Manage the case discussion and allow the candidate to formulate a
plan based on the assumptions and key evidence provided below (case-specific). Offer prompts when necessary and provide the following
information if he/she responds correctly and directly to the stimulus offered.
Part #1: Financial Data Have the candidate identify the current assets (CA) and current liabilities (CL).
Possible Answer:
Current assets consist of cash, inventory, and accounts receivable and current liabilities consist of accounts payable and short term debts.
Part #2: Company Information In this part the interviewer should provide background information on the client company.
The company Thermo Fisher Scientific is made up of three divisions. The high inventory problem can be traced to a division acquired by the client
about two years ago. The division manufactures equipment for arthroscopic surgery, namely capital equipment and blades which sell are similar to
razors and razor blades, just much more sophisticated and expensive.
Part #3: Inventory Ask the candidate to discuss possible reasons why inventories might be so high.
Possible Answer: sales, poor forecasting, obsolescence.
Part #4: Reasons for Inventory problem Explain to the candidate that technology has been changing rapidly and the rate of obsolescence is
extremely high. As earlier sales forecasts (shortly after the acquisition) had been overly optimistic, the client now finds itself loaded with obsolescent
finished goods inventory. Then ask the candidate to recommend correction actions to remedy the problem.
Possible Answer: Determine appropriate levels of inventory such that excess inventory is reduced and customer demands are met. Factors that
should be considered Product demand, manufacturing lead times, customer expectations on order lead times.
Part #5: Next Steps Tell the candidate that the client has 2.5 years of capital equipment finished goods inventory while NONE needs to be carried
since these items can be manufactured after receiving the order (i.e. The finished good product is no longer sold.) Then have the candidate wrap up
the conversation.
Possible Answer:
With respect to technology, while certain aspects of the product may have changed substantially, other are just as likely to have stayed similar to
what was previously used and could be salvaged. One could dismantle the product and reuse parts to manufacture the new devices. Selling off the

inventory to distributors in less advanced healthcare markets is another way to salvage some of the investment. Alternately write off the non
salvageable component parts.
Candidates Notes: Working capital consists of current assets minus current liabilities, then look at each element of CA and CL to find the problem.
Interviewer pressed for a list of CAs and CLs before we talked more about the company details.
013. Belgium Considers Privatizing National Lottery to Cut Debt
Case Type: industry analysis; organizational behavior; economics.
Consulting Firm: Booz Allen Hamilton (BAH) final round job interview.
Industry Coverage: government & public sector; entertainment.
Case Interview Question #00248: Suppose you are a senior executive at Booz Allen Hamilton (BAH). The other day you met the Belgian Minister of
State Owned Enterprises and he asked you whether it would be a good idea to privatize the National Lottery in Belgium (i.e. also to liberalize the
market and to open it to the competition).
Before accepting the engagement, you perform a quick analysis of the situation in order to see whether the idea is worth spending more time on or
not. Remember, your firm has a reputation of excellence to maintain and does not want to be involved in any projects that could potentially fail. What
is your recommendation? Do you accept the project? Why is it a good or a bad idea to privatize Belgiums National Lottery?
Additional Information:
Here are some background facts about the National Lottery industry in Belgium and previous privatizations.
The National Lottery enjoys a monopoly and offers different products. For all of them, the probability to win is fixed by the Government, as is the
price of each ticket. By now, half of the bets must be returned to players. The other half goes to charities or development projects (that have to be
financed anyway) after the distribution and administrative costs have been paid. Lottery tickets are distributed through newspapers kiosks and
supermarkets who receive a fixed amount per ticket sold. Lottery gains are tax-free.
In the recent years, the Belgian Government has privatized the telecom market and it has been a huge success. The incumbent and the new entrants
make much more money than before. The Belgian Government is trying to reduce its debt and is looking for other privatization opportunities.
Possible Answer:
Interviewer: How would you approach this case?
Candidate: I would look at the Net Present Value (NPV) of selling the National Lottery now versus the NPV of the future profits if the Lottery is not
sold.
Interviewer: Very good start. How would you evaluate the NPV of selling now?

