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March 2002

October 2001 CMA Entrance Examination

Table of Contents
PAGE
OVERVIEW.............................................................................................................1
PART 1
GENERAL COMMENTS.......................................................................................4
PART 2
QUESTION
Backgrounder ........................................................................................5
Additional Information........................................................................24
MARKERS COMMENTS...................................................................................34
SUGGESTED SOLUTION* .................................................................................43
SUPPLEMENT OF FORMULAE AND TABLES**.......................................67

*The suggested solution to Part 2 is presented in a more comprehensive manner than would be expected of a
candidate writing under examination conditions and represents one of several possible approaches.
**This supplement is provided to all candidates with each part of the examination.
Ce document est galement disponible en franais.
Copyright 2001 The Society of Management Accountants of Canada.

The Society of Management Accountants of Canada Page 1
October 2001 CMA Entrance Examination Overview

Overview
Purpose
The purpose of the Entrance Examination is to ensure that candidates have a sound technical
foundation and to ensure that they have suitable integrative, judgmental, analytical, strategic
thinking, and written communication skills for entry into the CMA Strategic Leadership
Program.
Format, Duration and Type of Questions
The October 2001 CMA Entrance Examination consists of two parts, each of a 4-hour duration.
PART 1
Part 1 of the examination consists of 165 multiple-choice questions, grouped into 11 sections
according to the topic areas listed in the CMA Entrance Examination Syllabus.
PART 2
Part 2 of the examination consists of one integrated, complex case. Information relating to the
case was provided to candidates in two separate documents: a Backgrounder (provided to
candidates in advance) and the Additional Information (provided to candidates at the Part 2
examination).
Thus, in total, 50% of the Entrance Examination consists of a case and 50% consists of objective
(multiple-choice) questions.
Testing Objectives, Topic Emphasis and Syllabus Coverage
OVERALL
The October 2001 CMA Entrance Examination tests on the CMA Entrance Examination
Syllabus according to the cognitive skill level expectations reflected in Blooms Taxonomy of
Educational Objectives. The Category 1 and 2 syllabus topics are tested according to the
emphasis indicated in the syllabus. Approximately 2/3 of the content knowledge testing pertains
to Category 1 topics and the remaining 1/3 pertains to Category 2 topics.
Generally speaking, each of the 11 major topic areas in the two categories (Management
Accounting, Corporate Finance, Operations Management, Information Technology, Strategic
Management, International Business, Human Resources, Marketing, Financial Accounting,
Taxation, and Internal Control) are tested in roughly equal proportion. However, the topic areas
of Management Accounting, Information Technology, and Financial Accounting are tested to a
somewhat greater extent. Conversely, a relatively lower weighting is placed on some of the other
topic areas.
Category 1 and 2 topics are tested on both the cases and the objective questions on the
examination.

Page 2 The Society of Management Accountants of Canada

PART 1
The Part 1 testing objective is to evaluate the candidates content knowledge. Its focus is on the
first three cognitive levels in Blooms taxonomy, namely knowledge, comprehension and
application. It tests directly on each of the 11 syllabus areas specified above within the context of
165 multiple-choice questions. It should be noted that not all of the multiple-choice questions are
of equal value.
PART 2
The Part 2 testing objective is to evaluate the candidates higher order skills, i.e., judgement,
integration, analysis, strategic thinking and written communication. Its focus is on the last three
cognitive levels in Blooms taxonomy, namely analysis, synthesis, and evaluation.
In order to maximize the time available for candidates to demonstrate their higher order skills
and to facilitate their development of a well-reasoned, in-depth response to the case, candidates
were provided in advance with a Backgrounder on the company that was the focus of the case.
The Backgrounder contained extensive information about the company and its related industry so
that candidates could familiarize themselves with both in preparation for the strategic analysis
that they were asked to undertake during Part 2 of the examination.
On the Part 2 examination writing date, the Additional Information was provided to
candidates, which included additional information about the company and indicated what
candidates were required to do. Generally, the candidates task during Part 2 was to assess the
strategic options facing the company in light of its strengths and weaknesses, interpret and use
the financial and non-financial information provided in the Backgrounder and Additional
Information, and write a report to management, exhibiting appropriate written communication
skills, as to what the company should do.
While the Part 2 case includes content from many of the 11 syllabus topic areas, the focus is on
testing the higher order skills mentioned above rather than testing detailed content knowledge
which is the focus of Part 1. Thus, for the most part, content knowledge is tested indirectly on
Part 2 through an evaluation of how the information included in the case is used by candidates to
develop a report that demonstrates their higher order skills.
Evaluation
Candidates must pass both parts of the Entrance Examination individually in order to proceed to
the CMA Strategic Leadership Program. Candidates received an overall grade out of 100 for
each part of the examination, a score on a scale ranging from 100 to 400, an indication of
whether they had passed each part, and an indication of how they performed relative to other
candidates on each part of the examination in the form of deciles for each topic area (Part 1) and
each skill (Part 2) being tested. Candidates should note that there was no correction factor on the
multiple-choice questions.


OCTOBER 2001 CMA ENTRANCE EXAMINATION CHARACTERISTICS
The following tables reflect the examinations major characteristics:
PART 1
Questions 1 to 165
Question Type multiple-choice
Number of Minutes 240
% Syllabus Coverage based on
relative value of the questions (not
based on the number of questions)

Category 1
Management Accounting
Corporate Finance
Operations Management
Information Technology
Strategic Management
International Business
Human Resources
Marketing

Category 2
Financial Accounting
Taxation
Internal Control

Total

24%
6%
6%
8%
6%
6%
6%
5%
67%

19%
9%
5%
33%
100%

PART 2
Question
Question Type integrated case
Number of Minutes 240
Syllabus Coverage Information relating to topics from most of the 11
major syllabus topic areas is included in the case.
Candidates are to use this information in developing
their written reports.

October 2001 CMA Entrance Examination General Comments
General Comments
October 2001
CMA Entrance Examination
Part 1
Part 1 of the October 2001 CMA Entrance Examination consisted of 165 multiple-choice
questions testing the eleven topic areas listed in the CMA Entrance Examination Syllabus. On
average, candidates answered 81 of the 165 questions correctly. The results for each topic area
were as follows:
Topic Area Number of Questions
Average Number
Correctly Answered
Management Accounting
37 18
Corporate Finance
11 5
Operations Management
11 6
Information Technology
14 7
Strategic Management
10 7
International Business
11 5.5
Human Resources
11 6
Marketing
9 5.5
29 11
Taxation
14 5
Internal Control
8 5
Total
165 81
It should be noted that the questions were not all valued equally. Those that had a plus sign (+) at
the beginning of the question were valued higher than the rest of the questions, and those with a
minus sign (-) were valued lower than the rest of the questions.
Generally, candidates performed fairly well on the questions testing material in the following
topic areas: strategic management, marketing, operations management, internal control and
human resources. The weakest areas of performance were on questions testing taxation, financial
accounting, and corporate finance. Performance on questions pertaining to management
accounting, information technology, and international business was average.
In the interests of improving the maintenance of a consistent passing standard over time, The
Society of Management Accountants of Canada has adopted equating methodology. This
involves the reuse of selected multiple-choice questions on future examinations. Consequently,
the actual multiple-choice questions used on the October 2001 CMA Entrance Examination are
not being provided. Practice multiple-choice questions are available in the June 2001 CMA
Entrance Examination and Solutions booklet and in Section F of the CMA Entrance Examination
Preparation Manual.

October 2001 CMA Entrance Examination Part 2 - Backgrounder

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

October 2001
Part 2
Backgrounder

The background information relating to the Part 2 case (Backgrounder) is provided to candidates
in advance of the Part 2 examination date. It contains information about the company in the case
and its related industry. Candidates are expected to familiarize themselves with this background
information in preparation for the strategic analysis that they will be asked to undertake during
Part 2 of the CMA Entrance Examination.
Candidates should note that they will not be allowed to bring any written material into the
examination writing center, including the advance copy of this Backgrounder. A new copy of
this Backgrounder, together with additional information about the company, will be provided at
the writing centre for Part 2 of the CMA Entrance Examination.
Candidates are reminded that no outside research is required and that the industry information
presented, which has been adapted for the purposes of this case, should be used in your analysis.

Chord Technologies Ltd.
Backgrounder

Company Background
Chord Technologies was a partnership owned by Franois Garneau and Jeff Chase that
represented the continuation of a sole proprietorship originally founded by Franois Garneau.
Garneau and Chase were good friends who first met at Technology College where they were
both in the architectural technology program. When Garneau graduated in 1994 (one year ahead
of Chase), he started his own business, which involved drafting blueprints for architects plus
some other drafting work for a metal cutting company. Although he was very proficient in his
work, he struggled to earn a living because the revenue from the drafting jobs was not substantial
and his clients would eventually find it more efficient to hire a full-time drafting technician.
Eventually, Garneau took a full-time drafting job in the cable industry, but he continued to do
some contract work at night.
Jeff Chase had been enrolled in the co-op program at the college. After he had successfully
completed his course requirements at the end of 1994, he still had one work term remaining to
complete his qualifications. He was fortunate to land a four-month assignment in Japan,
commencing in January 1995, where he was expected to train local technicians in the use of
computer-aided drafting (CAD) programs. (Both Chase and Garneau refer to themselves as
CAD jockeys.) These technicians would use the CAD programs to draft plans for new houses
for the company that employed them. Chase conducted his training in English, but while he was
in Japan he learned the basics of conversational Japanese.
The management of the Japanese company the technicians were working for were quite
impressed with Chases ability as a CAD jockey and with his creativeness. In fact, they offered
him a five-year contract to stay in Japan, provided that the appropriate administrative red tape
could be overcome. As it turned out, this could not be accomplished and Chase had to
respectfully decline. However, the possibility of Chase doing design work for them from Canada
was discussed.
After Chase returned from Japan in early May 1995, he and Garneau did some work for the
Japanese company on a limited basis. Garneau continued to work full-time in the cable industry
while Chase looked for full-time employment of his own. Their hope was that the work for the
Japanese company would eventually develop into something more substantial so that they could
devote all of their energies to their yet-to-be established partnership. Unfortunately, a variety of
problems arose related to the Japanese contract work, primarily involving getting approvals and
payments. The frustrations of dealing with this company caused Chase to give up his pursuit of
more substantial Japanese contract work.

In June 1995, Chase was offered a drafting position with a cable company operating in several
countries, including Canada, with its head office in San Francisco, California. After working in
its Toronto office for the remainder of 1995, Chase accepted a transfer to the San Francisco
office in January 1996. This presented Chase with a variety of opportunities to meet people in
the cable industry, including representatives of several companies involved in upgrading a
variety of existing cable networks. This gave him a potential contact network for the future.
Chase soon realized that his career advancement ambitions would not be realized with his current
employer, so he decided to return to Canada in the fall of 1996. Through his cable contact
network, he soon obtained some contracts to draft survey maps required in cable upgrading.
Fortunately, this work offered sufficient revenue to enable Chase and Garneau to take the big
step to commit to their own partnership full-time, and Chord Technologies was formed on
January 1, 1997. Since that time, Chords customers were primarily in the cable industry.
Initially, Chord Technologies operated out of Garneaus residence, located in a suburb of a major
Canadian city. As the need to hire additional contract technicians became obvious, Chord leased
a facility in the city. While this location suited both Chase and Garneau, Chord could have
operated from any location with reasonable access to an airport and an international courier
service.
Over its first two years of operations, Chord expanded significantly. By December 31, 1998,
Garneau and Chase had 16 CAD jockeys, two project managers and a director of quality control
working part-time under contract for them. Chase and Garneau were very busy during this
growth phase, handling all the management functions as well as drafting survey maps. At the
suggestion of their tax accountant, they agreed to consider incorporating their partnership and
hiring full-time employees.

The Communications Technologies Industry
Overview

In broad terms, the communications technologies industry covers all technologies involved in
communicating over distances through wire, radio, optical or electromagnetic means. These
include cable, satellite, microwave and wireless transmissions of signals for television, Internet
and telephone communications. The industry is dominated by large, national and international
corporate players, including AT&T, AOL/Time Warner, the Bell series of companies and Cox
Communications. These companies are all involved in a variety of activities, but were initially
involved in mass communications in one way or another. However, there is a second tier of
support entities that provide services to these mega companies, as they require. Chord is one of
these service providers. Upon its inception, Chord limited its activities to the cable transmission
sector of the industry.

The level of activity in the cable sector is determined by the health of the overall
communications technologies industry. The cable industry tends to grow both by expanding
coverage into new neighbourhoods and other areas not previously served, and by technology
upgrades. When resources become scarce or overburdened, it is usually the upgrading of existing
delivery systems that is cut back. This is to be expected since existing systems are already
producing revenue, although not always at optimal levels, while new neighbourhoods and areas
that do not yet have cable systems are not as yet producing any revenue, so they are given
priority.
In the television sector, cable companies are in direct competition with satellite and wireless
television transmission suppliers. In the Internet sector, cable companies primarily compete with
telephone companies, although satellite and wireless transmission companies have recently
started to supply Internet access. The bases of competition in the cable industry are speed and
quantity (i.e., variety) of product, since all competitors purport to have excellent reliability and
service. Of course, from a customer point of view, reliability and service remain major factors
and they tend not to be at the same level with each competitor. A description and comparison of
the competing technologies in the television and Internet sectors is provided in Exhibit A.
In recent years, there has been a substantial move towards consolidation in the industry, with the
major companies attempting to increase their size and market share primarily by the acquisition
of smaller competitors.
Chord Technologies
Planning and Budgeting

In the first two years of operation, Chord Technologies main focus was on producing a top
quality product, i.e., survey maps. The partners hoped to achieve a reputation for competence in
the industry in order to acquire additional contracts. This would allow Garneau and Chase to
further leverage their income by contracting competent CAD jockeys to assist in the drafting
work. This approach served them well, as Chord received interest in their work from potential
clients in Des Moines, Denver, Chicago and Atlanta. In addition, although they have not yet
performed any survey work in Canada, they have received some local inquiries.
As the volume of work increased, it became necessary for the company to implement project and
cash flow budgeting. Chase undertook this duty as part of the accounting function. The project
budgeting is quite straightforward, since it primarily involves estimating revenue on a per mile
basis, as specified in the related contract, then estimating the direct costs of performing the work.
Overhead, with the exception of necessary computer hardware and software upgrades and
systems maintenance, is mainly fixed. The company currently has enough leased space to
accommodate up to 30 CAD jockeys and 6 project managers comfortably.

