Consulting Case

Finance/Economics

Contents
Carpet One Carpet Store to Cut Inventory Holding Cost....................................................................1
Israel Chemicals Raises Capital to Build New Factory........................................................................3
Microsoft Buys Social Network Yammer for $1.2 Billion.....................................................................4
GP Investments to Build a New Football Stadium in Brazil................................................................6
What Kind of Companies Are They?......................................................................................................9
Peter Pan Bus Lines Resumes Daily NYC-Boston Service..............................................................11
The Rise and Fall of All Terrain Vehicles (ATV).................................................................................14
Which Cowboy Will Walk Out Alive From a Truel?............................................................................16
How to Analyze Economics of Electricity Market in Argentina?.......................................................17
Mail Order Cataloger Service Merchandise Profit Declines..............................................................19
Philadelphia Orchestra to Increase Revenues from Ticket Sales....................................................21
How Much to Ask for a 5 Year Oil Field Lease?.................................................................................23
Chesapeake Energy Not to Drill a New Natural Gas Well................................................................24
How Much is a Medium-sized Oil Tanker Worth?..............................................................................25
Newport News Shipbuilding to Build a New Tanker...........................................................................27
Brazil to Withdraw from International Tin Cartel.................................................................................30
CarMax to Tighten Car Loans & Auto Finance Policy.......................................................................32
Capital One Auto Finance to Revamp Loan Issuing System............................................................34
Capital One Cross Selling Prepaid Phone Card?...............................................................................36
Thermo Fisher Concerned By High Working Capital Requirement.................................................40
Belgium Considers Privatizing National Lottery to Cut Debt.............................................................42
General Dynamics Concerned About Falling Stock Price.................................................................44
What Factors Determine World Price of Crude Oil?..........................................................................45
How Many Stories to Build Manhattan Apartments?.........................................................................47
Goldman Sachs Capital to Invest in Royal Caribbean.......................................................................48
Fidelity to Invest in Hartford Group Common Stock...........................................................................50
How to Explain Net Present Value (NPV)?.........................................................................................50
Export-Import Bank Assess Cost-Revenue Curve.............................................................................51
How Many Stories in Trump Tower Chicago?....................................................................................52
Are Small Oil Tankers Really Worth Nothing?....................................................................................53
Vogue to Maximize Profits by Optimizing Delivery Number..............................................................54

Carpet One Carpet Store to Cut Inventory Holding Cost

Case Type: reduce costs; finance & economics.
Consulting Firm: NERA Economic Consulting first round full time job interview.
Industry Coverage: textiles.
Case Interview Question #00785: Carpet One Floor & Home is a home design retailers’ cooperative in
the carpet, rug, and other home design products. Our client owns a Carpet One specialty carpet store in
downtown St. Louis, Missouri. One of their most popular items is the chartreuse shag carpet.

A shag is a rug or carpet that has a deep pile, giving it a shaggy appearance.
Shag Carpets are the thickest carpets on the market. Some have long skinny fibers, while others have
shorter thicker carpet fibers. Originally created in the hey day of the 1960′s, shag carpet has made a big
come back with designers. In recent years, shag carpeting has seen a resurgence of popularity.

Our client would like to improve their profit on this particular chartreuse shag product. How would you go
about helping the client?
Possible Answer:
Question 1: Please evaluate some possible ways to improve their profit on the chartreuse shag carpet.
Suggested Solution:
Profits = Revenues – Costs = (Price * Volume) – (Fixed Cost + Variable Cost)

The interviewee should break the profitability problem down into price, volume, and cost. Using the chart
below, direct their answer towards cost.

Provide the following additional information only if requested and necessary:

a. Revenues

 Price: Already at high

 Volume:
 Sales = Demand: 300/month = 10/day
 At highest the client can sell – even with promotions
b. Cost

 Fixed Cost: Fixed cost for every order: $5

 Variable Cost:
 Cost per Shag ordered: $100
 Minimum Shags in an order (per supplier): 20
 Shag overnight: $1
Question 2: The client has discovered that a pile-up of inventory and high ordering costs can be blamed
for the low profits on their carpet. Could you think of some ways to reduce these costs?
Suggested Solution:
 Order less inventory using demand forecasts as guides.
 Work with supplier to reduce order costs.
 Reduce cost of inventory storage.
Question 3: The client has decided to optimize its inventory ordering costs by calculating the optimal
amount of Shag carpets to order to keep inventory at the lowest cost level. Calculate this value.
Suggested Solution:
10 Shag Carpets in Inventory.

