Evaluate final accounts and financial statements to interpret profitability, financial position and decisions in IB Business Management HL cases.
BP and the Gulf of Mexico
In May 2010, the oil company BP suffered a major disaster while drilling for oil off the coast of Louisiana, United States (US) in the Gulf of Mexico. The drilling platform exploded and was destroyed, killing 11 workers. Millions of tonnes of oil spilled out into the sea. This was the worst industrial accident BP had ever faced. Subsequently the price of BP shares fell by 30 %.
It took BP three months to stop the leak in the oil well. The oil spill had a major negative impact on fish, birds and the whole ecosystem. Regional fishermen, seafood restaurants and the tourist industry were the first to suffer from the impact of the pollution and demanded compensation.
This was a public relations (PR) crisis for BP. The US media attacked the company on a daily basis. Environmental pressure groups called for a ban on deep water oil drilling and even the US president got involved, announcing on television that BP would be "made to pay heavily". The perception was that BP's crisis management was slow, uncaring and inefficient. For example, Tony Hayward, the Chief Executive Officer (CEO) of BP was reported to have said that the oil spill "was tiny" and on another occasion he complained of stress and said he "would like his life back". However, to solve the problem in deep water was a very technical exercise, which had never been attempted before. As a result of this PR crisis, BP decided not to give dividends to its shareholders in 2010.
BP has identified the following as causes of the decline in financial performance:
- the loss of the oil drilling platform
- the cost of stopping the leak 250 metres below the sea
- the cost of the clean-up operations
- the fall in share price
- the loss of brand image and goodwill
- compensation paid to regional businesses
- compensation paid to the families of the workers killed.
Selected items from BP's balance sheet as at 31 December 2009 (US$ millions) (before the disaster).
Outline the importance of the balance sheet to two stakeholder groups of BP.
Using the information in the selected items from BP's balance sheet, calculate the loan capital (figure X ) and construct a balance sheet for BP as at 31 December 2009.
Explain how two of the financial consequences of the disaster will appear on BP's balance sheet as at 31 December 2010.
Bip
Bip (BB)
Nicolás and Loura want to start up a vehicle rental business in Punta del Este, a seaside resort in the Southern Hemisphere. The business will operate as a partnership and be called Bip Bip (BB). Tourist numbers are very high during the summer (December to February months in the Southern Hemisphere); the beach and water sports attract many tourists. B B will rent out convertible cars, electric cars and minivans. BB will purchase these vehicles through a leasing scheme.
"Because most rental income will occur in a few months of the year, we must forecast our cash position during the slow months and we must follow a budget," says Loura. She has forecasted the following figures for the first six months of operation, beginning in December 2015. All revenues received and costs paid will be in cash. All cash sales are paid at the time of the vehicle rental.
Due to the increasing importance of e-commerce, B B would like to offer an online booking service in addition to their website. Nicolás believes that an online booking service will allow B B to reach a wider national and international market, and will also reduce marketing costs. However, Loura argued that e-commerce also has some limitations.
After further discussion, Nicolás and Loura decided not to set up an online booking service. However, after May 2016, they will examine the budget and variances with care to determine if B B should offer an online booking service the following year.
Calculate the forecasted net profit, without any depreciation, for the first six months of operation (show all your working).
Chips to Go (C2G)
Chips to Go (C2G) produce potato chips for the British market. C2G's Chief Executive Officer (CEO) is Charles Chip who is a dynamic entrepreneur famous for taking risks with chip flavours such as "banana and sour cream" and "chocolate fudge" and promoting them with humour especially appealing to British culture. C2G has created a number of successful snack products under the C2G family brand. Charles uses intuitive rather than scientific decision-making. He rarely consults with senior managers or considers financial data.
C2G's value as a company in terms of goodwill, brand value and other intangible assets is tied very closely to the personality and lifestyle of Charles. He is the company's most valuable intangible asset and is very popular among the younger generation. He is constantly in the news trying to travel around the world in a canoe, or taking risks by parachuting off high buildings to gain free publicity and word-of-mouth promotion. Current and potential investors have contacted the finance department as to what may happen to the value of these intangible assets if Charles were to have a serious accident.
C2G is looking for ways to increase market share in an increasingly competitive domestic snack market. One long-time aim for Charles has been the creation of a potato chip with all the taste of regular chips but without any fat. The marketing department of C 2 G is very excited with this idea but the Production Manager has indicated to Charles that it cannot be produced. Charles has been told and was furious.
A second strategic option could be to launch the potato chips into a new international market. One of Charles's closest advisers has argued that C2G would need to be careful with its product and promotion, as overseas customers may not share British tastes in potato chips, or British humour in promotion. He urges Charles to take time to carry out extensive market research of the new international market.
Explain two reasons why it may be difficult to value C2G's intangible assets.