Candidate: Well, I guess it would be the discounted value of the future cash flows that a private operator would earn.
Interviewer: So far so good. What would influence the future cash flows?
Candidate: The demand. Is there any way to boost the overall demand for the Lottery in Belgium?
Interviewer: No, the market is stable and saturated. Let me rephrase my question: how would the cash flow from a private operator be different from
those of the National Lottery?
Candidate: If the demand does not change, we could perhaps be more efficient and reduce our costs.
Interviewer: Indeed, but the National Lottery is already run independently from the Public Administration and is considered quite efficient. What else?
Candidate: I guess the private operators would have to pay taxes. Their cash flows would be lower than those currently earned by the National
Lottery that does not have to pay taxes. Therefore, the NPV of the future cash flows would be lower than in the current situation. So I recommend that
the Government does not privatize the Lottery because the selling price would be lower than the NPV of keeping it.
Interviewer: Not so fast! You said they would have to pay taxes. Correct. Taxes are collected by the government, so it should compensate for the lower
selling price. So taxes are not the issue here. What else would you consider in a liberalized market?
Candidate: I expect the different companies to compete.
Interviewer: Indeed. What would be the consequences?
Candidate: Since the only way for competitors to differentiate themselves is to return a higher percentage of the bets to the players, I am afraid that
they would enter in a destructive war that would reduce their margins. If that is the case, their future cash flows would decrease. The consequence is
that the NPV is also reduced as well as the taxes collected on their earnings. So the Government would be worse off privatizing the Lottery business.
Interviewer: Home run! So would you accept the project?
Candidate: No, I think our firm can create more value on other projects.
Note: This is a final round case given by a partner. It is a conceptual case. There are no numbers. The goal of this case is to apply concepts from
microeconomics. This case is controversial as different people can come up with different answers. Therefore, it is more important to develop a
consistent set of arguments than to reach the solution. Please acknowledge that other arguments could be developed. The interviewer should not try

to force the interviewee to come too quickly but rather let him/her develop all his/her points. Then, ask him/her to proceed by elimination in order
to come to a final recommendation.
014. General Dynamics Concerned About Falling Stock Price
Case Type: finance & economics; reduce costs.
Consulting Firm: KPMG Consulting first round internship interview.
Industry Coverage: aerospace & defense.
Case Interview Question #00242: The client General Dynamics Corporation (NYSE: GD) is a major American military aircraft manufacturer and
defense contractor. The companys former Fort Worth Division manufactured the F-16 Fighting Falcon, the most-produced Western jet fighter.
Recently General Dynamics is worried that theirstock price is falling. How would you go about investigating the cause of the decline and help them
improve their share price?
Possible Solution:
The candidate should recognize that stock price is based on expectations of future profits. This insight will lead directly to a profitability
(revenues/costs) framework. The candidate should mention both the revenue side and the cost side as potential reasons why profits (and share price)
might be falling.
Good questions to hone in on a particular area are: Have prices of the clients military aircraft been falling? Has the client been selling fewer airplanes?
Have component costs risen? Have there been significant capital expenditures or maintenance expenditures? There are many similar questions one
could ask.
The interviewer should mention that the military aircraft industry has been contracting due to cutbacks in military defense spending. This
environment would limit prospects for improving revenue and focus discussion on costs.
There are a variety of ways to cut costs: cutting fixed costs by closing plants, automating more of the operation, using more common parts among
plane models, managing inventory better, training operators to be more efficient. The main point here is to think broadly. Remember that costs are
not only a function of the materials and equipment, but also of the work practices, available technology, and skill of the workers.
In this particular case, the recommendation to the client was to try to merge with another player to realize some economies of scale. When told that
there are five major players (Lockheed Martin, Boeing, Northrop Grumman, General Dynamics, Raytheon Company) and a number of small players in
the military aircraft market, it was easy to see that not all would survive a market contraction. The client General Dynamics later acquired several
smaller players and one year after these acquisitions, the share price started rising again.
015. What Factors Determine World Price of Crude Oil?