The interviewee should either use the Economic Order Quantity (EOQ) formula or logic. An example of
possible logic would be to use something like the tables below to determine EOQ:

Order 20 Carpets at a time Day 1 Day 2 Day 3

Shags in inventory 20 10 20

Cost ($) $5 (order cost) $10 (cost to store 10 carpets) $5 (order cost)

Remaining inventory 10 0 10

Order 10 Carpets at a time Day 1 Day 2 Day 3

Shags in inventory 10 10 10

Cost ($) $5 (order cost) $5 (order cost) $5 (order cost)

Remaining inventory 0 0 0

Economic order quantity (EOQ) is the order quantity that minimizes the total inventory holding costs and
ordering costs. It is one of the oldest classical production scheduling models. EOQ applies only when
demand for a product is constant over the year and each new order is delivered in full when inventory
reaches zero. There is a fixed cost for each order placed, regardless of the number of units ordered.
There is also a cost for each unit held in storage, commonly known as holding cost, sometimes expressed
as a percentage of the purchase cost of the item.
The interviewer should provide the EOQ formula if needed (the interviewee is not expected to know the
formula):

EOQ formula = sqrt(2 * Demand * Order Cost / Holding Cost)

Question 4: What is your final recommendation to the client for lowering costs?
Suggested Solution:
The interviewee first should summarize his/her analysis, then suggest possible strategies:

 Convince Shag supplier to reduce the minimum order to 10 carpets.

 Lower inventory storage cost to $0.50 per day.
Conclusion: In order to lower costs, the client should reduce minimum order size and lower inventory
storage cost.

Israel Chemicals Raises Capital to Build New Factory

Case Type: add capacity & growth; finance & economics.
Consulting Firm: Capital One first round full time job interview.
Industry Coverage: chemicals.
Case Interview Question #00783: The client Israel Chemicals Ltd (NYSE: ICL, TASE: ICL), also known
as ICL, is a chemical company that develops, produces and markets fertilizers, metals and other special-
purpose chemical products. ICL serves primarily three markets: agriculture, food and engineered

materials. ICL produces approximately a third of the world’s bromine, and is the
world’s sixth largest potash producer. It is a manufacturer of specialty fertilizers and specialty phosphates,
flame retardants and water treatment solutions.
The client ICL needs some capital to build a new factory in Tel-Aviv, Israel. Demand for their specialty
fertilizer products is increasingly high and this new factory will allow them to meet this demand. Your
consulting firm has been retained by the CEO of ICL to advise them on their options of raising new
capital. What would you recommend?
Possible Answer:
Question 1: What are the potential funding options for the client?
Suggested Solution:
 Equity (issue stock/shares)
 Short term or long term debt
 Hybrids like debt convertible to equity (CoCo bonds, Contingent Convertibles)
Question 2: Given the information below, what is the most attractive funding option for the client and
why?
Additional Information: (to be provided to the candidate if aksed)

Debt (Currently 70%)

 Short term loan: 3% with cash payments of $7 million per year.

 Long term loan: 6% with cash payments of $2 million per year.
 Getting the loan will increase percentage of debt to 75%.
Equity (Currently 30%)

 Current Return on Equity is low compared to the industry.

 Getting new equity will increase the percentage of equity to 42%.
Suggested Solution:
Return on Equity:

 Return on Assets: likely to stay the same – while the new factory will increase the assets, ICL will
also sell more, increasing sales.
 Leverage: If the client ICL obtains a loan for financing, this will increase.
Due to the low return on equity, a loan seems like a better idea, although the client ICL is pretty highly
leveraged already. Since the capital is for a long term asset (building a new factory), then the loan should
also be long term. A long term loan should also help ICL meet their interest payments as the payment
amounts will be lower. (In fact, as of April 2009, the company was said to be considering a bond offering
to raise $122 million.)