Operations

The upgrading of existing cable television systems first involves surveying the existing cables
and equipment, and drafting the initial survey maps of this equipment. Once a system is
surveyed, it is then redesigned to allow it to carry more channels and additional services. When
the redesigning is completed, the reconstruction of the cable system is undertaken and an effort is
made to sign up subscribers to take advantage of the enhanced products. Chords specific role in
this process is the drafting of the survey maps. This process is described further in Exhibit B.
Up to the end of December 1998, Chords operations were primarily focused on drafting detailed
survey maps for cable systems upgrades for a single client, a large telecommunications company
in the United States. Initially, these projects were limited to the West Coast of the United States,
but have now expanded to include Florida and Illinois. Chase and Garneau, initially, also
performed some hourly rate drafting work to supplement the operation. Any work that they have
undertaken outside of the survey mapping function has been handled on an ad hoc basis. There
has been very little of this.
During 1997 and 1998, Chord continually upgraded its computer capacity and workstation
efficiency. To facilitate supervisory and quality control activities, the company has implemented
a local area network and has made broad use of passwords for security purposes. Since the
companys main product is computer generated, Chord uses sophisticated equipment and
procedures. Also, as a security precaution, daily back-up copies are produced for off-site storage.
Most of Chords work continued to be in the United States during 1997 and 1998 despite the
increasing respect the company developed on both sides of the border. Because of the value of
the Canadian dollar relative to the American dollar, Chord has been able to submit contract
offers at the low end of the anticipated bid range while still allowing for a reasonable profit
margin. This has provided Chord with a significant competitive advantage over U.S. companies
interested in bidding on the same jobs. To date, Chord has not found that it has been competing
against other Canadian companies for this work.
Although each market, typically consisting of a group of cities and towns, tends to have a
different price range, the competing firms usually have a good idea of the acceptable bid range.
In practice, more contracts are awarded on the basis of satisfactory working relationships than by
open tender.
Organizational Structure

During 1997 and 1998, Chords management committee consisted of Chase and Garneau, who
were also the chief executive officer (CEO) and chief operating officer (COO), respectively (see
Exhibit C). The main qualifications and roles of the members of Chords management team were
as follows:


Jeff Chase, Chief Executive Officer

Chase is a qualified architectural technician and has developed leading edge skills in the area of
applied computer-aided drafting. He has also developed the ability to assist with the installation
of AutoCAD systems and to train operators for these systems. In addition to actually doing some
of the survey mapping as necessary, Chase has been responsible for rectifying any computer
problems as well as any necessary computer programming or customization, and the accounting
function.
Chase has a functional ability in conversational Japanese and, in addition to his considerable
technical skills, he has an innate creative gift for original design with respect to both computer
programming and the design of physical objects such as buildings and furniture. However, Chase
is generally not well suited to being an employee of a company other than his own. While he is
not rebellious, he typically moves quite quickly to the head of the class and then becomes
frustrated with the more limited skills, in his view, of those who remain senior to him. This can
be problematic, as senior management beyond the level of his immediate supervisor are usually
not inclined to disturb the overall morale of their organization to keep Chase happy, particularly
as it is not uncommon for many other employees to be better qualified, at least on paper.
Franois Garneau, Chief Operating Officer

Garneau is also a qualified architectural technician and a competent CAD jockey. He is fluently
bilingual (French and English) and has family and business contacts in Montreal. He also has
some design experience from his days assisting with metal cutting designs. Garneau has been
responsible for human resource management, business planning and the quality control function
for the company, and, like Chase, he has participated in the survey mapping process as needed.
Garneaus personality is in sharp contrast to that of Chase. While he works hard and is willing to
do whatever is needed, he is a lot more relaxed about life in general and provides another useful
perspective when Chase proposes a new idea. While Garneau is quite capable in his own right,
he is comfortable as, essentially, the number two executive and actually prefers to react to
situations that arise rather than create.
Linda Morton, Quality Control Manager

Morton, who at the age of 31 is a couple of years older than the partners, holds a Bachelor of
Commerce degree as well as a certificate in architectural technology. In July 1998, she decided
to work under contract for Chord on a part-time basis as a means of getting back into the
workforce after starting and raising a family for the previous four years. She quickly regained
whatever skills she may have lost and was clearly a special talent. She soon started taking on
jobs from other clients. Since the standard fee for contracted CAD jockeys is rather modest and
tends to stay within a fairly narrow range, Chase and Garneau decided to create a new function
for Morton at a higher fee in the hopes of convincing her to accept a long-term contract. She
agreed to only a one-year contract as the quality control manager on a part-time basis. The
quality control function seemed to be a natural fit for her, as she performed this role well.

Accounting Information Systems

Chords internal accounting records have been maintained using commonly available
spreadsheet software. The process is as follows: Chase enters all the cheques and receipts, then
the payments are posted to the appropriate spreadsheet expense column and totals are computed
for the fiscal period, which is also the calendar year. Since the company works almost
exclusively for customers in the United States, no GST is billed on these accounts (i.e., exports
are zero-rated for GST purposes). A memo record of GST paid out is maintained in the
spreadsheet, and applications for refunds of GST input tax credits in excess of GST collected are
submitted on a quarterly basis. If there is any work billed in Canada in a particular quarter, the
related GST is duly reported, thereby reducing the refund requested. When the GST refund is
received, it is recorded as a reduction to overhead expenses.
At year end, lists are made of any outstanding bills and any unpaid invoices to provide the basis
for calculating accounts payable and accounts receivable. The accountant who is contracted to
prepare Chords income taxes then makes the necessary entries to expense the outstanding bills,
report the unpaid invoices as revenue and record the related accounts payable and receivable.
As of December 31, 1998, Chord did not have any employees, as Linda Morton, the CAD
jockeys and the project managers were all independent contractors who had clients other than
Chord. The partnership simply filed T4A forms showing the amounts paid as other income. It is
expected that when Chord becomes a corporation and hires full-time employees, a regular
payroll routine using a well-known small business software package will be established. It is also
expected that the same software package will be used for recording the regular accounting
transactions of the corporation. The software in question would integrate the payroll function
with the general ledger function and, should it become desirable at some time in the future, the
project accounting module could be used to track work in process as well as prepare project
estimates and budgets.
Considering the dollar volume of business conducted by Chord, it actually has very few cash
transactions. This is a function of the size of its typical contracts and the relatively small number
of input components involved with the production of the survey maps.
Marketing

During the first two years of operation, Chords marketing activities consisted almost entirely of
using the personal contacts developed by Chase while he was in California. Once Chord received
its first large contract, the partners focus was on generating cash flow and becoming profitable
rather than on extensive marketing.
Human Resources

The main function performed by the contracted workers is the drafting of survey maps. For a
slightly higher fee, the project manager function includes the responsibility of coordinating the
various sub-map segments of a particular project in addition to performing regular drafting
duties. When hiring contractors, Garneau looks for people with superior CAD skills and gives

preference to those with an architectural background. He also has a preference for people who
are willing to learn new concepts, though this is a more difficult attribute to discern.
The initial term of a contract for a new CAD jockey is three months. For those who demonstrate
excellent skills, Chord offers a longer-term contract for a $2 per hour increase in rate. Prior to
1998, Chord had no trouble in attracting the quality and quantity of people that it sought,
although expectations regarding their ability were not always met. In 1998, it became more
difficult for Chord to find a sufficient number of qualified contractors and some of the regular
contractors decided to leave Chord in favor of other businesses, either as contractors or as
employees. For the most part, Chase and Garneau believed that these problems were industry
wide and were caused by a combination of a growing economy, particularly in the hi-tech
industries, and a shortage of qualified people in the work force.
Diversification Strategy

Chase and Garneau were well aware of the risks of depending primarily on one large client. To
address this situation, in 1998, they decided to consider pursuing a number of possibilities with a
view to providing some diversification to their activities. One of the options that they were
considering was to provide architectural design services locally for some friends who have a
successful residential housing construction company.
Another option being considered was a merger proposal received from CCC Ltd. (see Exhibit D).
Although Chase and Garneau viewed the initial proposal to be unappealing in terms of its
immediate returns and their share of ownership, they made a counter offer. While the partners
were not expecting a quick, positive response to all the terms of their counter offer without some
negotiation, they were interested in seriously exploring a variation on this proposal as a means of
broadening their market and the services they could offer.
Furthermore, with the background and training that Garneau and Chase possess, in addition to
their acknowledged superior drafting skills, they could provide drafting services to almost any
industry at the requisite level. Chase, in particular, was interested in pursuing the various
diversification opportunities, as he had a tendency to become bored easily and was always
looking for new approaches, better methods and new challenges. Although Chord was still a
relatively new company and despite the fact that he did not have enough hours in the day as it
was, Chase was anxious to try his hand at other projects.
In contrast to Chase, Garneau was much more comfortable with dealing with details and with
operating in a repetitive comfort zone. This did not mean that he was in any way opposed to
potential diversification opportunities, or even to putting in the extra effort to try to develop
additional services and markets while handling his share of the day-to-day operations. It simply
meant that he was less prone to requiring change to provide him with job satisfaction.
The two partners together provided a good psychological balance. Chase provided the impetus
for the need to consider what is new and what might be possible, while Garneau provided the
sounding board for new ideas and made sure that Chords philosophy did not become change
for the sake of change, but rather, change if the change will improve, or has an upside potential
to improve, the status quo.

Financial Management

In 1997 and 1998, the major revenue source for Chord was survey map drafting. The contracts
for this work, currently limited to U.S. customers, were written in terms of dollars per mile.
There was also a built-in premium for each apartment building on a particular map. Industry
practice is to pay an additional US$1 over and above the per mile rate for each apartment
building. These financial details are built into the contracts by general provision, but are not
numerically specified because the exact number of apartment buildings is not known at the time
that the contract is signed.
The rate charged per mile varies from US$100 to US$150, depending on the area and on the
customer. On specific contracts, Chord knows the actual revenue rate. However, for the purposes
of annual projections, an average expected revenue per mile of US$120 (Cdn$180) is used. See
Exhibit E for a summary of probable billing rates Chord expects to charge for its services.
Although there is additional compensation for apartment buildings, they are always losing
propositions, since the additional compensation is never sufficient relative to the additional time
required to do the survey mapping. Thus, the mapping is most profitable for areas where the
population density is fairly low and the style of dwelling is detached housing. The most time
consuming (and, therefore, least profitable) mapping involves areas that are high density and
multiple dwelling in nature.
For purposes of estimating costs and revenues for a particular job, Chord uses the mileage rate
stipulated in the contract, ignoring any bonus for multiple-unit buildings, and an average
mapping time of four hours per mile. Direct labour costs are estimated at $16 per hour for
drafting, plus an estimated $5 per mile for quality control. Chase and Garneau were aware that
labour costs would increase by about 10%, to cover employment expenses other than the direct
hourly wage rate, as a result of replacing contractors with full-time employees once the business
is incorporated. However, given the volume of work and the margin per unit, they did not see
any problem in absorbing these increased costs.
All other costs were treated as period costs. A condensed summary of operating results for 1997
and 1998 is provided in Exhibit F.

Exhibit A
Comparison of Technologies For Television and Internet
Digital Versus Analogue Television

Since 1953, the television industry in North America has followed the standard set by the
National Television Standards Committee (NTSC). This standard has specified analogue
transmission, which is the sending of television signals in the form of a constantly variable wave
(i.e., this is done by varying the voltage in an electrical signal). The video and audio signals of a
television program are transmitted simultaneously on separate high frequency radio waves,
which create a band, or channel. Each television station (or channel) has been assigned a
6-megahertz (MHz) slice of the radio spectrum for their transmissions, called a bandwidth. (A
hertz is a measure of frequency equal to one cycle per second, and a bandwidth corresponds to
the difference between the lowest and highest frequency signal that can be carried by a channel.)
Each high frequency wave is transmitted from point to point in a straight line to antennas,
satellite dishes or receivers in one of three ways: through terrestrial transmission (e.g., broadcast
through the air from transmission towers to antennas), through satellite transmission, or through
cable transmission.
In the 1990s, some television stations began to adopt digital television (DTV), which is the
transmission of television signals using digital rather than conventional analogue methods.
Digital transmission consists of an electronic pulse which has only two possible states (i.e., it is
either on or off, or it is positive or negative). Each pulse is represented by a one or a zero, known
as a bit. Both digital and analogue signals are transmitted in the same basic ways and have the
same range, but because a digital signal does not fluctuate, a digital transmission is more precise
than an analogue transmission, and much more digital data can be transmitted in the same
bandwidth.
In November 1997, Industry Canada agreed to adopt the North American DTV standard set by
the Advanced Television Systems Committee (ATSC). The ATSC standard includes 18 DTV
display formats separated into two categories: High-Definition Television (HDTV) and
Standard-Definition Television (SDTV). The main difference between the two formats is the
resolution (i.e., number of picture elements called pixels) that can be displayed on the television.
Each pixel is a single dot of light on the television screen, and the higher the number of pixels on
the screen, the sharper the picture will be. The highest quality format (HDTV) can display a
widescreen picture which has a width-to-height ratio of 16:9 (compared with a 4:3 ratio on a
conventional television set) and which is up to 900% sharper than traditional analogue television.
The advantage of SDTV is that a television station can broadcast up to 6 SDTV channels using
the same bandwidth as is required for a single HDTV or analog TV channel.

Some of the advantages of DTV over analogue TV include the following:
Superior clarity and depth of image, elimination of snow or ghosting, and exceptionally
vivid colours with no bleeding of colours at the edges.
Smaller bandwidth for a given image resolution.
Compatibility with computers and the Internet.
Superior audio quality (i.e., the ATSC standard specifies Dolby Digital for audio).
Interactivity (i.e., the ability to interact with the television program that is being broadcast,
such as downloading a recipe from a favorite cooking show).
DTV is currently being adopted by North American television stations and it is expected that
most will have adopted it by 2010. Like analogue signals, digital signals can be sent through
terrestrial transmission, satellite transmission or cable transmission. Although the signals will be
transmitted in DTV, viewers will be able to continue using their conventional analogue television
sets by connecting a digital-to-analogue converter to the television. This converter will receive
the digital signal and reformat it so that it can be displayed on an analogue television.
Cable Television

Origins:
In the 1950s, there were few television stations in North America and their signals could only be
received by antenna that had a clear line of sight from the stations broadcasting towers.
People living in remote areas, especially mountainous areas, could not receive the television
transmission. To solve this problem, remote communities began to erect receiving antennas that
were strategically placed and ran cables to carry the signals from the antennas directly to the
television sets in the local households. This allowed a greater proportion of the population to
enjoy television viewing. Because the signal from an antenna became weaker as it traveled
through the length of the cable, amplifiers had to be inserted at regular intervals to boost the
strength of the signal. Unfortunately, the amplifiers added noise and distortion to the signal,
resulting in a low quality picture. It took a couple of decades to solve the amplifier problems.
Advances in Technology:
The early cable companies started to utilize microwave transmitting and receiving towers to
capture signals from distant stations. This made it possible for cable customers to enjoy a greater
variety of channel choices and its popularity began to grow. Households that previously used
aerial antennas on their roofs began to switch to cable. These households also appreciated the
fact that they could easily and inexpensively equip more than one television set in more than one
room with cable service by simply using a splitter or installing additional cable outlets. This
allowed different household members to watch different channels at the same time.
In the 1970s, cable providers began transmitting signals to telecommunication satellites in
geosynchronous orbit around the earth, and they began to offer pay-per-view channels, which
further increased the popularity of cable television. By the 1980s, coaxial cable was being
replaced with fiber-optic cable. The main advantage of fiber-optic cable was that it did not suffer
the same signal loss as coaxial cable, which greatly reduced the need for amplifiers in the
system. This resulted in dramatic improvements in signal quality and system reliability. The
popularity of cable grew to such an extent that by the mid 1990s, around 95% of households in

Canada were wired for cable television service and about 75% of these households subscribed to
cable television.
As the number of channels grew, the bandwidth of cable systems also increased. By the 1980s,
most cable installations operated with 450 to 550 MHz of capacity, with a downstream
bandwidth capable of carrying the equivalent of up to 65 analogue channels. Today, some cable
systems are capable of carrying the equivalent of more than 110 analogue channels. With the
introduction of DTV, cable companies will be able to transmit many new channels to their
customers. For example, in addition to their regular cable channel packages, cable companies
could offer customers up to 40 digital music channels, 5 movie network channels, NFL Sunday
Ticket, NHL Centre Ice, and many pay-per-view channels. However, to take advantage of the
opportunities presented by digital technology, the cable systems require major upgrading. Also,
subscribers are required to purchase or rent a digital receiver box with digital to analogue
conversion capabilities for each television set that they wish to use for viewing digital channels.
Satellite and Wireless Television

Satellite and wireless television are simply alternative ways of delivering multi-channel
television. Todays most widespread method is cable television. Unlike cable television,
however, satellite television requires that you purchase or rent a dish antenna and a receiver. The
dish receives signals from a satellite orbiting the earth, and the receiver converts those signals
into the programming you will watch on your television. In Canada, the two major satellite
companies are Bell ExpressVu and Star Choice.
Wireless television uses multipoint distribution systems technology whereby the provider
collects television signals using numerous satellite dishes, transports the collected signals to
transmission sites via high capacity fiber optic cable, converts the signals to microwaves and
then transmits the microwave signals to the customers homes. Like satellite television, wireless
television requires you to purchase or rent a dish antenna and a receiver. In Canada, wireless
service is offered by Look TV.
Unlike cable television, satellite and wireless television requires line of sight technology. This
simply means that the dish antenna needs a clear view of the satellite or microwave transmitter to
receive the signals. Therefore, a prospective buyer is required to undergo a site evaluation before
purchasing to ensure that there are no obstructions in the neighborhood that would block the
signal.
In the early 1980s, the size and cost of satellite dishes were prohibitive for the individual viewer;
therefore, they were used mainly by cable companies to receive a large variety of channels and
then transmit them to their subscribers. As the cost of satellite dishes decreased, viewers began to
choose a direct-to-home satellite system instead of cable service because, after making the initial
capital investment in hardware, viewers could tune into any channel that was transmitted by
satellite for free, whereas the local cable company offered a limited number of channels for an
ever-increasing monthly fee. However, the satellite industry faced a setback in 1986 as
broadcasters began to scramble their signals, forcing viewers to pay for special decoding
receivers. In the mid 1990s, the satellite industry began to grow again, mainly because they could
take advantage of digital technology faster and easier than the cable companies. Today, about
one in twenty households in North America has a satellite dish antenna.