Case Type: finance & economics.

Consulting Firm: McKinsey & Company first round job interview.
Industry Coverage: Oil, Gas, Petroleum Industry.
Case Interview Question #00167: What factors determine the world price of crude oil?
Possible Answer:
Consider the influence of the capital markets and how future spot oil prices and speculation in the market impact international oil prices. Prices in
general economic terms are a function of supply and demand in the market.
Demand: Explore the factors aside from price that would effect demand such as new technology, import quotas, wars, etc. It turns out that global
demand for oil is inelastic meaning that changes in prices have less of an effect on quantity demanded. If this is the case, fluctuations in supply will
have a greater impact on the price.
Supply: Examine the impact of the various regional suppliers and their cost structures (for example, high cost in the U.S., low cost in the Middle East).
At this point, you may recommend drawing a simple graph. The low cost producers such as Saudi Arabia would be at the lower left end of the supply
curve while high cost producers such as the U.S. would be far to the right on the quantity produced x-axis. Thus, we can conclude that Saudi Arabia,
assuming that it has the capacity to produce more than it currently is, controls the price of oil. However, its production is limited by OPEC rules. If,
however, they use their excess capacity to control price (as in the case of the Persian Gulf War), the pricing power lies in their hands. Oil prices did
not skyrocket during the war because Saudi Arabia promised to increase production to a level that eclipsed the global pre-war level.
Another Possible Answer:
The international price of oil is determined by three major factors: demand, supply, market sentiment.
Demand Side Factors:
Weather. Cold weather increases consumption. The world is getting hotter. The 14 hottest years in history have been in the last 25 years. The warmer
the climate the less oil is consumed for heating, but the more oil is consumed for air conditioning.
Economic growth The stronger the growth, the more oil is consumed (mostly for industrial purposes). The incredible economic development of
countries like China and India and the emergence of car-owning middle classes in many developing countries enhanced demand and contributed to
the current crisis.
Ecological concerns and economic considerations lead to the development of alternative fuels and the enhanced consumption of LNG (Liquefied
natural gas) and coal, at oils expense. Even nuclear energy is reviving as does solar energy.
Wars increase oil consumption by all parties involved.
Supply Side Factors:

Oil exploration budgets are growing and new contracts have just been signed in the Gulf area (including Iraq), Brazil, and Canada. The more
exploration, the more reserves are discovered and exploited, thereby increasing the supply side of the oil equation.
Lifting of sanctions on Iraq, Iran and Libya will increase the supply of oil.
When there is an economic crisis in certain oil producers (Russia, Nigeria, Venezuela, Iraq) it forces them to sell oil cheaply, sometimes in defiance of
the OPEC quotas. This was the case in the late 1990s.
OPEC agreements to restrict or increase output and support price levels should be closely scrutinized. OPEC is not reliable and its members are
notorious for reneging on their obligations. Moreover, OPEC members represent less than half the oil produced globally. Their influence is limited.
New oil exploration technology and productivity gains allow producers to turn a profit even on cheaper oil. So, they are not likely to refrain from
extracting and selling oil even if its price declines to 5 US dollars a barrel.
Privatization and deregulation of oil industries (mainly in Latin America and, much more hesitantly, in the Gulf) increases supply. Recent moves in
countries like Venezuela, Russia, and Bolivia to re-nationalize their oil industries and unrest in countries like Nigeria raise global oil prices owing to
uncertainty and increased political risk.
Market Sentiment:
The mere belief that oil demand will increase dramatically at some point in the future can result in a dramatic increase in oil prices in the present as
speculators and hedgers alike snap up oil futures contracts. Of course, the opposite is also true. The mere belief that oil demand will decrease at some
point in the future can result in a dramatic decrease in prices in the present as oil futures contracts are sold (possibly sold short as well).
Price volatility induced by hedge funds, future contracts and other derivatives trading has increased lately. But, as opposed to common opinion,
financial players have no preference which way the price goes, so they are neutral.
Ouch. Its actually the refining capacity.
What you know as oil price is actually the sweet crude. The one that needs veeery little refining to be used. Heavier oils are of course cheaper. Now,
refining capacity is extremely expensive and not very profitable, so people try to use it to the max. It also takes 5 years to get new capacity so its
inelastic in the short term anyway.
When demand exceeds refining capacity, sweet crude increases A LOT because it can still be used, without being subject to the refining capacity
constraints.