Microsoft Buys Social Network Yammer for $1.2 Billion

Case Type: merger & acquisition (M&A); pricing & valuation; finance & economics.
Consulting Firm: Capital One first round full time job interview.
Industry Coverage: software, information technology (IT).
Case Interview Question #00782: Yammer is a freemium enterprise social networking service that was
launched in 2008. Yammer is used for private communication within organizations and is an example of

enterprise social software. The tool was originally developed as an internal

communication system for the genealogy website Geni. Access to a Yammer network is determined by a
user’s Internet domain so that only individuals with appropriate email addresses may join their respective
networks.
The year is 2012. Technology giant Microsoft Corporation (NASDAQ: MSFT) is looking to buy out
Yammer. At this time, Yammer is already profitable and is expected to have steady, continued growth for
the foreseeable future. The CEO of Yammer has offered to sell for $1.2 Billion. Is this a reasonable price
for Microsoft?
Possible Answer:
Question 1: What are some of the methods for valuing the acquisition target Yammer?
Suggested Solution:
 Discounted Cash Flow (DCF)
 Comparables / multiples from similar companies.
 Multiples such as price to earnings ratio, price to sales, assuming that information is available.
Question 2: Using a simple DCF valuation method, is an acquisition price of $1.2 Billion a good deal?
Additional Information: (to be provided to the candidate if aksed)

 Discount Rate (WACC, weighted average cost of capital): 11%

 Growth Rate: 3%
 Yearly Cash Flow (for foreseeable future): $50 million
Suggested Solution:
1. Basic DCF

Simplified Discounted Cash Flow = Perpetuity = Cash Flow / (Discount Rate – Growth) = $50 / (0.11-0.03)
= $625 million

Therefore, the asking price of $1.2 Billion is not a good deal.

2. Advanced

Use this version of solution if the interviewee should know how to calculate the Weighted Average Cost of
Capital (WACC). Note: The interviewer could add a couple of years of differing cash flows if he/she wants
the question to be more complex.

Additional Information: (to be provided to the candidate if aksed)

 Market Risk Premium: 8%

 Yammer’s Beta: 1
 Percentage of Debt: 20%
 Percentage of Equity: 80%
 Risk Free Rate: 5%
 Tax Rate: 30%
 Cost of Debt: 5%
Cost of Equity = Risk Free Rate + Beta * Risk Premium = 5% + 1 * 8% = 13%

WACC = Percentage of Debt * Cost of Debt * (1 – Tax Rate) + % of Equity * Cost of Equity = 20% * 5% *
(1 – 30%) + 80% * 13% = 11%
The DCF valuation is the same as the basic DCF from this point, resulting in a lower valuation than the
asking price.

Question 3: Can you think of risk factors or other considerations that could be taken into account when
making the buyout decision?
Suggested Solution:
The Discount Rate 11% is quite high, is it possible that Yammer is less risky and deserves a lower
discount rate?

Can Microsoft add any value to Yammer that will increase its future cash flow, lower costs at Microsoft, or
add other synergies that might increase the value of the acquisition? (In fact, Microsoft later announced
that the Yammer team would be incorporated into the Microsoft Office division).

GP Investments to Build a New Football Stadium in Brazil

Case Type: finance & economics; private equity & investment; math problem.
Consulting Firm: Arthur D. Little first round full time job interview.
Industry Coverage: sports, leisure, recreation.
Case Interview Question #00775: GP Investments is a leading alternative investment firm in Latin
America with a strong presence in asset management, principally private equity funds. Since its
foundation in 1993, GP Investments has raised US$5 billion from investors worldwide and

has completed investments in more than 50 companies in 15 different

industries. The firm invests across a range of industries in Latin America, with bigger focus in Brazil.
The year is 2010. An investment fund owned by GP Investments is assessing a proposal to build a new
football stadium in Brazil. The private equity firm will continue to own and operate the football stadium for
a period of 5 years post construction. After the 5-year period the firm is planning to sell the stadium to a
new owner. Should the private equity firm make this investment? Please prove the profitability of this
project.
Additional Information: (to be provided to interviewee if asked)
1. Investment

4 years are required to plan and build the new football stadium, with an initial investment of $500 M in
year 0 (2010).
2. Stadium

 The new football stadium has a capacity of 50,000.

 Average stadium occupancy: 50% (assume that this holds for all 3 ticket types).
 The local football team plays 50 matches/year, 50% of which are played in the new stadium.
 Depreciation (straight line) = 20 years.
3. Revenues

Revenue generation will start in year 4 (2014).