With satellite and wireless television, a symptom called rain fade is a common problem. This
occurs when there is a heavy rain, which can result in the obstruction of the signals or even a
blackout of service. If the dish antenna is installed improperly, these outages are even more
likely to occur. Also, an accumulation of snow and ice during the winter months can reduce the
quality of the reception. Another disadvantage is that you cannot watch multiple channels on
different television sets without purchasing or renting additional receivers. With cable television,
no additional receivers are required to view analogue television channels on different televisions.
Internet
Originally, Internet access was available to the public only through telephone lines. In the 1990s,
cable companies began offering Internet services to their subscribers utilizing their cable lines.
Despite having cable lines already in place, cable companies are required to make substantial
investments in equipment and software to build the end-to-end IP networking infrastructures
necessary to support the high-speed Internet service. This includes items such as modems,
routers, servers, security systems and network management tools.
Competition between the cable and telephone companies has been intense. The telephone
companies, who use dedicated lines, claim that telephone lines are both faster and more secure
than cable because the subscribers connection is not shared. Conversely, the cable companies
claim that cable is faster than telephone lines.
In reality, either service can be faster or slower than the other depending on the situation, and the
security risk attached to using cable is minimal. For example, cable may operate more slowly as
more people use the system. Similarly, telephone lines may operate more slowly the further away
the subscribers computer is from the central office. It can be said, however, that at peak
performance, cable Internet service is slightly faster than the high-speed service which is
available through telephone lines.
What is best in any given location depends on availability, price and the reliability of the
competing suppliers. Potential users are well advised to also research speed at various times of
the day if this is important to them, as this may vary, both in terms of a single supplier and
among competing technologies.

Exhibit B
Chord Technologies
Procedures In Developing and Delivering Drafting Projects

The Overall Steps:
1. Acquiring the drafting contract.
2. Obtaining basic municipal maps of the area covered by the contract, along with the data
from the survey of the existing equipment (see item i below).
3. Drafting the appropriate survey maps (see items ii to vi below).
4. Carrying out a quality control review of the maps.
5. E-mailing the completed product to the customer.
6. Expediting the delivery of hard copies of the maps to the customer.
7. Receiving customer approval of the completed work.
8. Invoicing for the completed work and receiving payment.
Additional Detail Related to Steps 2) and 3) Above:
Note: Chord would be involved in all three drafting processes (ii, iv, and vi below) as a
contractor for the cable provider. Chord uses AutoCAD drafting software to produce all of its
drawings. This software is among the most widely used CAD packages available. Chord has
customized the software in such a way that better quality drawings can be produced in less time
than with the standard software package. The customization also provides for more consistency
among drafting technicians. This reduces the time needed to perform the quality control process.
i) Surveying

Surveying is the process of collecting all of the current field information, such as the location of
all houses, apartment buildings, schools, churches, office buildings, cables, aerial and
underground structures, cable systems equipment (amplifiers, splitters, taps, etc.), distances,
accurate street names, addresses and other relevant information. This survey is a local on-the-
ground walk around. When the data accumulation is complete, the data is run through a quality
control process (QCP) to ensure its accuracy, and is then sent for drafting to Chord.

ii) Drafting of Survey Information

This process involves drafting the data collected in step 2) using a computer-aided drafting
system and then running the survey drawings through a QCP to ensure that they reflect the field
data. The information is then sent to the cable providers designers.
ii) Design

This process involves taking all of the existing survey information and redesigning the cable
system to meet the new requirements. The new requirements may involve the addition of new
channels, digital cable service, or Internet over cable service. When the redesign is completed,
the information is returned to Chord.
iii) Drafting of Design Information

The existing survey drawings are now modified, using the redesign information, to create
construction drawings. The modified drawings are run through the QCP to ensure their accuracy,
and then forwarded to the construction division of the cable provider.
iv) Construction

The construction drawings are used as the basis for constructing the new cable system in the
field. The appropriate new equipment is installed and tested. Sometimes the newly constructed
system will vary slightly from the construction drawings due to field conditions. Any changes
are hand drafted on As Built drawings in the field. This information is then sent back to Chord.
v) Drafting of As-Built Information

The construction drawings are updated based on the As-Built information provided by the
construction division. They are run through the QCP to ensure accuracy, and are then stored,
both digitally and on paper, for future reference.


Exhibit C

Chord Technologies
Organization Chart
December 31, 1998

Management Committee

Jeff Chase (CEO) Franois Garneau (COO)

Accounting Operations

Data Processing Project Managers

Quality Control
(Linda Morton)

Computer Systems, CAD jockeys
Design and Maintenance
Business Planning
Customer Relations


Exhibit D

Chord Technologies
Merger Proposal From CCC Ltd.
November 28, 1998
The Company

XPL Ltd. (XPL) is an inactive subsidiary of Cable Construction of Canada Ltd. (CCC). CCC has
a thriving business in the construction aspect of cable installation. It has tried to develop its own
drafting and design operation twice in the past, but has been unsuccessful.
The Proposal

XPL would purchase the assets of Chord for $400,000 in cash plus 34% of the outstanding
shares of XPL. In addition, both Chase and Garneau would be employed as executives of XPL at
annual salaries of $120,000 each, with a minimum 5-year term, conditional on annual sales being
maintained at no less than $1,000,000. CCC expects to provide a minimum of $1,000,000 in
revenue to XPL through its construction customers. CCC will also ensure that there is sufficient
cash flow available, i.e., up to 75% of any outstanding receivables. XPL will pay an annual
dividend of not less than 50% of its after-tax income (the tax rate will be approximately 40%).
The Analysis

It appears that XPL would basically be using cash collected from Chords current
receivables to finance the $400,000 of upfront money it needs to pay for Chords assets.
Without the merger, Chase and Garneau have projected that they will net $200,000 each
in 1999 from Chords operations.
Based on the data projected by CCC as well as Chase and Garneaus own knowledge of
direct costs, their most favourable calculations indicate that XPLs 1999 net after-tax
income would be about $400,000. Therefore, Chase & Garneaus share of any dividend
would be about $68,000 (i.e., .5 x 34% x $400,000). This would give each of them a
salary of $120,000 and a dividend of $34,000 for the year.
The Discussion

Chase and Garneau would not be averse to taking an early gain on their company if it provided
enough of a nest egg to provide some security. However, to receive the cash equivalent of their
current receivables plus a job with a five-year harness for substantially less money than they
expect to make by retaining their business was not very attractive.


The Counter Offer

After reflecting on the proposal, Chase and Garneau decided that the offer was quite
unsatisfactory from their perspective, but if CCC seriously wanted to merge XPL with Chord,
they would make the following counter offer:
$1,000,000 in cash plus 50% of the shares of XPL.
Executive positions at XPL, at an annual salary of $150,000 each, with a two-year guarantee.
Positions on the board of directors for both of them.
Option to sell their shares in XPL to CCC for $1,000,000 after two years, payment terms
open to negotiation before closing.

Chase and Garneau were willing to negotiate somewhat from this position, but they wanted to
establish some realism in the discussions which they felt was lacking to this point.


Exhibit E

Chord Technologies
Probable Billing Rates

Type of Service

Architectural drafting

Cable systems survey mapping
Billing Rate in Canadian Currency

$30 to $35 per hour

$150 to $225 per mile
or $93 to $140 per kilometre

Exhibit F

Chord Technologies
Condensed Operating Results
For the Years Ending December 31

1998 1997
Revenue from survey maps
Other revenue

Contract expenses

Income before partners taxes

$900,000
10,000

315,000

468,000

$580,000
32,000

160,000

340,000

October 2001 CMA Entrance Examination Part 2 - Additional Information

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

October 2001


Part 2

(Time Allowed: 4 hours)

Notes:
i) Candidates must not identify themselves in answering any question.
ii) This examination has a total of 8 pages and consists of one question. Ensure that you
have a complete examination question paper before starting to answer the question.
iii) All answers must be written on official answer sheets. Work done on the question paper
or on the Backgrounder will NOT be marked.
iv) Included in the examination envelope is a supplement consisting of formulae and tables.
It is a standard supplement that may be useful for answering the question on this paper.
v) Part 2 consists of one case question, which you are to answer in the four hours allotted.
vi) Examination answer sheets must NOT BE REMOVED from the examination
writing centre. All used and unused answer sheets and working papers must be sealed in
the examination envelope and submitted to the presiding officer before you leave the
examination room.


Additional Information

Historical Update
Effective with its fiscal year commencing January 1, 2000, Chord was incorporated and was
renamed Chord Technologies Ltd. The two founding partners were issued 1,000,000 common
shares each in return for $1,000 each in cash. The incorporated entity recorded the capital assets
at their tax values, which were approximately equal to their net fair values at the time. The only
other items transferred to the corporation were some cash, the accounts receivable, the accounts
payable and some nominal amount of supplies and prepaid expenses. The net difference (i.e.,
value of transferred assets less transferred liabilities less $2,000 share equity) was credited
equally to Chase and Garneau and recorded as a liability in the Due to shareholders account.
For tax purposes, a Section 85 rollover was filed to establish that this was essentially a sale to
oneself.
On January 1, 2000, Chord Technologies, the partnership, ceased to function as an active
business and its federal business number was cancelled. With the agreement of its existing
customers, all of Chords contracts were continued under the new corporate name. As planned,
the new corporation ceased to use contract workers and instead hired full-time employees at the
same rate per hour as before. Although some of the previously contracted workers agreed to sign
on as employees, including Linda Morton, many declined the offer and Chord had to hire and
train new staff.
During 1999 and the first part of 2000, Chord continued to obtain significant contracts from U.S.
cable companies to prepare survey maps. In fact, for the first quarter of 2000, billings had topped
$475,000 and Chord had contracts in hand for an additional $1,425,000 to be completed by year
end. Expectations were that revenues would easily top $2,000,000 for the year, provided that
competent staff could be found to produce the volume of work required. Unfortunately, the
turnover of CAD jockeys was beginning to become a problem, primarily because of the lack of
any visible career path that Chord could offer.
The pressure to maintain production and keep pace with the mounting volume of administrative
concerns, combined with the prospects of a substantial increase in profits, led Chase and Garneau
to hire a receptionist-bookkeeper and to increase the number of CAD jockey positions to 26 in
early 2000. A third project manager position was also established.
Due to the much higher level of activity, there had been no progress made in terms of resolving
the issue of the companys dependency on the cable sector. Consequently, Chords resources had
been increasingly tied up in accounts receivable and work in process, causing Chords working
capital requirements to frequently exceed its line of credit. Additionally, CCC Ltd. had not
responded to Chords counter offer and Chord had not pursued the issue further.


The April 2000 Board of Directors Meeting
Both Chase and Garneau had been working long hours on various aspects of the business and,
despite its apparent success, there was a sense that things were somewhat out of control. Among
other things, the time demands of staff recruiting and training were taking a heavy toll.
Competition for techies was intensifying and recruiting was becoming more difficult. In
addition, Chase and Garneau were not very satisfied with the level of administrative support they
were receiving.
Linda Morton, however, continued to perform very well and Carol Milan, one of the CAD
jockeys, had become a natural leader in the office. Carol was often the first one that others on her
team would turn to if they were having a problem. Chase, in particular, wanted to ensure that
Chord fully utilized her talents and retained her interest.
In light of the above, the following decisions were made at the April 2000 board of directors
meeting:
As a staff retention measure, it was decided to give all permanent technical staff a 20%
increase in their hourly rates.
Linda Morton would be promoted to the new position of office manager and relieved of her
quality control responsibilities.
Carol Milan would be promoted to the quality control manager and would also be used to
assist with the training of new CAD jockeys.
The Remainder of 2000
During the last three quarters of 2000, the following occured at Chord Technologies Ltd.:

Morton and Milan settled into their new positions and did a good job. However, Morton
expressed a desire for greater participation at the decision-making level.
The contract work continued at a steady pace, but there were signs of a leveling off of
activity in the industry, particularly in the cable upgrading sector, as the impact of the costs
of amalgamation began to be felt. Chords main customer advised Chord not to be concerned,
as it would be continuing cable upgrading and would require 700 miles per month of survey
mapping in 2001. While this would represent a small decrease relative to current levels, it
could easily be handled through attrition at the production level. If necessary, the project
managers could be reduced by one or their hands on requirement could be increased.
Receivables continued to be outstanding for significant periods of time, preventing Chord
from accumulating any significant cash reserves.
Chase and Garneau turned down another proposed merger.

2001
In January 2001, Chord was advised by its main U.S. customer that there would be a temporary
cutback in the upgrading of cable systems. Its head office declared that there would be a 25%
budget reduction across the board for the next six months. The impact on Chords contracts was
that average mapping requirements would drop to about 500 miles per month. The customer
contact assured Chase, however, that this was only temporary, and that regular volumes should
resume at the end of the six-month period.
Notwithstanding the above, Chase requested payment from the customer of the US$609,600 in
billings currently outstanding, and his contact promised to look into the matter. Subsequently, the
contact advised Chase that the outstanding invoices had either not been received or had been
misplaced, and requested Chase to re-invoice them. Chase did so shortly thereafter.
Chase and Garneau discussed the implications of the unforeseen reduction in survey mapping
business at the January 2001 board of directors meeting. Although no reduction in revenues can
be received in a positive way, they saw this temporary downturn as an opportunity to perform
staff reviews and ensure that quality had not slipped during the recent busy period. Chase also
noted that this volume reduction would allow him to ensure that all the proper year-end
procedures were carried out. By coincidence, Chord was two CAD jockeys below what it ideally
needed for its workload previous to receiving this news. Not surprisingly, they decided not to fill
these positions in the short term.
The following other issues were raised at the board meeting:
Chase expressed an increasing concern regarding collection of receivables, a situation that
was putting serious pressure on funding the regular payroll.
Garneau suggested that they should look more seriously at prospects for diversification.
Chase agreed; however, no definite plans were made in this regard.
In August 2001, Chords main U.S. customer advised them that, as a result of the company
having had its credit rating reduced by Dun and Bradstreet recently, its head office had put a
temporary hold on all new cable upgrade projects, with a few very specific exceptions. It was
expected that it would take the company between twelve and eighteen months to reestablish its
desired working capital position. Chase was advised by his contact at the company that Chords
share of the limited work available would be only 50 miles per month. In a related matter, Chase
thanked his contact for his recent efforts in getting some of Chords invoices paid, but pointed
out that payments were still substantially in arrears. His contact agreed to do what he could, but
blamed the problem on head office. Nevertheless, he assured Chase that payment would be
forthcoming shortly.