Lesson learned?
016. Goldman Sachs Capital to Invest in Royal Caribbean
Case Type: private equity, investment; finance & economics; mergers & acquisitions; math problem.
Consulting Firm: Capital One first round job interview.
Industry Coverage: Financial Services; Tourism, Hospitality & Lodging; Transpoortation.
Case Interview Question #00142: Your consulting team has been retained by Goldman Sachs Capital Partners, the private equity arm of Goldman
Sachs (NYSE:GS). Based in New York City, New York, GS Capital Partners is focused on leveraged buyout and growth capital investments globally. It
has raised approximately $39.9 billion since inception across seven funds and has invested over $17 billion.
To diversify its assets, GS Capital Partners is considering purchasing one of two cruise lines: Carnival Cruise Lines operates in the Mediterranean
and has an initial cost of $25 million, while Royal Caribbean operates in the Caribbean and has an initial cost of $50 million. Both cruise lines are
profitable, and Goldman Capital has an ROA (Return On Assets) of 20%. Which one would you advise Goldman to choose? How would you start your
analysis? What factors do you need to consider?
Possible Answers:
Factors/Issues to Consider:
What is the primary goal/motive for the purchase (asset diversification, extension of existing business line, improving profitability, etc.)?
What are any potential synergies or core competencies that Goldman Sachs Capital can leverage to this business?
Are there any environmental factors, e.g., political, international, economic such as inflation, exchange rates, tax rates, demand cycles?
What is each cruise lines useful life? (Assume 10 years.)
Assume all of the above does not significantly impact your analysis and go with the choice that will yield the highest Net Present Value (NPV). Assume
tax rate is 60% for Carnival Cruises in the Mediterranean and 40% for Royal Caribbean in the Caribbean.
Comparison of two choices
Carnival Cruises

Royal Caribbean

# of Passengers

100K per year

100K per year

Average Fare

$500 per passenger $500 per passenger

Annual Revenue

$50M

$50M

Fuel

$1M

$500K

Labor

$2M

$8M

Operation Revenues

Operation Costs

Food

$40.8M

$20.4M

Docking

$.15M

$75K

Annual Cost

$43.95M

$28.975M

Annual Profit

$6.05M

$21.025M

Tax Rate

60%

40%

After Tax Profit

$2.4M

$12.6M

PV@20% discount rate over 10 years $10M

$52.8M

Initial Cost

($25M)

($50M)

Net Present Value (NPV)

($15M)

$2.8M

Therefore, choose Royal Caribbean for sure.

017. Fidelity to Invest in Hartford Group Common Stock
Case Type: finance & economics; pricing & valuation.
Consulting Firm: Oliver Wyman 1st round job interview.
Industry Coverage: Financial Services; Insurance: Life & Health; Insurance: Property & Casualty.
Case Interview Questions #00109: Your client is the treasurer in Fidelity Investments, one of the largest mutual fund groups in the world. She is in
charge of managing a portfolio of investments in addition to her treasury responsibilities. Recently, she has asked for your advice about the purchase
of a large position in the Hartford Financial Services Group (HIG, a large insurance and financial services company), whose stock is listed on NYSE.
HIG is currently selling for $22.97 per share (as of September 15, 2010). The treasurers investment analyst predicts that the stock will pay a dividend
of $0.25 for the foreseeable future. Current quarter earning per share (EPS) for HIG is 15 cents. Short-term treasury bills are yielding 2.5 percent, and
long-term T-bills are yielding 4.5 percent right now. The treasurer is contemplating the purchase of 15000 shares of HIG common stock and wants
your help in determining a fair market price.
How would you go about determining a fair price for HIG?
Possible Answers:
$22.97 per share.
According to Efficient-market hypothesis (EMH), prices on traded assets (e.g., stocks, bonds, or property) already reflect all past publicly available
information (interest rate, dividend payout, earning potential, etc). Thus, the currently traded price is the fair price. At first sight, this case is a pricing
problem. What the interviewer really wants to test on is your basic knowledge of finance & economics.