Revenues come from two parts: ticket sales, and non-ticket revenues which include sales of food and
beverages, merchandise and organization of events.

For the purpose of the case, consider that COGS, SG&A, and revenue from ticket sales increase by 10%
each year. Revenue from sales of advertisements, food and beverages, merchandise and organization of
events increases at 50% each year.

 For the first year with revenues (year 4), assume that non-ticket revenue is $200 M.
 COGS = $120,000 (year 4)
 SG&A = $1,200,000 (year 4)
4. Tickets types and prices:

Ticket Type Seats Price/Seat

Super premium 5,000 $300

20,00
Premium 0 $100

25,00
Popular 0 $50

5. Consider tax rate of 25% and discount rate of 10%.

6. Consider 5 year time horizon for NPV calculations.

Possible Answer:
1. Calculation of ticket sales

Stadium Capacity: 50,000

Occupancy: 50%

Ticket Type Seats Price/Seat Ticket Sales

Super
premium 5,000 $300 $1,500,000

Premium 20,000 $100 $2,000,000

Popular 25,000 $50 $1,250,000

Total 50,000 $4,750,000

Considering Occupancy: $2,375,000

Matches/year: 50
Matches in the stadium/year: 25
Revenues from tickets/year: $2,375,000 * 25 = $59.4M

2. 5-year NPV Calculations

20 20 20
Year 2010 11 12 13 2014 2015 2016 2017 2018

Invest 500
ment M

Ticket
sales 59.4M 65.3M 71.8M 79M 86.9M

Additio
nal
revenu
e 200M 300M 450M 675M 1,012.5M

COGS 120,000 132,000 145.200 159.720 175.692

SG&A 1.2M 1.3M 1.4M 1.6M 1.7M

EBITDA 258.1M 363.9M 520.2M 752.3M 1,097.5M

Depreci
ation 25M 25M 25M 25M 25M

EBIT 233.1M 338.9M 495.2M 727.3M 1,072.5M

Net
Income 174.8M 254.1M 371.4M 545.4M 804.4M
Depreci
ation 25M 25M 25M 25M 25M

Operati -
ng cash 500
flow M 199.8M 279.1M 396.4M 570.4M 829.4M

Annual
Discou
nt Rate 10%

199.8/ 279.1/ 396.4/ 570.4/ 829.4/

(1.1)^4=136. (1.1)^5=173. (1.1)^6=223. (1.1)^7=292. (1.1)^8=386.
PV 5M 4M 8M 7M 9M

$713
NPV .3M

Conclusion:
The PE firm should proceed with the investment due to positive NPV.

What Kind of Companies Are They?

Case Type: finance & economics; industry analysis.
Consulting Firm: Oliver Wyman first round summer internship job interview.
Industry Coverage: Financial Services.
Case Interview Question #00712: Bank of America Merrill Lynch is the corporate and investment
banking division of Bank of America. It provides services in mergers and acquisitions, equity and debt
capital markets, lending, trading, risk management, research, and liquidity and payments management. It

was formed through the combination of the corporate and investment banking
activities of Bank of America and Merrill Lynch following the acquisition of the latter by the former in
January 2009.
You are a junior Equity Research Analyst recently hired by Bank of America Merrill Lynch. On your first
day of work, your manager wants to see how good your financial statement analysis skills are. Here is
information about three companies A, B, and C. What can you make of this data? And can you determine
what type of industry each company is in?
 Revenue
Net Income After Taxes s Assets Liabilities Equity

Company
A 254M 2.6B 2.8B 1.0B 1.8B

Company B 7B 77B 1.121T 1.085T 35B

Company C 11B 348B 151B 89B 61B

Possible Answer:
This is a mini case about accounting and financial statement analysis. If the interviewee is absolutely
stuck, lead him/her to calculate Return On Assets (ROA), Return On Equity (ROE), Net Profit Margin,
Debt-to-Assets Ratio, Debt-to-Equity Ratio, etc. The Current Ratio cannot be calculated here because
Total Assets and Liabilities are provided, as opposed to Current Assets and Liabilities.

After calculations are complete, have the interviewee interpret the data. Based on the numbers, what kind
of companies do you think these are?

Analysis (Calculations to be completed by the interviewee.)