Possible Options
Diversification

With the decrease in the survey mapping business, Chord could more vigorously pursue other
CAD applications, such as some of those services Chase and Garneau have provided or
experimented with in the past. These include the following:
1. Architectural design and drawings for residential housing.
2. Drafting support for architects.
3. Program installation, setup and training for CAD software.
4. Customization of CAD software.
5. Industrial design production drawings.
6. Corporate logo and web-site design.
7. Aerial photography survey map drafting.
For items 3 and 4, Chase would currently be required to do the work. For items 1 and 6, Chase or
Garneau could fulfill the work requirements, though Chase is more inclined to the creative side
than Garneau. For items 2, 5 and 7, any qualified CAD jockey could handle the work with
minimal supervision. (See Appendix 1 for probable billing rates.)
Acquisition
Chord has an opportunity to acquire a small CAD service bureau located close to Chord. This
company, known as Computer Design Services Inc. (CDSI), currently specializes in providing
CAD jockeys for short-term or replacement assignments. It also has the ability to design web-
sites and carry out other CAD applications. The company continues to be reasonably successful.
In what is known to be a low margin business, CDSIs most recent three-year history is as
follows:
2000 1999 1998
Gross revenue $4,360,000 $4,010,000 $3,650,000
Income before owners salaries and income taxes 434,000 388,000 365,000
Net income 120,000 120,000 90,000
Retained earnings 220,000 190,000 160,000

Indications are that CDSIs shares could be acquired for $852,000, with $402,000 payable upon
closing and $150,000 per year for the next three years. All three of its shareholders would be
equally happy to either leave CDSI or continue on a salary basis. In the latter case, two of the
three, Ella Nehrik, an MBA in human resource management, and Carl Ho, an architectural
technologist, would be willing to lend their after-tax share proceeds back to the business on a
renewable term basis at an interest rate of prime plus 1%, on the condition that Chase and
Garneau would provide a personal guarantee.

Employment
Chase and Garneau are both easily employable. In fact, both have had job offers in the recent
past that they could still accept. In Garneaus case, the offer is from an uncle in another province
who is a partner in a well-respected firm of architects. This experience could lead to several
possibilities in the future. First, a service bureau for providing CAD services to architects could
be started, if pricing could be kept competitive. Second, contacts in the cable industry in that
province could be made. Third, this experience could provide invaluable information and leads
with a view to opening a Chord office in a major city in that province at some future time.
Alternatively, Garneau could also find employment locally.
Chase has two existing offers, one from a local firm entailing a twelve-month consulting and
training assignment that would allow him to stay on the cutting edge of CAD technology and
further develop his instructing skills. Presumably, Garneau could also benefit from Chases
experience by eventually offering consulting and training services in French as well as in
English. Chases second offer is from his residential construction friends to establish and manage
an architectural design department for them.
Other
a) Chase and Garneau could simply wind-up Chord and go their own ways for now as far as
business is concerned. Perhaps they could resume working together at a later time.
b) Chord could suspend operations until business picks up in the cable upgrade industry.
c) Chord could be sold, albeit at a very sacrificial price, perhaps to Linda Morton and Carol
Milan.
d) Chase has again been offered a contract to go to Japan. This contract would be for a
maximum of three years. Chase would be paid the equivalent of US$200,000 annually
and he would be entitled to renew or cancel the contract on 30 days notice on either
anniversary date. If his wife of six months remained in Canada, his annual living costs in
Japan would be in the neighbourhood of US$120,000, including income taxes. If he takes
his wife, who would not be employable in Japan, his annual living costs would increase
to US$160,000.
In October 2001, Chase and Garneau decided to solicit the services of a consultant, Gerry Parker,
to assist them in sorting out their options.
Preliminary Research Findings
In preparation for his assignment, Parker undertook some preliminary research and discovered
the following:
Although the list of employment options above was prepared as objectively as possible, the
shareholders of Chord have certain personal priorities. Jeff Chase, whose wife has just started
a job in the marketing department of a large automobile manufacturer, would see going to
Japan at this particular time as a measure of last resort. Indeed, he would prefer to be able to
function from his present location. Garneau, who is currently unattached, would see working

for his uncle as either a last resort or a short-term solution. He would prefer a solution that
includes the continuance of Chord and its recovery as a creative, profitable company.
Although Chase is, perhaps, less sentimental about Chord, he also sees it as a viable and
desirable option. He, too, would prefer a solution that includes the rehabilitation of Chord.
Both Chase and Garneau continue to believe that they can do well together with their
complementary abilities.
A case could be made for having all of the survey work done by the CAD jockeys while
Chase and Garneau pursue more challenging and profitable activities more in line with their
unique and valuable talents, an observation that both have made from time to time.
The operations of Chord have actually been very basic in its short existence. This is probably
a good thing, since both Chase and Garneau have been handling areas of the operations for
which they have only minimal training and experience.
Until the end of 1999, the accounting function consisted of keeping the minimum amount of
data needed for filing personal tax returns for the partners and meeting other compliance
requirements as necessary. Since partnerships in Canada are not required to pay tax on work
in process, Chord had not developed any record keeping system for tracking it. Accounting
for capital assets has been done by the tax professional used by the partners either at personal
tax time or any time that they have required financial statements for any other purpose.
Although Chase has an innate ability to balance a chequebook, he has little knowledge of
bookkeeping or accounting. With the implementation of commercial accounting software,
Chase found the concepts of journal entries and ledger accounts to be, at the very least, a
time consuming distraction.
Although Chord has experienced periodic pressure on its cash flow since its inception, its
past success has allowed Chase and Garneau to accumulate a significant amount of personal
net worth. However, as a result of Chords inability to satisfactorily increase its line of credit
at the same pace as its working capital needs, Chase and Garneau have had to periodically
advance cash to the company. The current balance of the Due to shareholders account is in
excess of the $300,000 that Chord has in overdue receivables. If they were inclined to, Chase
and Garneau could raise up to an additional $200,000 to further finance Chords operations.
Chord currently has only nominal liabilities other than payroll and amounts owing to
shareholders. It expects to meet its payroll obligations from receipts related to the contracts
currently nearing completion, provided that it does not incur costs for idle employee time.
Chords current line of credit is $50,000.
Chords total survey mapping contracts have dropped to 70 miles per month (50 from its
main customer and 20 from other smaller customers). The general sentiment in the cable
upgrade industry is that it will undergo a gradual recovery over the next five years, as the
returns on recent acquisitions and mergers start to be seen in real cash terms. It is clear that
upgrading of cable systems cannot be ignored indefinitely or there will be a significant
impact on market share.
Ben Hiro, currently one of Chords project managers, has great difficulty relating to the other
CAD jockeys because he is not able to understand what it is that people do not understand.
However, he has an innate ability to keep the computers in his section running and to quickly
correct any errors that are discovered in quality control. Thus, his intellect is respected but

his communication skills are not. Technical performance on the job got him the promotion
from CAD jockey to project manager. Wendy Smits, another project manager, seems to be
extremely well liked by the other employees. While she is not considered to be particularly
clever, she does have good people skills and is able to problem solve through the collective
skills of the other CAD jockeys. The third project manager, Martin Halliday, seems well
suited to this particular role. He has good planning skills and adequate communication skills.
CAD jockeys on his projects seem to think he is almost invisible, though they all agree that
Hallidays projects seem to run very smoothly.
Of the current group of CAD jockeys (16, including the project managers), 10 are considered
to be easily replaceable while the others are thought to be superior.
Linda Morton has some past experience as a controller of a small corporation and has
expressed an interest in enrolling in the CMA program. She has also expressed a desire to
become a shareholder if she is to continue with Chord, as she is concerned with her financial
security. She likes her employers, but will need to have her wishes addressed soon, or she is
likely to pursue alternatives that she perceives as being more consistent with her best
interests. In addition, Carol Milan has enjoyed the training part of her position much more
than the quality control work, which she finds tedious. She seems relatively unconcerned
about her long-term future, but she would also be interested in becoming a shareholder.
One of the main difficulties that Chord has encountered in its dealings with its major client
has been collections on account. While one might expect that a company of this size and
reputed wealth would be quick to pay these relatively minor invoices, such is not the case.
The process seems to be very involved. First, Chord must complete and send the maps. After
a period of up to six weeks, the work is then approved and Chord is given permission to send
its invoices. These are approved by the operating department, but seem to go somewhere else
for a rest before finally being processed for payment and paid. The turnaround time has
been as long as four months, and occasionally some amounts have been outstanding for more
than six months. Despite Chords relatively strong profit position, this substantial time delay
puts constant pressure on its cash flow position. To date, this has had a limiting effect on the
steps that Chord could take in terms of diversification.

Chase has attempted to address this problem with the client. As a result, there has been some
gradual improvement (the time from billing to collection rarely exceeds 90 days now) and,
when the volume of business from this client was at its peak, the problem was less of a strain
on Chord. Fortunately, the profits of the preceding years have permitted the company to
establish a line of credit and also to build up some equity (see Appendix 2).
Chord currently has a five-year lease at $30,000 per year, with over three years left to run.
There is a possibility that the adjacent tenant would be interested in taking over all or part of
Chords current space.
Although the business has a web-site and has actually designed a few as well on a fee basis,
it has not been developed as an advertising vehicle. Rather, Chase has used it to experiment
with his web-site design skills.
Further discussions with the principals of CDSI indicate that Ella Nehrik has the best grasp
of the industry specific knowledge. If any of the existing shareholders of CDSI were to
continue working for the company, they would expect to be paid the typical management

salary in the industry of $90,000 per year. Tax on the capital gain from selling the shares is
expected to total $180,000, since all three principals are in the high personal tax bracket.
CDSI itself has an effective rate of tax of 40%.
While recognizing that the CDSI proposal has certain positive attributes, Garneau felt that
Chord might just be acquiring someone elses problems and that it might be better to focus
on things with which he and Chase can be involved from the beginning. Chase, however, felt
that startup projects carry substantial risks that an already existing business does not.
Chase and Garneau have recently received another proposal from CCC Ltd. (see Appendix
3). They have asked Parker to include it in his considerations.
For calculation purposes, an exchange rate of Canadian $1.50 per U.S. dollar is used. The
prime interest rate is currently 7%.
Chord had developed a customized AutoCAD system that allows for a faster turnaround
time than most of its competitors can provide. Conversely, many of its competitors provide
all-inclusive or turnkey services which Chord does not offer. These companies provide the
survey, drafting and design functions, and some of them also provide the construction
services.

Required:
As Gerry Parker, develop an integrated report for Chase and Garneau, advising them on
the strategic direction that they should take, complete with recommendations and an
implementation plan, and addressing other issues and concerns requiring their attention.
In undertaking this task, you will need to take into consideration your background
knowledge of the company as well as the additional information provided above.


Appendix 1
Expanded List of Probable Billing Rates

Type of Service Billing Rate in Canadian Currency
Architectural drafting $30 to $35 per hour
CAD training $100+ per hour
Consulting on CAD installations $200 per hour
Web-site development $75 to $100 per hour
Design creation $25 to $500 per hour (it depends on how quickly the
client is satisfied with the design)
Cable systems survey mapping $150 to $225 per mile or $93 to $140 per kilometre

Appendix 2

Condensed Financial Information
For the Years Ending December 31

2000 1999 1998
Revenue from survey
maps
$1,890,000 $1,620,000 $900,000
Other revenue 16,000 6,000 10,000
Wages and benefits 954,000 -
Contract expenses - 621,000 315,000
Shareholders salaries 300,000 - -
Income before taxes 502,000 888,000 468,000
Year-end balances:
Cash (115,000) 62,623 (3,816)
Accounts receivable 914,400 675,000 361,200



Appendix 3

Extracts from CCC Ltd. Joint Venture Proposal
September 1, 2001

In view of the changing conditions in the industry and the fact that both of our operations have
been significantly affected at least temporarily, and given that there could be a significant benefit
in being able to compete on a turnkey or all-inclusive basis in the industry, we have decided to
make a different proposal at this time. To enable CCC Ltd. to legitimately offer a turnkey service
to Canadian cable companies, we must be able to provide the survey mapping function. As is
widely known, we have been unsuccessful in attempting to do so in the past. Thus, we would like
to propose the idea of setting up a joint venture with Chord Technologies Ltd. for the purpose of
servicing the Canadian market.
The Proposal
1. XPL will issue to Chord 10,000 shares of XPL in return for $50,000. XPL will accept
payment in the form of computer equipment and work stations valued at approximately
$50,000. CCC currently owns 10,000 shares of XPL; therefore, after the transaction, both
CCC and Chord will each own 50% of XPLs shares.
2. CCC will provide $50,000 in cash as our matching share of the startup assets.
3. XPL will lease space from Chord on a break-even basis for as long as this is advantageous to
Chord.
4. CCC will contract with XPL to provide survey mapping support services for all such
contracts that it acquires at its third-party contract price, less a three percent (3%) finders fee
to cover related administration costs. The price for services will never be lower than $85 per
kilometre net. (Note: 1 kilometre = .62 miles.)
5. CCC will undertake to ensure that XPL has sufficient cash flow and will provide an
administrative staff person to XPL on a contract basis who will be responsible for the
accounting and reception duties as well as any other miscellaneous administrative matters
that may arise.
6. CCC will guarantee a minimum of 100 kilometers of survey mapping per month, to
commence no later than three months after the agreement is finalized.
7. Chord will sign a contract with XPL to arrange for all necessary technical staff (to be
employed by XPL) and provide all necessary operational supervision (including quality
control) to XPL on a timely and priority basis. Compensation will be at the rate of $25 per
kilometre mapped, increasing annually by $2 per kilometre, and will be paid net 30 days.
8. The term of the agreement will be for five years, but can be terminated by either party upon
six months notice, subject to the completion of any existing work in process.

October 2001 CMA Entrance Examination Part 2 Markers Comments
Markers Comments
October 2001
Part 2

While Part 1 of the examination tests the candidates technical knowledge of the topics in the
CMA Entrance Examination Syllabus, Part 2 tests the candidates higher order skills, i.e.,
strategic thinking, analysis, integration, judgment, and written communication. Part 2 consists of
a single integrative case and requires at least a general understanding of a wide cross-section of
topics appearing in the CMA Entrance Examination Syllabus.
The case information is presented to candidates in two parts: the Backgrounder, which is
distributed two days before the examination sitting, and the Additional Information, which is
distributed at the start of the examination sitting. Although the Backgrounder is provided ahead
of time, this cannot be considered a take home examination, as the relevant issues to be
addressed are only revealed in the Additional Information.
To fairly assess the candidates higher order skills, a global marking approach was used. For
strategic thinking, markers assessed the candidates understanding of the strategic planning
process and ability to use the process systematically to solve the business problems. For analysis,
markers assessed the candidates ability to identify and analyze at an appropriate level of depth
the many issues that arise from the case. The quality of the candidates strategic and operational
analyses was assessed as part of the integration and judgment skills. The candidates ability to
organize and clearly communicate their answers was assessed as part of their written
communication skills.
The Part 2 case involves a private Canadian company, which began as a partnership between two
talented architectural technologists. The company (Chord) has primarily provided a specialized
survey map drafting service to a single client, a large U.S. cable company. Recent changes in the
telecommunications industry has resulted in a slow-down in this clients cable upgrading
initiative, which has caused it to drastically reduce the amount of work it contracts to Chord.
Now, less than two years after incorporation, Chords two shareholders must examine the
companys strategic direction and decide how best to approach the future. In addition to the
options of downsizing, selling the business, or changing Chords strategy, two opportunities have
recently been presented and require consideration (i.e., a joint venture proposal and the
opportunity to diversify by acquiring an existing company).
As a consultant hired by Chords two shareholders, the candidate is expected to use an
appropriate strategic approach to analyze the companys situation, assess the strategic options in
light of the companys strengths and weaknesses, interpret and use the financial and non-
financial information provided in the Backgrounder and Additional Information, and write a
formal report to the shareholders, exhibiting appropriate written communication skills. The
report should advise them on the strategic direction that should be taken, complete with
recommendations and an implementation plan. Analysis of the relevant operational issues
presented in the case should be appropriately integrated into various sections of the report.