018. How to Explain Net Present Value (NPV)?

Case Type: finance & economics.
Consulting Firm: NERA Economic Consulting 1st round job interview.
Industry Coverage: Financial Services.
Case Interview Questions #00091: Assume that I have no mathematical ability. How would you explain the concept of Net Present Value (NPV) to
me?
Possible Answers:
me: First I would take a $100 bill out of my pocket. Well, actually, more like 3 $20s, 1 $10, 1 $5,a bunch of $1s and some laundry change that equaled
$100. I would give you an option of taking the $100 now or a year from now. Most people would want the money now rather than wait for it. The idea
of forgoing current consumption is the 1st principle of NPV.
Next I would try to get you to put a value on having the $100 today vs. a year from now. I might tell you that there is one investment opportunity
that, if you had the $100 today, would enable you to turn the $100 into $200 by the end of the year. There is also a 2nd opportunity where you could
turn the $100 into $1000 at the end of the year. Under which investment scenario would you be willing to pay more for the $100? The idea of
opportunity cost, what you could do with the $100 if you had it today, is the 2nd principle of NPV.
Interviewer: If I had two boxes on my desk and I told you that the NPV inside of both boxes was the same, what else would you want to know before
selecting a box?
me: I would want to see the cash flows. I would prefer to get more money sooner rather than later.
I would also want to know the time horizon of the two projects/investments. A shorter time horizon is preferable.
I would also want to see how you incorporated risk into your NPV calculations. Did you do this in the cash flow calculations, attempting to attach
probabilities to the cash flows or perhaps calculating best case, worst-case, and likely case scenarios, or did you do this in the discount rate by
assessing your next best investment opportunity? In either case, if I thought that you had underestimated the risk in one of the NPV calculations then
I would recalculate the NPV, revising it downward.
NPV is the difference between inflow and outflow at present time. Cash carries an opportunity cost and opportunity cost consists of rate of return,
time value of money & inflation. Cash in hand is more important than getting cash after a year or so. Suppose you invest $ 100 in a project that
provides you $ 60 and $ 55 at the end of the year 1 & 2 respectively. PV can be derived by discounting both the payment @ opportunity cost at
present time. NPV will be arrived by deducting $ 100 (outflow) from PV of inflow.
019. Export-Import Bank Assess Cost-Revenue Curve

Case Category: finance & economics.

Consulting Firm: First Manhattan Consulting Group 1st round job interview.
Industry Coverage: International Trade.
Case Interview Questions #00090: The Export-Import Bank of the United States (a.k.a. Ex-Im Bank, is the official export credit agency of the United
States federal government) has a new business opportunity. They can import a popular consumer product from Europe at a price of $20/unit. The
shipping rates are as follows: $10/unit for the first 100 units, $20/unit for the next 50 units, and $30/unit for all units above 150. This business
opportunity will have fixed overhead expense of $1000. Ex-Im Bank can then sell the product for $45/unit in the U.S. and can sell as many as they
import.
Can you draw the marginal cost-marginal revenue graph and the total cost-total revenue graph for this business opportunity?
Possible Answers:
1. The Marginal Cost-Marginal Revenue Graph
Marginal Cost (MC): $30 for first 100 units, $40 for next 50 units, $50 for units above 150.
Marginal Revenue (MR): $45 for all units.
Ideally you would want to produce at the point where MR = MC. In this case however, MR is greater than MC for the 1st 150 units. ($45 > $30 and $45
> $40) At unit #151, however, MC = $50, which is greater than MR = $45. In this situation, then, 150 units is the number that you would want to sell.
2. The Total Revenue-Total Cost Graph:
Total Revenue (TR) starts at the origin and is a straight line increasing by $45/unit. Total Cost (TC) starts at $1000 for 0 units. It is a straight line from
0-100 units, increasing by $30/unit. It then increases by $40/unit between 100-150 units, and $50/unit above 150 units.
020. How Many Stories in Trump Tower Chicago?
Case Type: market sizing; finance/economics.
Consulting Firm: Cambridge Associates 1st round job interview.
Industry Coverage: Property & Real Estate.
Case Interview Questions #00063: Your client for this case is American business magnate, real estate developer, chairman and president of The
Trump Organization Mr. Donald Trump. Trump is also the founder of Trump Entertainment Resorts, which operates numerous casinos and hotels all
over the world.
The year is 2001. Donald Trump just announced that he is going to build a new skyscraper in downtown Chicago (Trump International Hotel and
Tower), but he is not sure how many stories to make it. How would you help him decide?
Possible Answer:
Note: This case is very similar to the How Many Stories to Build Manhattan Apartments case, so look at those suggestions also.