Net Profit
ROA ROE Margin Debt-to-Assets Debt-to-Equity

Company 254M/2.8B = 254M/1.8B = 254M/2.6B =

A 9% 14% 10% 1.0B/2.8B = 36% 1.0B/1.8B = 56%

Company 1085B/1121B = 1085B/35B =

B 7B/1121B = 1% 7B/35B = 20% 7B/77B = 9% 97% 3103%

Company
C 11B/151B 7% 11B/61B = 18% 11B/348B = 3% 89B/151B = 60% 89B/61B = 148%

Recommended Conclusion
Company A has the highest ROA and Net Profit Margin. However, it has the lowest ROE, Debt-to-Assets
ratio, and Debt-to-Equity Ratio. This suggests that Company A is perhaps a low volume, high margin
store, such as a jewelry store. (Company A is in fact Tiffany & Company).

Company B has the highest ROE, and Debt-to-Equity is out the roof! Additionally, it has the highest Debt-
to-Assets ratio, so it uses a lot of Debt, increasing the firm’s risk-exposure. Company B has the lowest
ROA among the companies. Assets and Liabilities are pretty equal. All of this suggests that Company B
may be a financial institution of some kind. (Company B is in fact Morgan Stanley).
Company C has the lowest Net Profit Margin, and Assets are almost twice the Liabilities. This suggests
that Company C is a high volume, low margin store, like a retailer of some kind. (Company C is in fact
Wal-Mart).

Peter Pan Bus Lines Resumes Daily NYC-Boston Service

Case Type: improve profitability; finance & economics.
Consulting Firm: L.E.K. Consulting first round summer internship interview.
Industry Coverage: transportation.
Case Interview Question #00607: Our client Peter Pan Bus Lines is a long-distance bus transportation
company headquartered in Springfield, Massachusetts, United States. The company operates daily
intercity bus service between Boston and New York City. They operate with buses leaving every hour

from 7AM to 10PM, inclusive (meaning buses leave at 7AM and 10PM and all
other hours in between), from both Boston and NYC.
There are 3 questions that you should answer for this case:

1. What is the minimum number of buses the company needs to operate?

2. What are some ways the Peter Pan Bus Lines company can increase profits?
3. How would you value the Peter Pan company?
Suggested Approach:
This is an analytical case asking the candidate three specific questions to answer in succession. Below is
a rough outline for solving each of the three questions.
1. The candidate should realize that a bus leaves the first shift from NYC & Boston at 7AM and will be
able to make the return trip at 11AM. This pattern repeats. So, you only need 4 buses from both locations,
for a total of 8 buses.

2. The interviewer was looking for brainstorming potential solutions here. The candidate should give a list
of recommendations to increase profits. The profitability framework “Profits = Revenues – Costs” could be
used to guide your discussion.

3. In valuing the company, the interviewer is looking for the broad approach, not the actual number. The
candidate should first walk through a P&L (profit and loss) and then the method for a FCF (free cash flow)
valuation.

Additional Information: (to be given to candidate if requested)

The following facts are to be disclosed during the course of the case.
 It takes about 4 hours to make a one-way trip from NYC to Boston.
 For the sake of simplicity, we will assume that the bus can leave right away to make the return trip,
meaning passengers loading and unloading time is negligible.
 One-way ticket costs $15 and there is no round trip packages.
 There are 40 seats per bus, and assume that every bus is operating at full capacity (no empty seat).
Possible Solution:
Interviewer: So, how would you approach figuring out the number of buses required?

Candidate: First I would need to know how long the trip takes between NYC and Boston. I believe it takes
roughly 3-4 hours, is this correct?

Interviewer: Yes, you can assume 4 hours.

Candidate: What about the time it takes to unload and load passengers and refuel before making the
return trip?

Interviewer: Let’s assume that’s negligible.

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

Candidate: Yes, but first I want to know a few additional points about the client company. Are we currently
operating at full capacity? Additionally what is the competition like?

Interviewer: Yes, assume all buses are 100% filled. Additionally we are in a highly competitive market and
raising prices would be unwise.

Candidate: OK. So in brainstorming ways to raise profits, profits = revenues – costs, I want to think about
ways to increase revenues, reduce costs, or both.