Overall, performance was acceptable, with most candidates making an effort to use the strategic
planning process, appropriately balance the quantitative and qualitative aspects of their analyses,
and provide a report in a reasonably acceptable format.
It appears that candidates who performed well on Part 2 came in with an open mind, as well as a
clear understanding and familiarity with the information in the Backgrounder. They were ready
to react to the issues presented in the Additional Information and drew on the information from
the Backgrounder only to the extent that it was required to support their analyses of the relevant
issues. Some candidates, however, tended to focus too much on the information provided in the
Backgrounder. The purpose of the Backgrounder is to increase the candidates familiarity with
the company and the industry in which it operates; it does not provide the main issues that a
candidate will be required to address in answering the examination.
The average candidate attempted to follow a reasonable approach to the case (e.g., situation
analysis, analysis of options, recommendations, implementation plan). Weaker candidates
overemphasized one or two aspects of the case analysis, or addressed all of them very
superficially. There was a tendency for some candidates to describe various strategic analysis
models without demonstrating an ability to apply the models.
It appears that some of the weakest candidates brought with them a canned analysis of the
Backgrounder information and attempted to use this analysis regardless of whether it applied to
the situation that unfolded in the Additional Information. In preparing to challenge the
examination, candidates should avoid forming preconceived notions of what might appear in the
Additional Information because this makes it more difficult to adjust their thinking to adapt to
the new information.
Other common tendencies of weaker candidates were as follows:
1. Spending too much time on quantitative analysis. While some quantitative analysis is
required in a complete report, much more weight is given to how the candidate
interprets and uses the quantitative data in their analyses of the strategic options.
Providing large volumes of calculations when the results of such analyses are of limited
usefulness in solving the main issues is not a productive use of scarce examination time.
2. Spending little or no time on quantitative analysis. Some calculations are necessary for
proper assessment of the companys situation and the strategic options.
3. Spending too much time on preparing a situation analysis and not enough on applying the
results of this analysis in evaluating the strategic options or arriving at recommendations
for the business issues.
4. Dealing with each strategic and operational issue in isolation (i.e., failing to integrate the
various issues).
5. Ignoring or paying little attention to the immediate over-capacity issue.
6. Spending too much time on window dressing such as the executive summary. While all
elements of a report (including a table of contents, executive summary, and introduction)
are required for a good grade for the written communication segment, these elements may
be relatively brief.

Strategic Thinking
This section pertains to the candidates understanding of the strategic planning process,
knowledge of a strategic planning method, and ability to apply the methodology in a systematic
way to arrive at an integrated strategic plan. It focuses on the integrity and consistency of the
logic from one step to another in the strategic planning process.
Strong performance was reflected by the following:
A description of the strategic planning method being used or the importance of a systematic
approach.
Development of a purpose/vision/mission for the company.
Preparation of a comprehensive situation analysis, whereby the organization is viewed from
a broad perspective.
An application of the situation analysis and consideration of the shareholders wishes in the
assessment of the strategic options.
A clearly stated recommendation of a strategic direction that comes out of the analysis.
An actionable implementation plan that would serve as a useful guide to management by
addressing the most critical strategic and operational issues that would affect the success of
the plan, and indicating what should be done, who should do it and when it should be done.
Most candidates recognized the importance of using a strategic planning process and understood
its various elements, but only the best candidates were able to apply an appropriate approach
both systematically and effectively. A number of candidates placed too much focus on the
employee recruitment problems that occurred in the past and did not realize that the urgent issue
was one of overcapacity and the immediate need for downsizing.
Candidates usually attempted a situation analysis (e.g., SWOT), and the stronger candidates
reflected their analysis in assessing the strategic options. Unfortunately, some candidates spend
too much time applying several situation analysis models (e.g., SWOT, Porters Five Forces,
PEST), or applied them ineffectively (e.g., focusing Porters Five Forces analysis on the
telecommunications or cable industry instead of on the architectural technology services
industry). As well, some candidates approached the situation analysis as a stand-alone exercise
and made little or no use its contents in the rest of the report.
Most candidates appropriately made one or more strategic recommendations; however, many did
not clearly explain why they chose a particular strategic direction.
Most candidates attempted to provide an implementation plan, but some of these plans were
simply a list of unsupported recommendations regarding various operational issues, which did
not explain how they would assist in the implementation of the recommended strategies (i.e.,
they did not focus on the functional changes that would have to be made to support the strategic
recommendations). As well, candidates often did not clearly indicate what should be done, by
whom and when it should be done.

Analysis
This section pertains to the candidates ability to make use of the information available in the
case. This includes the ability to identify the many issues in the case that need to be addressed
(breadth), and to analyse the issues in detail (depth).
Breadth
Strong performance was demonstrated by the following:
Clear recognition of the strategic issues (e.g., lack of diversification) and strategic options
(i.e., diversification, joint venture proposal, acquisition opportunity, temporary downsizing,
suspend or discontinue operations, employment opportunities).
Clear recognition of most of the business (operational) issues that are problems or
weaknesses that need to be addressed (e.g., cash flow problem, short-term overstaffing
problem).
Appropriate identification of the issues in the situation analysis (e.g., appropriately
recognizing that the favourable foreign exchange rates present an external opportunity
rather than in internal strength).
Clearly stated recommendations and/or conclusions for most of the business issues that
were addressed.
Depth
Effective use of the information provided in the case to analyse the issues identified.
Appropriate depth of analysis of the issues and alternatives, depending on the information
available and the importance of the issue, i.e., the individual issues and alternatives merit
different levels of analysis (e.g., working capital management merits more analysis than the
lack of advertising, and the joint venture option merits more analysis than the option to
suspend operations).
The inclusion of both quantitative and qualitative analyses in the evaluation of the joint
venture proposal and the CDSI acquisition opportunity, including some assessment of
future profitability.
An examination of the various product diversification alternatives, particularly in terms of
the most productive use of the shareholders time.
Consideration of the effects of the major weaknesses regarding cash flow, overstaffing,
dependence on a single client and lack of product diversification.
Overall, the breadth of analysis by candidates was well done. Most candidates recognized that
lack of diversification of clients and/or products was an issue and addressed the strategic
alternatives to some extent. Some of the weaker candidates failed to address the joint venture
proposal as a strategic option. At times, candidates identified status quo as a strategic option
without realizing that this is not really a viable option in this case, i.e., the company would go
bankrupt if nothing is done at least about the overstaffing. The major business issues were
recognized by most candidates, but recommendations to solve these issues were often not
provided.

The depth of analysis was adequately done by many candidates. However, some focused on the
operational issues rather than the strategic issues, while others focused on the strategic options,
leaving little time to address the operational issues. As well, many candidates provided little or
no quantitative analysis of the joint venture and acquisition proposals. It should be noted that
candidates who did not provide sufficient breadth of analysis could not do well on depth of
analysis (i.e., a sufficient number of issues were required to be analysed for candidates to also
score well on depth of analysis).
Integration
This section pertains to the candidates ability to identify connections between related elements
of the case and to consider, or determine, how one element impacts another. Candidates are
expected to be able to integrate their strategic thinking with their analyses of the issues and the
recommendations arising from their analyses. Candidates should integrate the situation analysis
with the analyses of the strategic and operational issues. As well, they should integrate two or
more strategic elements, strategic elements with operational elements, and two or more
operational elements.
Strong performance was demonstrated by the following:
A summary of some form (executive summary, situation assessment, recommendations,
etc.) tying the key issues and recommendations together, with emphasis on the major issues.
A clear picture of the companys current situation and the important actions it must take to
address its problems.
In the analysis of the strategic options, a discussion on the impact of the various choices on
performance (e.g., profitability, competitiveness, sales, capacity, etc.) or on other specific
aspects of the business.
Referring back to the key success factors, strategic direction, mission, shareholders
preferences, and significant strengths, weakness, opportunities and threats while evaluating
the strategic and operational issues (e.g., consideration of fit of alternatives to the situation
analysis).
Application of integrative thinking (i.e., an explicit discussion of how any issue affects any
other issue) at all levels: between the strategic issues, between the operational issues, and
between the strategic and operational issues.
Consideration of many related factors together in the analysis and a clear reflection of these
relationships in the recommendations and implementation plan.
Most candidates provided some integration between the situation analysis and the analysis of the
strategic and operational issues. Fewer candidates provided integration between the strategic
issues and the operational issues. Weaker candidates failed to explicitly state the linkages or
relationships between issues, and often made vague statements hoping the reader would read
between the lines and make the linkages himself/herself.

Judgment
This section pertains to the candidates judgment from the perspective of understanding what is
important and relevant in the case, what solutions best help resolve the problems, and how the
recommendation can be implemented. Judgment also pertains to the consideration of both pros
and cons as well as quantitative factors in the analysis of the strategic alternatives, the quality of
both the quantitative and qualitative analysis, and the consideration of how the pros can be
maximized and the cons can be overcome in implementing the recommended strategies. Overall,
the candidates analyses are expected to make sense, and conclusions and recommendations are
expected to be logical and consistent with the analyses.
Strong performance was reflected by the following:
Demonstration of appropriate emphasis on what is important in the case, in terms of
strategic and operational issues.
Evidence that the issues have been prioritized, such as a discussion of why some issues are
more critical than others or focusing more on the operational issues that will support the
recommended strategic direction and less on those issues that would no longer be relevant.
Use of the information provided in the case to analyse, both quantitatively and qualitatively,
the various alternative and issues in the case (i.e., evidence that the candidate correctly read
and understood the case information and used the information effectively in the analysis of
the various issues).
Consideration of both pros and cons in the analysis of the alternatives, as well as how the
cons could be overcome.
Use of appropriate methodologies and correct application of the methodologies, indicating
an understanding of the various topics of the CMA Entrance Examination Syllabus
including how and where to apply them (e.g., cash flow/profitability analysis, return on
investment, net present value/payback, breakeven analysis).
Relevant and appropriate analysis of the strategic and operational issues, reflecting a high
quality of analysis that makes sense for the situation.
Conclusions and recommendations that are relevant to the issues discussed, especially the
major strategic issues, as well as being logical and consistent with the analysis provided,
useful in addressing the major concerns, and convincing to the reader.
Overall, candidates did not demonstrate a reasonable level of judgment. Although many
appropriately recognized the importance of the strategic alternatives relative to the operational
issues, some candidates ranked all issues as being of equal importance or looked at operational
issues in isolation (i.e., without relating them to the strategic issues). As well, some placed too
much emphasis on the situation analysis and/or analysing the strategic options, leaving
insufficient time to address an implementation plan and the important business issues.
Most candidates appropriately spent most of their time on qualitative analysis and used
quantitative analysis only to strengthen the qualitative discussion. Some of the stronger
candidates considered the impact of various options in connection with the resource utilization
issues. Poorer candidates either failed to complete any quantitative analysis or spent too much
time on providing calculations without interpreting or using the results in their discussions of the
relevant issues. As well, in many cases the quantitative analysis contained various errors and was

not very useful (e.g., data used in calculations were often not consistent with the data provided in
the case).
Most candidates provided conclusions and recommendations for most of the issues that they
addressed, which usually flowed logically from their analyses. However, some failed to make
definite recommendations, or provided recommendations that were contradictory or not
consistent with the analysis.
Other evidence of weak judgment demonstrated by candidates include the following:
Extensive analysis of matters that do not deal with Chords immediate problem of loss of
work from its major client and Chords strategic alternatives in dealing with its immediate
and future strategic direction.
Analysis of each issue equally with no indication of what is most important.
Not recognizing strategic issues as strategic issues.
Overemphasis on only one strategic alternative or on the options of suspending, winding up
or selling Chord, instead of the options of diversification, joint venture and acquisition.
Lack of consideration of major weaknesses and important business issues (e.g., working
capital management and resource utilization), and/or overemphasis on minor or less
significant business issues (e.g., human resource issues).
Overemphasis or underemphasis on quantitative data.
Superficial qualitative analysis.
Lack of consideration of both pros and cons.
Quantitative analysis that is irrelevant, illogical or full of errors.
Providing general discussions and recommendations that are not specifically tied to the case
facts (i.e., discussion that is so general that it could be applied to any case).
Drawing conclusions that are not consistent with the analysis.
Providing conclusions and recommendations that are not useful in solving the major issues
facing Chord.

Written Communication
This section pertains to the candidates ability to communicate his/her thoughts professionally
and clearly, and present his/her answers in an appropriate format. The main components being
assessed in this section are format, style and language skills.
Format
Format pertains to the physical manner in which a candidates answer is presented (i.e., layout
and organization). Strong performance was reflected by the following:
Use of formal report format, which included the following elements: table of contents,
executive summary, introduction, body, conclusions/recommendations, and appendices or
exhibits.

Well organized presentation, demonstrated by some or all of the following:
- Clearly labelled headings and subheadings to help the reader understand the flow of the
argument.
- Clear reference to exhibits within the body of the report to direct the reader to where the
numbers used in the discussion were calculated.
- Clear separation of each point (e.g., paragraph breaks or bullet points) to help the reader
identify the points supporting an argument.
- Use of tables and lists where appropriate to help the reader understand how points relate
to each other.
Virtually all candidates presented their answers in the form of a report and most included some
form of introduction, along with analysis, recommendations and exhibits. Fewer candidates
included a table of contents and/or executive summary. Some demonstrated a lack of
understanding the purpose of an executive summary, i.e., they neglected to include an overview
of the major issues and recommendations that came out of the report. These candidates instead
provided an introduction that they labelled as the executive summary or a discussion of the
history of the company without an indication of what direction the company should be taking. A
number of candidates also did not provide an appropriate introduction (i.e., an introduction
should provide the purpose and scope of the report). The presentation of most candidates
answers was reasonably well organized and included the use of headings and subheadings. Some
candidates, however, did not provide page numbers or submitted reports in an order that did not
follow the page number sequence, thus making it difficult to properly assess the organization of
the report.
It should be noted that, although legibility of the candidates handwriting is not directly given
weight in the marking, poor or illegible handwriting can impede the readers ability to
understand the candidates message, thereby indirectly affecting the candidates score on the
other sections of their evaluation.
Language and Style
This pertains to how the candidate uses words to communicate. Strong performance was
reflected by the following:
Use of a professional business tone (as opposed to colloquial or familiar tone) and tact.
Few spelling or grammar errors.
Use of appropriate sentence structure (e.g., including subjects and verbs in expressing
ideas) and punctuation.
Clear and concise expression, allowing the reader to understand what the candidate is trying
to say.
Logical and coherent flow, allowing the reader to follow and understand the
argument/discussion (e.g., the logical order of sections and arguments, natural flow of one
section to the next, some closure brought to the analysis of the issues and to the report).
Clear audit trail (e.g., clearly labelling what a number represents in terms of what it is and
how it was calculated, references to exhibits or other sources of information in making an
argument), which help in the clarity and flow of the report.

Most candidates demonstrated adequate language and style. Some candidates made inappropriate
or tactless comments regarding the actions of the shareholders or Chords existing operations. On
occasion, some candidates used unprofessional language such as slang or colloquialisms. While
committing a few spelling and grammar errors were forgiven by the markers in
acknowledgement of the stress of the examination setting, a significant number of candidates
displayed generally poor grammar, spelling and/or sentence structure in their reports,
demonstrating poor language skills.

October 2001 CMA Entrance Examination Part 2 Suggested Solution

Solution to
October 2001
Part 2

The following sample solution presents only one approach to the case. Readers should note that
various other valid approaches and conclusions are possible.

Date: October 18, 2001
To: Jeff Chase and Franois Garneau, Chord Technologies Ltd.
From: Gerry Parker, Consultant
Subject: Strategic Direction of Chord Technologies Ltd.

Attached is the requested report containing my analysis and recommendations regarding the
strategic direction of Chord Technologies Ltd. (hereafter referred to as Chord). The report also
provides an implementation plan and highlights some operational issues that require immediate
attention. I must emphasize the importance of taking quick action no matter how you decide to
proceed. Lack of action, in the short term, can only serve to aggravate the current situation.

Thank you for this opportunity to be of service. I would be more than happy to meet with you, at
your convenience, to discuss the report and any matters arising out of it.

Gerry Parker


A Report to Messrs. Chase and Garneau
of Chord Technologies Ltd.