Essentially, this is a market sizing and financing decision case that requires the job candidate to analyze economic supply and demand. Clearly you
dont want to lose money on the deal. Rebuilding will house tenants, who will pay to reside there. The costs of building and maintaining the structure
(both fixed and incremental by story) need to be compared to revenue generating capacity of the project. When marginal revenue equals marginal
cost you stop adding stories.
By the way, stood at a height of 1,389 feet (423 m) including its spire, Trump Tower Chicago ended up having 98 stories with 2 floors below ground.
021. Are Small Oil Tankers Really Worth Nothing?
Case Type: pricing & valuation; economics & finance.
Consulting Firm: Ernst & Young (EY) 1st round job interview.
Industry Coverage: containers; freight delivery, shipping services; oil, gas & petroleum industry.
Case Interview Questions #00052: Your rich uncle has just passed away and left you with 3 small oil tankers in the Persian Gulf. How do you
determine how much these small oil tankers are worth?
Possible Answer:
This problem involves the interplay of Supply and Demand forces to determine the value of the oil tankers.
1. Supply:
The nature of tanker supply will be revealed by defining the different tanker types (in laymans terms: small, medium, and large) in the industry and
the cost related prices associated with employing each type. In effect, a step function supply curve results for the industry with each step a different
tanker type.
2. Demand:
Demand for the services of tankers is assumed fairly inelastic due to refinery economics dominating the purchase decision.
Conclusion:
It will turn out (by carefully creating the supply/demand curves) that at the given level of demand, only large and medium tankers are put into supply.
This renders your late uncles small oil tankers suitable only for scrap at the present time.
022. Vogue to Maximize Profits by Optimizing Delivery Number
Case Type: improve profits; math problem; economics.
Consulting Firm: Towers Watson 2nd round job interview.
Industry Coverage: Publishing, Mass Media & Communications.
Case Interview Questions #00031: Vogue is a fashion and lifestyle magazine that is published monthly in 18 national and one regional edition by
Cond Nast Publications, a worldwide magazine publishing company with main offices in New York, Chicago, Miami, Madrid, Milan, Tokyo, London,
Paris, and Moscow. Total annual circulation for Vogue magazine is about 1,250,000 as of 2010.

The chief publisher of Vogue is trying to decide how many magazines she should deliver to each individual distribution outlet in order to maximize
profits. She has massive amounts of historical data for sales volumes through these outlets and a well constructed internal accounting system. How
should she go about computing an appropriate number?
Possible Solution:
The best way to tackle this optimization case (without going into a huge quantitative analysis of Economic Order Quantity EOQ) is not so much to
start asking questions as to set out an outline for analysis and fill in as you go.
It should be observed immediately that to maximize profits, marginal revenues would be set equal to marginal costs. The marginal revenue for a
magazine would be its cover price times the probability that it will be sold. The probability of sale, with an appropriate confidence interval, could be
established in some manner from the historical sales data. The marginal costs could be obtained from the internal accounting data.
A detailed discussion of the application of these concepts from basic microeconomics and statistics may be necessary.