 First with revenues, we can possibly add additional services such as selling snacks or magazines on
the buses or in the terminal.
 We could also add more departures to the schedule, however I’m not sure people would be
interested in taking buses that arrive later than 2AM.
 Finally we can think about an acquisition to boost profits. Potentially with an acquisition we might be
in a better position to increase prices because we’ll have more pricing power.
Interviewer: That’s all very good. What about the cost side?

Candidate: Well, first with the acquisition case I mentioned before we have potential to reduce overall
costs given operational synergies such as equipment, repairs, and cost of other services we offer.
Besides that, we can look at our buses and potentially upgrade our fleet to more fuel-efficient vehicles, or
vehicles that will have a longer useful life or require fewer repairs. We would have to do cost-benefit
analysis on such options. Also I would want to review other cost areas such as marketing, labor, and so
forth, to see whether we can reduce those.

Interviewer: That’s good. Now before you tell me how to value the company, starting with revenues can
you walk through the major components of the profit and loss statement (P&L) starting with revenues?

Candidate: Sure, after revenues would be all gross costs including fixed costs & variable costs.
Subtracting these costs would give you EBITDA (earnings before interest, taxes, depreciation and
amortization). Now we can use this metric to value the company via comparable multiples if we know of
any other recent transactions with bus companies. However, I assume this isn’t common so we will need
to proceed further and value the company using free cash flows (FCF).

Interviewer: Very good observation. How do you get to free cash flows from EBITDA?

Candidate: Well, first we need the Net Income number. We subtract out any depreciation and
amortization to get EBIT. Finally we apply the company’s tax rate to get net income. Now assuming there
is no interest expense, we can use net income to get to FCF. If there is interest expense we need to get
Net Operating Profit after tax which removes the tax effected interest expense from net income.

Note: here the interviewer can interject and ask what would make up depreciation and amortization (D&A)
– depreciation on buildings and buses, amortization on other potential acquired intangibles like goodwill.

Interviewer: Very good. Let’s assume no interest expense here and start with Net Income.

Candidate: OK, so FCF = Net Income – ΔNet Fixed Assets – ΔNet Working Investment.

The first term ΔNet Fixed Assets, or change in net fixed assets, is Capital Expenditures (e.g. new buses
or real estate we purchased) minus Depreciation on any property, plant and equipment (PP&E).

The other term ΔNet Working Investment represents working Current Assets (Necessary cash, Accounts
receivable, Inventory, other current assets) – Automatic Sources (Accounts payable, anything accrued,
other non-interest bearing liabilities).

Interviewer: Excellent. Thank you.

The Rise and Fall of All Terrain Vehicles (ATV)

Case Type: industry analysis; finance & economics.
Consulting Firm: NERA Economic Consulting first round job interview.
Industry Coverage: automotive, motor vehicles.
Case Interview Question #00569: Our client Polaris Industries (NYSE: PII) is a manufacturer of
snowmobiles, ATV (All Terrain Vehicle), and neighborhood electric vehicles. Headquartered in Medina,
Minnesota, USA, the company had total operating income of $220 million on revenue of $2.0 billion in

fiscal year 2010.

For this case, your consulting team is doing market research work for the ATV division of Polaris
Industries. The Head of ATV division wants to understand the cyclicality of the ATV business. He has
some historical information about the industry wide sales of ATVs from 1980 till year 2007: see the chart
below (Figure 1). The client wants to know the exact reasons for the cyclicality of ATV business.
Specifically:

 Why did the ATV sales fall in 1980?

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

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

 ATV, or All Terrain Vehicle, also known as a quad, quad bike, three-wheeler, or four-wheeler, is
defined by the American National Standards Institute (ANSI) as a vehicle that travels on low-pressure
tires, with a seat that is straddled by the operator, along with handlebars for steering control. As the
name implies, it is designed to handle a wider variety of terrain than most other vehicles.
 ATV is primarily an off-road vehicle used for recreational purposes. It has 4 wheels, and is typically a
little smaller than a motorcycle and people ride it like a motorcycle.
 Users – It is very popular among kids and adults, or ages 15 to 50.
Notes to the Interviewer:
Don’t allow the candidate to open the case with a framework. Instead, dive straight into the case. This
presents a more uncommon challenge: having to think on one’s feet constantly. There are hundreds of
reasons why annual ATV sales have fluctuated so much. The candidate should be able to brainstorm
ideas and conduct a conversation with the interviewer to identify which reasons make the most sense and
which ones do not.