TABLE OF CONTENTS

EXECUTIVE SUMMARY
INTRODUCTION
SITUATION ANALYSIS
Strategic Direction
Current Mission Statement
Environmental Scan
Financial Analysis
IDENTIFICATION AND EVALUATION OF STRATEGIC OPTIONS
A. Wind Up or Sell Chord and Pursue Other Employment Opportunities
B. Suspend Chords Operations Temporarily
C. Continue to Operate Chord at a Reduced Level of Activity
D. Diversify Chords Line of Services
E. Joint Venture with CCC
F. Acquire CDSI
RECOMMENDED STRATEGY
IMPLEMENATION PLAN
Revised Mission Statement
Immediate and Strategic Actions
Financial Management and Accounting Information Systems
Management
Organizational Structure and Human Resources
Marketing
CONCLUSION
APPENDICES
Appendix 1 SWOT Analysis
Appendix 2 Financial Analysis
Appendix 3 Analysis of CCC Joint Venture Proposal
Appendix 4 Analysis of CDSI Proposal
Appendix 5 Proposed Organizational Structure


EXECUTIVE SUMMARY
In its short history, Chord has experienced rapid growth, but has depended mainly on providing a
single service to a single large customer. This dependency has caused the situation Chord is now
facing: a drastic reduction in business as a result of a downturn in the cable sector of the
telecommunications industry. The lack of diversification must now be addressed. Unless new
business can be generated, you will soon be forced to lay off all, or most, of your staff, at least
until the cable upgrade industry recovers and the survey mapping business improves.
Therefore, the most urgent decision to be made is whether to suspend Chords operations,
temporarily or permanently, run Chord with a couple of employees while, in the short run, you
look to other activities to supplement your incomes and keep current with industry
developments, or make some major changes in the nature and operations of Chord for
implementation in the near future.
Both of you appear to prefer a solution that will revitalize Chord. One option is to take
immediate steps to diversify the line of services offered by Chord, which would utilize the talents
of at least your superior employees. At a minimum, you could temporarily reduce staff to Morton
and Milan, and select short-term options that will best prepare you to manage Chord when
business follows its expected recovery. This would probably require you to offer an ownership
interest to Morton and Milan as an encouragement to stay on.
Another option is to purchase CDSI, which offers potential synergies and a number of possible
diversification options, but would require a significant injection of your personal financial
resources. You could also choose to accept the joint venture proposal from CCC, which would
allow you to retain some of your better employees and would provide some additional income
for Chord.
To make a sensible short-term decision regarding employee retention, you will have to reach a
decision on how you plan to proceed over the longer term. After talking with you and others, and
having evaluated all the information available, is recommended that Chord adopt a strategic
direction that focuses on diversification in the long term. To help accomplish this, the following
is recommended:
1. Continue to operate Chord for purposes of servicing the 70 miles of cable systems
mapping per month, and pursue diversification by adding new services to your product
line.
2. Immediately accept CCCs joint venture proposal regarding XPL.
3. Immediately take the necessary steps to acquire CDSI and offer Ella Nehrik the position
of director of human resources.
Taking these actions will allow Chord to immediately expand its line of services and its client
base, to some extent. Changes will also be required in the areas of human resources, marketing,
financial management and information management to enhance Chords ability to attract and
effectively service new clients, and ensure continued long-term growth and profitability.

INTRODUCTION
Prior to the abrupt decline in prospective business that Chord has recently experienced, Chord
has been managed pretty much on a crisis basis. The current serious crisis has indicated the
degree to which Chord is vulnerable to changes in the industrial environment and has also
brought many underlying concerns to the surface.
The company has a strong technical competency and a core of capable employees. It is fortunate
that it is in a position to survive the current market downturn and has the potential to benefit
immeasurably from its experiences to date. At the same time, quick decisions must be made to
prevent a serious depletion of resources in the short term.
This report evaluates Chords current situation, provides an evaluation of the available strategic
alternatives, and makes some recommendations in this respect. Some of the more specific issues
are then addressed. The report concludes with an implementation plan.

SITUATION ANALYSIS
At the present time, Chord is experiencing a threat to its profitability and employees. While this
has partly arisen through uncontrollable factors, it is also a function of your failure to determine
Chords strategic direction, take advantage of its existing opportunities, take action in response
to existing threats, make more use of its strengths and address its identified weaknesses.
Strategic Direction
Up to this time, you have been consumed with the start-up and keep-up aspects of Chord. This
preoccupation with operations has prevented you from addressing, in any organized fashion, the
important broader issues of long-term strategic direction and vision. These include determining
the answers to such questions as, Why are we in business? What are we good at? What do
we value? What do we want to become? and What should our future technology-product-
customer focus be? Without a strategic direction, you have allowed Chord to become dependent
on a single, large client. As well, you have not been able to foresee the changes in the
telecommunications industry and how these might affect Chord in the long run. In light of the
recent drop in volume of business from your main client, it is imperative for you to now assess
Chords strategic direction.
To help you determine your strategic direction, an assessment of your current situation is
required, beginning with a determination of your current mission statement and then an
evaluation of your external environment, your internal environment and your financial health.
Current Mission Statement
In addition to neglecting to determine a strategic vision, you have not yet clearly articulated your
mission. A mission statement typically focuses on the current scope of the business, and broadly
describes the companys present capabilities, customer focus, activities and business makeup.
From the discussions I have had with you, from other observations I have made, and from
information that has been made available to me, your current mission could be stated as follows:


We are committed to operating a profitable business by offering quick delivery of high
quality drafts of survey maps for the cable sector of the telecommunications industry. At
the same time, recognizing that our corporate success is largely dependent on our human
resources, we are committed to providing as satisfying and rewarding a work
environment as is practically achievable in our circumstances.
Environmental Scan
A summary of some of the strengths, weaknesses, opportunities and threats of Chord is provided
in Appendix 1. This SWOT analysis identifies many of the environmental issues facing Chord
today, which will be further discussed where appropriate in the balance of this report.
Chord has been operating in the communications technology industry over which it has little
control. The major players dwarf Chord in all respects and Chord is a minor player. Chord may
provide the best support in the industry in its niche, but Chord is easily replaceable. As yet you
have not been replaced, but you have felt the impact of an industry-wide cutback over which you
have no control. The demand for competent technicians will also go up and down with the
industry specific economy.
Key success factors in the industry include superior technical skills, quality production, quick
turnaround times, cutting-edge technology, and competitive pricing. In the U.S. market, you have
been able to achieve all of these. However, you should recognize that a contributing factor to
Chords success in the U.S. market has been a competitive price advantage resulting from
favourable foreign exchange rates, which is something else Chord cannot control. Should the
Canadian dollar strengthen, this price advantage in the U.S. could disappear.
You have indicated to me that you are aware of the risks of depending primarily on one large
client and that you have considered diversification as a way to address this situation. I would
agree that a general strategic direction which focuses on diversification of both clients and
products would certainly help reduce the effects of changing external environmental factors on
Chords overall health.
In deciding on the specific strategies to adopt with the objective of achieving a long-term
strategic direction focused on diversification, you should be significantly influenced by your core
competencies. Clearly, your core competencies are your cutting-edge technology, creativity,
superior technical skills, and focus on quality and fast turn-around. It is in addressing services
and products that are particularly impacted by these core competencies that you will be most
successful. Fortunately for Chord, you, collectively, have a wide range of technical
competencies, as evidenced by the areas in which you have previous experience. However, to
maximize the utilization of your core competencies, you will need to delegate some of the non-
core functions to others.
Financial Analysis
Overall, Chord is currently in reasonable shape financially and does not have any significant
short or long-term debt or commitments. The survey map drafting work is profitable, with a
current contribution margin of about $88.92 per mile (see Appendix 2). However, there are some
areas of concern:


Collection of accounts receivable has been a problem, resulting in frequent cash flow
problems especially during the past two years. In 2001, this situation has improved, having
reduced the receivables from $914,000 at the beginning of 2001 to $300,000 as at October
2001. As well, the main customer has provided assurances that payment of the balance owing
would be forthcoming in the near future, which should further improve the cash situation.
With the major cancellation of most of the survey mapping work, future revenues will not be
sufficient to sustain the current level of payroll (see Appendix 2). Employees will either have
to be let go or be re-deployed, and shareholder salaries may have to be withheld or
substantially reduced.
Assuming a reduced payroll and the collection of current overdue receivables, it is estimated
that Chords current line of credit will be sufficient to cover operating cash requirements for
the rest of 2001. Otherwise, you may be required to continue advancing funds to finance
operations.
Chords cash situation is such that a major investment could only be undertaken if you find
an external source of funds or if you advance some personal funds. However, provided that
the outstanding accounts are, in fact, collected and costs are effectively minimized, this
should only be a short-term issue.
With the decrease in business and more than three years left on the lease, Chord will have
expensive excess space. If necessary, you can sub-lease some or all of the space to the
adjacent tenant.
IDENTIFICATION AND EVALUATION OF STRATEGIC OPTIONS
While it appears that Chords long-term strategic direction should focus on diversification, you
first need to be concerned with its short-term survival. It is evident from the previous analysis
that you cannot continue Chords operations as is with the same level of employees. There are a
variety of options open to you (as follows), which should be evaluated in terms of compatibility
with your core competencies and your personal desires, as well as their feasibility and their
effects on your personal wealth:
A. Wind up or sell Chord and pursue other employment opportunities.
B. Suspend Chords operations temporarily.
C. Continue to operate Chord at a reduced level of activity.
D. Diversify Chords line of services.
E. Enter into a joint venture with CCC.
F. Acquire CDSI.
A. Wind Up or Sell Chord and Pursue Other Employment Opportunities
Both of you have expressed a preference for pursuing your economic future in cooperation with
each other and through the vehicle of Chord Technologies Ltd., if at all practical. Therefore, this
option should only be considered if there is no feasible way to continue operating Chord
profitably.

B. Suspend Chords Operations Temporarily
This option is not as drastic as winding up Chord altogether and it recognizes the reality of the
market conditions in the cable upgrade industry. It would enable you to accept consulting
positions or other employment that would provide you with the opportunity to develop contacts
in the Canadian cable industry and/or contacts in other industries. Eventually, when the cable
upgrade industry begins to recover, you could start Chords operations again and use the newly
developed contacts to solicit new business for Chord, thereby achieving diversification. On the
downside, all of Chords employees would have to be immediately laid off and there could be
difficulties finding competent staff later when you need them. As well, you would have to do
something about your lease either find a way to terminate it early, or find someone to sublease
the space, such as the adjacent tenant. Another argument against this option is that Chord would
be abandoning its current main client, which might decide to use another companys services
once the cable upgrade industry recovers. Chord could be in the position of having to find all
new clients.
In terms of your core competencies and your personal preferences, this option would likely
satisfy both in the long run, but not in the short run, since you would not be working together for
the time being. You would almost have to start your business from scratch, which is not much
better than the option of winding up Chord. You should only seriously entertain this option if
you discover that your main client does not intend to pay you the $300,000 in overdue
receivables, in which case you would likely not wish to deal with them again in the future.
C. Continue to Operate Chord at a Reduced Level of Activity
It should be clear that there is no feasible status quo option available, as you would only have
approximately 300 hours of work per month (i.e., 70 x 4 = 280 hours of drafting and about 20
hours of quality control), resulting in many idle employee hours. The closest you could come to a
status quo position is to lay off all of your employees and do the 70 miles per month of drafting
yourselves. This would provide you with a position similar to when you started business, and it is
a possibility. The calculations in Appendix 2 indicate that this option should provide you with
salaries and income of $1,964 + $6,376 = $8,340 per month or $4,170 each. This could easily be
increased by $2,500 (or $1,250 each) if you could sublet your leased space.
In terms of your personal preferences and wealth, you would still be working together under this
option and making a reasonable living, for the time being. This option would allow you to
continue to provide your client with a quality product on a timely basis and Chord would remain
functional and poised to take advantage of any upturn in the operations of your client. However,
this option by itself does not provide any diversification and you would be exposed to the same
risks as before. As well, you would be letting go some very skilled employees who may not be
available or willing to come back later when the cable upgrade industry improves.
Appendix 2 also indicates that, instead, you could employ two full-time CAD jockeys to do the
work and still earn between $1,700 and $5,200 (i.e., $1,700 + $1,000 + $2,500), depending on
whether you did your own administration and were able to sublet all or some of your space.
Under this scenario, you could basically have Chord run itself while each of you devoted
yourself to generating income from any of the variety of options available to you. It should be
pointed out that income will be maximized when the two of you can be fully productive at the
top end of your charge-out scale, say $100+ per hour, while using other architectural technicians

to do the basic CAD jockey work at a cost to you of $21.12 per hour (i.e., $16 x 1.1 x 1.2.). This
would also allow you to develop new contacts and achieve some diversification.
D. Diversify Chords Line of Services
From the situation analysis, it appears that Chords main weakness is its dependence on only one
service being provided to one main client. Although Chord has a superior AutoCAD program
that gives you a competitive advantage in the survey map drafting market, your have had little
success in obtaining significant contracts from cable companies other than your main client. One
reason for this is that Chord does not offer turnkey services. You certainly have the talent to
provide the surveying and design services as well as drafting survey maps, so you could consider
offering these services to your current and potential cable clients. If they also require you to
provide construction, you could investigate the possibility of contracting out the construction
service, perhaps to CCC Ltd.
There are a number of other services that you could add to your product line, some of which only
the two of you are currently qualified to do and some only Chase would be able to do (e.g.,
architectural, industrial and/or web-site design, and CAD software customization, installation
and/or training). These services have high charge-out rates and would be a very profitable use of
your time. On the other hand, in some cases this could result in only a short-term gain.
Customization of CAD software, CAD training and consulting on CAD installations could result
in your clients eventually becoming your competitors for CAD application jobs, which could
erode your competitive advantage in the long run.
Some new services could be done by the CAD jockeys (e.g., aerial photography survey map
drafting, drafting support for architects and industrial design production drawings). This would
allow you to keep at least some of your best employees and provide them with some variety in
their jobs, which could help keep them motivated. You could also put some of the superior
employees through training programs to develop the skills to perform some of the services that
are at the higher end of the charge-out scale.
This option is not without its challenges, however. It may take time to find sufficient clients and
work to keep your employees busy. In the meantime, you would either have to lay off these
employees who you many not be able to hire back when you need them, incur idle employee
costs, and/or incur employee training costs. As well, you would have to delegate Chords
administrative functions to others.
Consideration also has to be given to the fact that this option might not succeed without
developing an effective marketing strategy to help you obtain new clients.
Overall, this option would be compatible with your core competencies and would result in you
doing what you do (and hopefully enjoy) best. It may also be the only way you will be able to
ensure the long-term growth and profitability of Chord by minimizing the risks of significant
decreases in business as a result of specific market downturns.