The interviewer should allow the conversation to float to different areas, challenging the candidate as he
or she analyzes different factors. This is largely a discussion case, but the interviewer should keep the
discussion focused and should press the candidate constantly.

Possible Answer:
This “Industry Analysis” type of case tests a candidate’s understanding of macro-economics and how the
economic cycles impact industry wide sales.

 In the 1980s: initially ATVs were 3 wheelers and they had a lot of safety concerns. So the U.S.
government essentially banned them. That explains the drastic fall.
 In the 1990s: 4 wheeler ATVs became popular as they were safer. People wore helmets. ATVs were
restricted to off-road trails. This caused the stabilization of sales.
 2000 – 2007: The U.S. economy was going through a housing market bubble. People had a lot of
credit available. They used the money to buy ATVs, and also other luxury products or recreational
goods. So the rise in sales number.
 Year 2007: A credit crunch in the housing and financial market.
 After 2007: ATV sales will likely fall again and stabilize somewhere in the halfway mark by year 2011
or maybe 2012.
Note:
 The U.S. economy went through several cycles between 1980 and 2000. The dot-com bubble was
around year 2002.
 ATV user demographics – the user population remained about the same.
 ATV prices grew with inflation.
Which Cowboy Will Walk Out Alive From a Truel?
Case Type: math problem; finance & economics.
Consulting Firm: Cornerstone Research first round job interview.
Industry Coverage: Agriculture, Farming, Aquaculture.
Case Interview Question #00557: There are three cowboys: Cowboy A, Cowboy B, and Cowboy C.
They are standing in an equilateral triangle in a truel (a three-person “duel”). Each cowboy has one gun
and one bullet and they all must shoot each other at the same time. Whoever Cowboy A shoots has a
100% chance of dying. Whoever Cowboy B shoots has a 60% chance of dying.
Whoever Cowboy C shoots has a 40% chance of dying. So, which cowboy is most likely to walk out
alive?
Note to Interviewer:
As the interviewer you should not allow the interviewee to apply any framework for this math, probability
and game theory related case. Just jump straight into the case and present the questions successively as
the candidate answers each one. Try to throw the candidate off pace by not allowing a framework and
changing the scenarios. It should feel very different for the candidate, but a well-practiced one will roll with
the punches and take a hold and drive the case.
Question #1: Which cowboy is most likely to walk out alive?
Possible Answer:
Calculate the probability of each cowboy dying:
 Cowboy A: (60% + 40% ) / 2 = 50%
 Cowboy B: (100% + 40% ) / 2 = 70%
 Cowboy C: (100% + 60% ) / 2 = 80%
Thus, Cowboy A is the most likely to walk out alive.

Question #2: In the previous situation, the cowboys didn’t know each other’s probabilities. Now assume
that the cowboys know everyone’s probabilities; then who is the most likely to walk out of there alive?
Possible Answer:
In this scenario, each cowboy will try to eliminate the stronger one of the rest two, in order for himself to
survive.

 Cowboy A will shoot Cowboy B because Cowboy C has higher chance of dying than B
 Cowboy B will shoot Cowboy A because Cowboy C has higher chance of dying than A
 Cowboy C will shoot Cowboy A because Cowboy B has higher chance of dying than A
Therefore, Cowboy C is the most likely to walk out alive.

Question #3: What is the relationship between parts 1 and 2? What exactly caused the change in the
most likely to survive?
Possible Answer:
There is an inverse relationship between the probability of survival and the amount of information known.
Being a better shooter makes the cowboy a more likely target, and thus hurts his probability of survival.
The key drive is the availability of information.
Question #4: Can you provide a business example of when having asymmetric information can lead to
different outcomes?
Possible Answer:
There are almost countless examples. An excellent candidate should brainstorm several and describe the
relation to each. Some examples are: international trade, corporate mergers and acquisitions, insider
trading, contract bargaining, government negotiations, new market entry, etc.

How to Analyze Economics of Electricity Market in Argentina?