E. Joint Venture with CCC
This proposal is analyzed in Appendix 3. The calculations presented use very conservative
numbers based on the minimum volume of work guaranteed by CCC. These calculations indicate
a probable loss for XPL. However, both the management fee and rental charges would flow
directly to Chord, resulting in a contribution of $20.91 per mile for Chord. Therefore, there
would be little risk for Chord since any XPL losses would be shared equally with CCC, while
Chord would still benefit from the management fee and rent paid by XPL.
In general, the positive aspects of this proposal are much stronger than the negative ones. This
proposal helps Chord to resolve some of its overcapacity problems by keeping at least a couple
of its CAD jockeys employed and utilizing idle space and equipment. While the venture stands to
be marginally unprofitable at minimum revenue levels, it has considerable potential and opens up
the Canadian market.
The most important of the negative points is that Chord will be required to give XPL priority
treatment. In the expected better days to come, this may have a negative impact on Chords
ability to supply its regular customers on a timely basis.
While this proposal caters to Chords core competency of leading edge technical ability in the
use of computer-aided design and application, it does little to resolve the need for diversification
of its services. It would, however, serve to broaden the market niche available to Chord.
F. Acquire CDSI
Some preliminary analysis of this proposal can be found in Appendix 4.
Quantitative Considerations
The schedule in Appendix 4 breaks out the determination of net income, by its pieces, using the
formula $434,000 - x - .4($434,000 - x) = $120,000, where x = owners salaries. According to
industry information, management salaries would typically be $90,000 each, totalling $270,000,
which is greater that the salaries that had been paid to the owners in the past three years. This
indicates that either the past net income for CDSI has been overstated, or that one or more of the
owners is not performing a function that would justify a salary of $90,000 per year. A third
possibility is that they have a preference to split their remuneration between salaries and
dividends in a certain way. If Chord purchases CDSI and hires the three current owners, the
expected net income using the 2000 gross revenue would be $98,000.
The asking price can be paid over a three-year period. This, in effect, reduces the purchase cost
by the discounted value arising from the payment deferrals. A precise calculation of this value is
not possible without making significant assumptions, but the applicable discount rate would fall
between the after-tax cost of debt of about 4% (i.e., .6 x 7%) and the minimum expected return
of about 12.5% (i.e., $98,000/$852,000). There are good arguments for the appropriateness of the
higher number, in the circumstances, since it represents the expected return on the investment.
At 4%, using the tables, $150,000 per year for three years has a present value of $416,000, and at
12.5% per cent, the present value is around $357,000. Even taking the higher amount, the
apparent asking price becomes $818,000, with an expected return on investment (ROI) of around
12% (i.e., $98,000/$818,000). Using the lower amount, we get an ROI of about 13% (i.e.,
$98,000/$759,000). These returns would be satisfactory, especially given the fit that CDSI
appears to offer Chord. Any savings from replacing some or all of the current owners with less


expensive employees, or from any reduction of Chords costs as a result of acquiring CDSI (e.g.,
human resource management talent, source of CAD jockeys), would increase the ROI, thus
making this option more attractive.
Qualitative
Some arguments for acquiring CDSI are as follows:
1. As Mr. Chase had pointed out, a going concern with a proven history has a lot to offer over
starting a business from scratch. There could be significant synergistic benefits. For example,
CDSI could have human resource and accounting systems in place that could be utilized by
Chord.
2. The activities in which CDSI is currently involved, primarily the provision of CAD jockeys
on a part-time or temporary basis, web-site design and the provision of other CAD
applications, are consistent with Chords core competency. Indeed, all of these activities are
included on Chords list of services under consideration for diversification and with which
you have previous experience.
3. The hiring of Ella Nehrik, who would bring with her a background and expertise in human
resources management in addition to her industry specific knowledge, would be a
tremendous start toward resolving your various human resources issues.
4. CDSI would be a complimentary and flexible fit with Chords other activities and would add
flexibility in staffing cable industry contracts as well as offering some variety to those
employees who desire it. In this way the addition of CDSI would help improve employee
satisfaction and thus help alleviate employee retention problems.
Some arguments against acquiring CDSI are as follows:
1. As pointed out by Mr. Garneau, the purchase of CDSI carries with it the risk of inheriting
unknown problems. For example, the same economic factors affecting Chords client could
also be affecting CDSIs customers.
2. The acquisition could substantially tie up your personal available capital resources (see
Financing below).
3. If Chord wishes to retain some of its current people, there may be some unexpected costs
until the acquisition is completed and the staffing situation can be appropriately ironed out.
Financing
Under the proposal, Chord would have to come up with $402,000 on closing. Since it appears
that it would be in everyones best interests for Nehrik to be retained, the business could borrow
back her share of the payment after taxes (i.e., $74,000), leaving $328,000 for Chord to find in
investment funds. This amount could be further reduced if you decide to hire back one or both of
CDSIs other two owners and they agree to loan back some of their sale proceeds. As well, while
no asset information is provided for CDSI, it is clear that a net worth in excess of $220,000 exists
in the company. Thus, it may have some borrowing power if the need arises.
If necessary, it has been indicated that you could provide the capital if the accounts receivable
are collected from Chords main client (i.e., $300,000 in accounts receivable to be collected, plus
$200,000 in personal funds).


It can be concluded, then, that the financing can be accomplished provided that the parties are in
favour of the transaction and that Chord is able to collect the $300,000 outstanding accounts
fairly quickly.

RECOMMENDED STRATEGY
From previous analysis, it can be concluded that Chords greatest chance for long-term
profitability is through diversification of clients and services. With the current excess in capacity,
you have an opportunity to delegate your current duties to your most competent staff so that you
can focus on pursuing the various diversification options. The acquisition of CDSI would greatly
assist in achieving the diversification objective and could provide employment for those CAD
jockeys that you would otherwise have to lay off. The CCC proposal also has more in favour of
it than against.
On the surface, it might seem a bit risky to recommend both the joint venture and the acquisition
of CDSI, but these options could be made to work well together while, at the same time,
eliminating or mitigating some of the obvious concerns facing Chord. The following general
strategies are recommended:
1. Continue to operate Chord and add some new services to your product line. In the short-
term, keep two of your CAD jockeys to fulfil the current contracts of 70-miles of cable
survey map drafting per month. Delegate the administrative functions to others so that
you can focus on finding new business and developing diversification. Utilize the initial
slow time for training of some of the better CAD jockeys to expand their skill sets in
support of the long-term diversification effort. However, Chord will still need to reduce
staff at least for a few months.
2. Accept the joint venture proposal from CCC. As previously noted, there are several
positives to this proposal. Although it will run at a loss if it operates at the guaranteed
minimum level, this will not be a real loss for Chord, and it is certainly not the intention
of CCC to operate XPL at this minimal level. This option requires no additional capital
investment, will utilize idle equipment, and will provide work for a minimum of two
CAD jockeys in the near future (beginning no later than three months after finalizing the
agreement) and perhaps for several more.
This option uses the same skills that Chord has used in the U.S., provides a vehicle for
employing some of the better CAD jockeys, and may help provide Carol Milan with a
full time training position. It has a minimal downside and, should the worst case scenario
occur, it could be shut down fairly quickly. It will also help Chord utilize its available
leased space and contribute to covering the lease costs.
3. Subject to acquiring additional financial information and ensuring that Ella Nehrik is on
side, proceed to consummate the acquisition of CDSI. Of the choices, this is the one that
requires some capital outlay. However, as we have seen, it has much to offer. In addition
to being a sound financial investment in its own right, it offers a series of synergistic
benefits. These include flexibility in hiring and transferring CAD jockeys as they are
needed by Chord and XPL, a vehicle through which Chord can diversify the services it
provides, the skill set that comes with Nehrik in the human resources area, and quite
possibly some internal systems and controls that Chord could find useful. As well, it is


possible that CDSIs operations could be moved to Chords premises, thereby utilizing
some or all of Chords excess space and equipment.
Though this option comes with some risks and there will undoubtedly be some
unforeseen problems, you should be well capable of dealing with them, since you are
already knowledgeable in all of the areas. Overall, it appears that the benefits far
outweigh the risks.
It is believed that following the above strategies would be far more effective in achieving your
long-term objectives than suspending Chords operations temporarily or selling Chord. In any
case, these options will still be available should the above strategies not prove to be profitable.

IMPLEMENTATION PLAN
Revised Mission Statement
In view of the situation analysis and strategic recommendations, the following is a recommended
mission statement:
We are committed to operating a profitable business by offering high quality services, in
the general field of architectural technology, to various industries in the global
marketplace, including the telecommunications industry in both Canada and the U.S.
These services include survey map drafting, web-site development, design creation, CAD
training and consultation, and providing temporary placement services for architectural
technologists (i.e., CAD jockeys). At the same time, recognizing that our corporate
success is largely dependent on our human resources, we are committed to providing as
satisfying and rewarding a work environment as is practically achievable in our
circumstances.
Immediate and Strategic Actions
Staff Reduction You should immediately implement a plan to reduce your staff complement to
the level required to operate during the transition stage. At a minimum, the ten easily replaceable
CAD jockeys should be laid off, or possibly employed by CDSI, if feasible. You should be able
to utilize the remaining employees to fulfil the existing contracts, to take over some of the
administrative duties and to go through training programs to expand their skills in support of the
diversification strategy.
Joint Venture Immediately communicate your interest in accepting CCCs joint venture
proposal and do whatever you can to expedite the start-up of XPL. Because of the general
difficulties in recruiting and training new staff, it may be more practical to keep a couple of the
CAD jockeys (who will ultimately be employed by XPL) on Chords or CDSIs payroll, than to
lay them off now and hope to later rehire them. If you lay off any of the superior CAD jockeys,
they will likely be able to find new employers in the interim and may not be available when you
need them.


Acquisition Begin negotiations regarding the acquisition of CDSI. Make it clear to Ella Nehrik
that she is a key aspect to the execution of the deal and that you expect her to take over the
human resources function of Chord as well as CDSI, and to loan back her share of the after-tax
proceeds from the sale of CDSI. It should be noted that the sale of Ms. Nehriks interest in CDSI
could be structured in a variety of ways to preclude the immediate incurrence of tax, such as a
share exchange or the deferral of payment of the proceeds. Investigate the potential gains Chord
could expect from hiring the other two CDSI shareholders, and offer one or both of them jobs if
the gains would exceed the costs. It is likely that Carl Ho has the skills to provide some of the
higher revenue services, such as architectural design, which would support Chords
diversification strategy. He could also be useful for training Chords superior employees and
could help provide financing by loaning back his after-tax proceeds of the sale of CDSI.
Strategic Planning Implement a continuing process for ongoing strategic planning. One
available tool for monitoring corporate progress is the balanced scorecard.
Collection of Accounts One of your top priorities is the collection of the outstanding accounts
receivable from your main client, as you will not be able to finance the purchase of CDSI
without settlement of this account. Initially, this task should be handled by Mr. Chase. If,
however, he is unsuccessful in his collection attempts, you may have to resort to turning over
collection to a factor or seeking legal means of collection. This however should be a last resort,
as you do not wish to permanently damage your relationship with this client and risk losing
future contracts when the cable upgrade industry recovers. On the other hand, if your client has
no intention of paying you for your services, you should stop providing them to this client and
focus more of your efforts on finding new clients.
Financial Management and Accounting Information Systems
The synergies of acquiring CDSI could help in improving Chords financial management and
accounting information systems. If CDSI has an experienced controller, this person should also
take over the finance and accounting functions of Chord. Otherwise, you could promote Linda
Morton to the position of controller. She has appropriate prior experience and has demonstrated
her loyalty and competence in several areas. She is also interested in enrolling in the CMA
program, which will greatly increase her management skills. However, it may be necessary to
offer Ms. Morton an equity share in the company to entice her to remain with Chord. You must
carefully consider whether her value to the company is worth offering her a share of the
business.
Currently, Chords working capital management needs to be improved and the responsibility for
maintaining the accounting records should be delegated to someone other than Mr. Chase. Until
the acquisition of CDSI is complete, Linda Mortons duties as office manager should be
expanded to include the task of working capital management and accounting. In preparation for
the anticipated diversity of clients expected from the restructuring and diversification strategies,
appropriate procedures for the following should be established and implemented: credit approval,
payment terms, monitoring of accounts and follow-up.
Chord requires better banking arrangements. A more appropriate line of credit should be
established that better reflects the realities of your business, i.e., collections typically take 90
days. Ms. Morton could be assigned the task of shopping for the bank that would offer Chord the
financial support it requires for the most reasonable terms.

As part of the negotiations to acquire CDSI, you should hire a consultant to independently assess
the value of CDSI. The assessment should include an opinion regarding its current internal
systems, which would enable you to determine the potential synergies you could expect from the
acquisition. Therefore, although Chords current accounting and management information
systems are inadequate, no substantive action should be taken until it is determine what can be
used from CDSIs current systems. Consideration could also be given to amalgamating the
accounting function of XPL with those of Chord and CDSI.
Management
As previously mentioned, in the short term, Chord will have excess capacity in terms of
employees, space and equipment as a result of the drastically decreased volume of work from
your main client. By adopting the recommended strategies, most of your resource utilization
problems will be solved as follows:
XPL will utilize some of the excess space, equipment and employees.
Diversification will increase the amount of work, thereby utilizing excess capacity.
Depending on what resources are required to maintain the operations of CDSI, it may be
possible to move CDSIs operations to Chords premises, thereby utilizing the remaining
excess capacity.
Another management issue, that of strategic planning, was previously addressed and need not be
repeated here.
A third management issue pertains to the most effective use of your own time and talents. In the
past, you handled not only the drafting work, but all of the administrative functions as well. As
your operation grew, you continued to perform most of the administrative functions, which was
not the most productive use of your time. Both of you are skilled architectural technologists and
are not adequately trained in most of the administrative areas. Therefore, you should utilize your
skills in the more specialized and lucrative areas and limit your involvement in the administrative
functions to strategic planning and monitoring of results.
You should continue to use competent CAD jockeys to perform the routine drafting work and
you should employ, on a full-time or contract basis, the management specialists you require to
take care of the administrative functions. This would support the companys diversification
strategy to a great extent and help maximize the companys revenue generating potential.
Organizational Structure and Human Resources
Organizational Structure:
There are several employees who have been identified as having particular skills that should be
appropriately deployed. These include the following:
1. Linda Morton Currently the office manager, but has the ability and experience to
become the CFO. However, she may decide to leave unless you allow her to become a
shareholder.


2. Carol Milan Currently the quality control manager, but prefers her training
responsibilities to her quality control responsibilities. With the acquisition of CDSI and
the requirement to provide XPL with technical staff, there is a possibility that there will
be sufficient training work for her to devote full time to the training function.
3. Ben Hiro Currently a project manager who has excellent technical skills but weak
communication skills. In the long run, he may be more effectively utilized as director of
quality control. Another alternative is to train him to provide some of the more lucrative
services that are being considered in the diversification plan (e.g., web-site and logo
design, architectural design).
4. Wendy Smits and Morgan Holiday Currently project managers doing a reasonably good
job in this role. Unfortunately, there may not be enough work in the short term to keep
them fully occupied in this role. During the transition period, it may be advisable to put
them through a training program to develop their skills in areas that would support the
diversification strategy.
5. Ella Nehrik Currently a shareholder of CDSI who has an excellent background in
human resource management and has the best grasp of the CDSIs industry specific
knowledge. She should be retained to manage all of the human resources of both CDSI
and Chord, and assist in overseeing the operations of CDSI.
6. Possible talent currently at CDSI As previously mentioned, CDSI could currently have
an efficiently operating financial management and accounting information system in
place being run by qualified staff. In this case, it may be possible to assign them the
responsibility of managing Chords finances and accounting information system as well
as CDSIs systems. In this case, it may not be necessary to promote Linda Morton to
CFO and the risks associated with not allowing her to acquire a share of the business
would be substantially mitigated. There could be other employees of CDSI who could be
utilized by Chord, such as human resource systems employees and the personnel who
provide the web-site design service. As well, Chord could use CDSI as a source of CAD
jockeys when required.
Eventually, your organizational structure should appear similar to that presented in Appendix 5.
CAD Jockey Retention:
A critical human resources issue is CAD jockey retention, which has been a problem in the past.
To deal with this problem, you have mainly used the approach of offering attractive wages, since
you could not offer much in the way of career advancement opportunities. In the short term,
CAD jockey retention should not be a problem as the industry slow-down has decreased the
demand for CAD jockeys with cable survey mapping expertise. Indeed, you will have to lay off
some of your CAD jockeys in the short term.
As previously mentioned, you should use the transition period to train your employees to
perform more than just cable survey map drafting work. You may also wish to adopt an ongoing
training program for your technical staff to develop their skills and promote flexibility. Although
this program will be costly, at least initially, it will likely be a critical factor in the successful
implementation of your diversification strategy.

In the long term, adoption of the diversification strategy and a good training program should
provide CAD jockeys with more interesting career paths, variety in their work, and the potential
for promotion. This in turn should lead to greater job satisfaction and, together with a
competitive compensation package, should significantly reduce Chords employee retention
problems in the long term.
Human Resources Systems:
Currently, there are no structured human resources systems in place at Chord. In the past, you
dealt with the recruiting and training of personnel on an as needed basis, and staff reviews were
done when you had the time to do them, rather than being scheduled at appropriate intervals. As
indicated in your mission statement, your corporate success is largely dependent on your human
resources. Therefore, it is important for you to establish human resources systems that deal with
the areas of performance evaluation, compensation (including benefits), job descriptions and
training. If the balanced scorecard approach is adopted for monitoring corporate progress to
assist in ongoing strategic planning (as was previously recommended), it can be fully developed
down to the level of personal balanced scorecards as a means of performance evaluation. These
systems can be developed concurrently with the restructuring and diversification of Chord.
The acquisition of CDSI could be a great benefit in this regard. With Ella Nehriks background
in human resources and the primary activity of CDSI being the short-term placement of CAD
jockeys, it is likely that CDSI has excellent human resources systems in place, which could be
adapted to apply to Chords expanded and restructured organization.
Marketing
A significant contributor to your inability to diversify your operations in the past is your lack of a
marketing strategy. Therefore, your survival and future success could depend on your developing
an effective marketing strategy. Mr. Chase should continue to develop his U.S. and Japanese
contacts, which could eventually generate some business. In the short term, you could make
better use of your web-site for promotional purposes.
As with other areas of the business, it is possible that the acquisition of CDSI could help in the
marketing area as well. It likely has an established clientele that may also be in the market for
some of Chords expanded services, and its network of contacts could also be tapped into to
generate new business.
In the medium term, you should contract with a marking specialist to design and implement an
effective marketing strategy. Whether to hire some in-house expertise in the long term or
continue to contract out this function should be decided at a future date after assessing the
success of the newly adopted strategies.


Two areas of financial accounting arise under the proposed strategies.
1. The joint venture with CCC will have to be accounted for using the equity method (in
brief, this means that the investment will be carried at cost, reduced by any dividends
received and adjusted for any proportional profit [increase] or loss [decrease]).
2. The acquisition of CDSI will be accounted for using the purchase method of
consolidation accounting. It will be necessary to know the book value of CDSI in order to
calculate the purchase price discrepancy, which will probably be in the neighbourhood of
$850,000 - $220,000 = $630,000. After appropriate allocations to identifiable assets,
liabilities and share capital, the difference will be set up as goodwill and must be
amortized using the straight-line method over the estimated life of the goodwill, which
should not exceed 40 years.

CONCLUSION
A decision to proceed with the acquisition of CDSI and the joint venture, together with a
diversification strategy, should allow you to put Chord firmly on the road to recovery and
provide you with the diversity of flexibility to circumvent a repetition of your recent difficulties.
As well, the proposed implementation plan should result in appropriate management and
operational systems that you will require to maintain a smoothly functioning organization.


Appendix 1
SWOT Analysis
STRENGTHS:
1. Strong technical competency.
2. Expertise in AutoCAD systems and design.
3. Creativity.
4. Quality controls in place.
5. Directors are compatible and complimentary.
6. Continual upgrading of computer capacity & workstation efficiency; use of LAN system
with appropriate security measures.
7. Japanese/French language skills.
8. Web-site in place and web-site design skills are available in-house.
9. Good quality employees (e.g., Morton, Milan).
10. Good reputation.
11. Profitable.
12. Good contacts in the cable industry.
WEAKNESSES:
1. Minimal planning, particularly strategy.
2. No mission statement.
3. Dependence on one major client (i.e., no client diversification).
4. Single service business, limits potential clientele.
5. Poor working capital management.
6. Cash flow problems (e.g., frequently exceeds line of credit).
7. Slow collections of accounts receivable.
8. Recent loss of work causing overstaffing and other underutilization of resources.
9. Minimal accounting systems and inadequate accounting records.
10. Minimal accounting controls.
11. Limited managerial skills and resources.
12. Unproductive use of shareholders time (e.g., the time Chase spends on accounting could
be more effectively utilized doing income-generating activities).


13. Minimal outside input (no outside directors).
14. Inadequate training (e.g., accounting, human resources).
15. No system for work-in-process monitoring.
16. No marketing.
17. Problems in recruiting and retaining staff (e.g., lack of career path offered to CAD
jockeys causing high employee turnover).
18. Inadequate support staff.
19. No structured performance measurement/evaluation system.
OPPORTUNITIES:
1. Canadian market (e.g., CCC/XPL).
2. Diversification:
CDSI
Consulting
Branching
CAD training
Designing (various)
Turnkey services to cable industry.
3. Japanese/Quebec markets.
4. Foreign exchange rates results in competitive pricing advantage in the U.S. market.
5. Employment opportunities:
Garneaus uncle
Local employment
Consulting & training services
Architectural design
Japanese contract for Chase.

THREATS:
1. Competition from suppliers who provide turnkey services.
2. Industry amalgamation resulting in levelling off of activity in the industry.
3. Competitors are larger than Chord.
4. Technological changes causing satellite & wireless to challenge cable in the
television/Internet service provider industry (i.e., threats to cable industry from substitute
products/competitors results in less need for Chords services).
5. Shortage of qualified job applicants.
6. Risk of bankruptcy of major client.

APPENDIX 2
Financial Analysis (in Canadian Dollars)

Contribution Margin per Mile from Survey Map Drafting
Revenue $120 x 1.5 $180.00
Drafting labour 4 hours x $16 x 1.1 x 1.2 $84.48
Quality control $5 x 1.1 x 1.2 6.60 91.08
$88.92

Projected Revenue from Drafting Survey Maps in 2001
Main customer January to July: 500 miles x $180 x 7 months = $630,000
Main customer August to December: 50 miles x $180 x 5 months = 45,000
Other customers* 20 miles x $180 x 12 months = 43,200
$718,200
* It is assumed that business from other customers is constant at 20 miles per month throughout
2001.

Cash Requirements Under Proposed Reduced Operations
Revenue per month (70 miles x $180) $12,600
Direct labour (note 1):
Drafting (70 miles x $84.48) $5,914
Quality control (70 miles x $6.60) 462
6,376
Administration (note 2) 1,000
Rent (note 3) 2,500
Overhead (note 4) 760 10,636
Monthly cash requirement $ 1,964
Notes:
1. It is assumed that Chord will only keep enough employees to service the contracted
work.
2. It is assumed that there will be some costs associated with administration, whether
this is performed by one of the employees or by one of the shareholders.
3. Based on the worst case scenario: existing lease and no offsetting revenues or
beneficial changes (i.e., $30,000/year 12 months = $2,500/month).
4. Based on 2000 data. Net margin is $652,000 (i.e., $1,890,000 + $16,000 - $954,000 -
$300,000) and income before taxes is $502,000. The difference of $150,000 less the
lease expense of $30,000 is $120,000, which is approximately 6% of revenue from
survey maps (i.e., $120,000 $1,890,000). Using this formula, the monthly overhead
is estimated as approximately $760 (i.e., 6% x $12,600).


Based on the above, monthly expenses will total approximately $11,000. Assuming expenses
must be carried for one month of work-in-process plus the three months for collection, the cash
requirement should be about 4 x $11,000 = $44,000.
The above projection is considered to be conservative, but it assumes that the shareholders will
not require abnormal compensation from the company, that overhead costs other than rent are
variable, and that there are no idle employee costs. Therefore, the cash requirement could be
worse.

October 200 1CMA Entrance Examination Part 2 Suggested Solution
Appendix 3
Analysis of CCC Joint Venture Proposal
QUANTITATIVE
Calculations pertaining to XPLs minimum monthly income:
Revenue (minimum net proceeds after finders fee = 100 km. x $85/km.) $8,500
Direct labour (100 km. x .62 x $84.48) 5,238
3,263
Management contract, including quality control (100 km. x $25/km.) 2,500
Income before rent, receptionist, other expenses $ 763
Chord currently pays $30,000 12 = $2,500 per month for rent. If Chord only charges 10% of
this to XPL for rent, there would only be $763 - $250 = $513 left for a receptionist and other
expenses. Therefore, it is likely that XPL would incur a loss at an activity level of only 100
kilometres per month.
Calculations pertaining to Chords minimum monthly income:
Revenue from management contract (100 km. x $25/km) $2,500
Direct labour for quality control (100 km. x .62 x $6.60) 409
Income before rent revenue $2,091
QUALITATIVE
FOR
1. Chord would be directly compensated for its
management of the survey mapping,
resulting in a contribution margin of $20.91
per kilometre.
2. Chord has the startup assets on hand, which
will be idle unless a great deal of new work
can be found soon. Therefore, there would
be no initial cash outlay.
3. The proposal would allow a mechanism for
retaining a couple of the top architectural
technicians, at little or no cost.
4. XPL would utilize some of Chords existing
idle leased space.
5. The proposal would provide an entry point
into the Canadian market.
6. Chord would indirectly benefit from CCCs
ability to offer turnkey services.
AGAINST
1. Chord would be required to assume all
product responsibility.
2. The effort needed to manage the proposed
operation may detract from other activities
designed to rejuvenate Chord.
3. This activity is less profitable than similar
work in the U.S. (i.e., contribution margin
of $20.91/km. versus $88.92/mile =
$55.13/km. from U.S. clients). Should
resources have to be rationed, Chord would
have to give XPL priority treatment (i.e.,
Chord would incur an opportunity cost of
$34.22/km.).
4. Although Chord would be responsible for
operations, it would have to share control
with CCC.


Appendix 4
Analysis of CDSI Proposal
QUANTITATIVE
Revised Statements of Income
2000 1999 1998

Gross revenue $4,360,000 $4,010,000 $3,650,000
Expenses other than salaries & taxes 3,926,000 3,622,000 3,285,000
Income before owners salaries and income taxes 434,000 388,000 365,000
Owners salaries 234,000 188,000 215,000
200,000 200,000 150,000
Income taxes (net income .6 x 40%) 80,000 80,000 60,000
Net income 120,000 120,000 90,000
Dividends 90,000 90,000 ?
Increase in retained earnings $ 30,000 $ 30,000 $ ?

Normal salaries would total $270,000 (i.e., $90,000 x 3), so income in 2000 is overstated by
($270,000 - $234,000) x .6 = $22,000. The previous years are overstated by greater amounts.
Therefore, the net margin for 2000 should have been ($120,000 - $22,000) $4,360,000 =
2.25%. If all three current owners were hired back, Chord should be able to realize an annual net
income of at least $98,000 (i.e., $120,000 - $22,000).
There are various other factors to be considered, as follows:
a) The gross revenue grew by 8.7% in 2000 and 9.9% in 1999, which shows a decreasing
trend. However, the income before owners salaries and income taxes shows an upward
trend (i.e., 11.9% in 2000 over 1999, and 6.3% in 1999 over 1998).
b) There are currently three shareholders, all drawing management level salaries. Ella
Nehrik, who has experience with human resource management, could help in the
management of Chords human resources. It is unknown what functions Carl Ho and the
other owner serve for CDSI, but if they had to do with providing web-site design and
CAD applications, they could prove to be useful in managing these services should Chord
decide to begin offering these services. As well, Carl Ho could provide architectural
design services. However, if they simply functioned as CAD jockeys, Chord would be
better off keeping some of its current CAD jockeys at $21.12/hour (which would be
about $40,000 per year) than hiring these former CDSI owners at $90,000 per year.
c) The payments would be spread over three years, thereby reducing the actual net present
value of the acquisition.


Appendix 4 (contd)
Assuming CDSIs gross revenue remains at the 2000 level, the after-tax income from CDSIs
operations would be $98,000 (i.e., $120,000 - $22,000) if all three former owners were hired
back. If two of the owners were not hired back and instead two CAD jockeys were retained to
perform their duties, income would increase to $159,400, calculated as follows:
Originally stated 2000 net income before owners salaries & taxes $434,000
Labour costs for two CAD jockeys (2 x $40,000) $80,000
Cost of one management salary 90,000 170,000
264,000
Income taxes 105,600
Revised estimated income $158,400
This amount would be sufficient to cover the three $150,000 annual payments to the current
owners. However, Chord would still need to find the cash to make the initial $402,000
investment. If only Ella Nehrik was hired, she would be able to reinvest her after-tax share
proceeds of $74,000, calculated as follows:
Initial proceeds at closing ($402,000 3) $134,000
Less capital gain tax ($180,000 3) 60,000
$ 74,000
QUALITATIVE
FOR
1. This is an already existing company with
clientele, a solid profit history and
operations complimentary to Chord.
2. The company would come with built-in
management and Nehrik would bring much
needed expertise in human resources
management.
3. In many respects, CDSI would provide
both diversification for Chord and client
services that would require staff with
similar skills.
4. CDSI would provide a natural vehicle for
Chord to develop and market other client
services, such as CAD training, consulting,
and web-site design.
.
AGAINST
1. This acquisition would require an initial
outlay of $254,000 [i.e., $402,000 (2 x
$74,000)] if both Carl Ho and Ella Nehrik
were hired, or $328,000 (i.e., $402,000 -
$74,000) if only one of them was retained.
2. CDSIs main revenue driver is the
temporary personnel business, which is
unfamiliar to Chord.
3. Since CDSI requires employees with similar
qualifications, there could be a
compounding effect when these people are
in short supply.
4. Chord would inherit any problems already
present in CDSI.
5. Any impact of the cable industry slow down
would not be reflected in CDSIs 2000
results (i.e., there could be a decrease in
demand for CDSIs services over the next
year or two).

Appendix 5
Proposed Organizational Structure

Board of Directors
Jeff Chase
CEO
Ella Nehrik
Human Resources
Training
(Carol Milan)
Marketing
Advanced Architectural
Technology Services
(Jeff Chase, Carl Ho)
Administration
CFO / Office Manager
(Linda Morton or other)
Receptionist /Bookkeeper
Franois Garneau
COO
CDSI
Operations
CAD Jockey
Placement
Web-site Design
CAD Applications
Quality Control
(Ben Hiro)
Project Managers
(Smits, Halliday)
CAD Jockeys
XPL Supervision
Computer Systems,
Design and Maintenance

October 2001 CMA Entrance Examination Part 2 Supplement

Supplement

Formulae

1. CAPITAL STRUCTURE
a) After-Tax Marginal Cost of Debt:

( )
k k T or
T I
F
b
=
1
1 ( )

where k = interest rate
T = corporate tax rate
I = annual interest payment on debt
F = face value of debt
b) Cost of Preferred Shares:
k
D
NP
p
p
p
=
where D
p
= stated annual dividend payment on shares
NP
p
= net proceeds on preferred share issue
c) Cost of Common Equity:
i) Cost of Common Shares (Capitalization of Dividends with Constant
Growth Rate):
k
D
NP
g
e
e
= +
1

where D
1
= dividend expected for period 1
NP
e
= net proceeds on common share issue
g = annual long-term dividend growth rate
ii) Cost of Retained Earnings:
k r
D
P
g
re e
e
= = +
1

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


iii) Capital Asset Pricing Model:

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

j
= beta coefficient for security j (measure of systematic risk)
d) Weighted Average Cost of Capital:
k
B
V
k
P
V
k
E
V
k
b p e
=

where B = amount of debt outstanding
P = amount of preferred shares outstanding
E = amount of common equity outstanding
V = B + P + E = total value of firm
2. PRESENT VALUE OF TAX SHIELD FOR AMORTIZABLE ASSETS
a) Present Value of Total Tax Shield from CCA for a New Asset
Present Value =
CdT
d k
k
k
CdT
d+ k
k
k +
+
+
=
+
+
2
21
1 05
1 ( )
.

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

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

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

, depending on cash flow assumptions


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

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


Table 1 (contd)
( )
P
i
n
=
+
1
1

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


Table 1 (contd)
( )
P
i
n
=
+
1
1

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


Table 1 (contd)
( )
P
i
n
=
+
1
1

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


Table 2
Present Value of One Dollar Per Year n Years at i%
( )
P
i
i
n
n
=
1
1
1

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


Table 2 (contd)
( )
P
i
i
n
n
=
1
1
1

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


Table 2 (contd)
( )
P
i
i
n
n
=
1
1
1

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


Table 2 (contd)
( )
P
i
i
n
n
=
1
1
1

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

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, depending on cashflow assumptions

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