Case Type: finance & economics; industry analysis.
Consulting Firm: Analysis Group first round job interview.
Industry Coverage: energy industry.
Case Interview Question #00525: You are a consultant on a project to study the economics of the
electricity market in the South American country of Argentina. The current population of Argentina is
around 41 million. The electricity market in Argentina has three types of electricity plants: coal fired, oil

fired and gas fired. The table below summarizes the economics of each type.
Type of power plant based on fuel source Coal Oil Gas

Cost per unit of electricity 35 75 125

Price per unit of electricity 50 100 175

Annual market supply available (units of electricity) 10 15 25

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

Question #1: Draw a demand curve for a demand range 0 to 50 units.

 Possible Answer:
See Figure 1, the demand curve for electricity market in Argentina.

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

Type of power plant Coal Oil Gas

Cost per unit 35 75 125

Price per unit 175 175 175

Capacity sold at demand = 35 units 10 15 10

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

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

Calculations: Profits in dollars

Plant type Coal Oil Gas

Demand = 1 – 10 (50-35) * 10 = 150 0 0

Demand = 11 – 25 (100-35) * 10 = 650 (100-75) * 15 = 375 0

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

Question #4: What are the implications of this kind of market conditions for your client who is in this
market?
Possible Answer:
A new competitor who may enter the market can change the market economics depending on what type
of power plant the new player sets up and how much capacity it installs.

It is important to forecast demand accurately and if required diversify the portfolio with a combination of
different types of power plants.

Mail Order Cataloger Service Merchandise Profit Declines

Case Type: improve profitability; finance & economics.
Consulting Firm: Booz & Company first round job interview.
Industry Coverage: retail.
Case Interview Question #00500: Our client Service Merchandise is a mail order cataloger (company
who publishes and operates mail order catalogs) and retailer chain of catalog showroom stores carrying
fine jewelry, toys, sporting goods, and electronics. Mail order is a term which describes the buying of

goods or services by mail delivery. A mail order catalog is a publication

containing a list of general merchandise from a company who buys or manufactures goods, and then
markets those goods to prospective customers.
During the 1970s, Service Merchandise was the nation’s top mail order catalog retailer. At its peak, the
company achieved more than $4 billion in annual sales. As the company expanded, it began to open
showrooms nationwide, mostly in the vicinity of major shopping malls. Recently, however, the client has
been experiencing declining profit per catalog. Give me five different possible causes.
Possible Approach:
Try to be focused and structured: I started to give 5 answers. I probably should have been a bit more
organized with my answers because I sounded like I just mentioned anything that came to mind. Based
on the interviewer’s background (PhD in Economics), I expected an economics related case. As it turned
out, the case went into economics later on. I used the MR = MC equation to structure my case at the later
stage.
Prioritize the issues and filter out unneeded information: I started the case with Marginal Cost (MC) first,
since that was easier to estimate. I then moved on towards figuring out the MR (Marginal Revenue)
equation. I needed information on the demand and the revenue by customer groups.
Additional information sought: I asked for MC information for catalogs and MR information for customers.

I used a graph to illustrate the MR-MC lines (they love Price-Demand graphs).

Possible Answer:
Interviewer: (Interviewer drew a chart showing declining profitability/catalog over the past 4 years) Can
you provide with 5 possible causes for this decline?

Candidate: (I used a clipboard and drew up five bulleted numbers (1-5) and provided the following five
possible causes)

 Starting to target unprofitable customers

 Items in catalog have lower margin
 People are not ordering from catalogs
 Shipping Costs could be higher
 Products are not popular among customers
Interviewer: (It turns out that they are sending catalogs to customers who order less) How should the
client company determine who to send to and whom not?

Candidate: In a competitive industry such as mail order catalogs, MR = MC (Know the background of the
interviewer, I thought this would be a good place to start). Let’s start with the marginal costs. Do you have
any information on this?

Interviewer: Marginal cost = $3

Candidate: I will need some information on Marginal Revenues. I would like to rank customers in deciles
based on the revenue each provides.

Interviewer: The interviewer had actually done a regression and gave me the equation of the curve: MR =
50 – 2 * “customer percentile”. Customer percentile: Profit by customers ranked. This was based on the
customer database of the client.

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

Philadelphia Orchestra to Increase Revenues from Ticket Sales

Case Type: increase sales or revenues; finance & economics
Consulting Firm: NERA Economic Consulting first round job interview.
Industry Coverage: entertainment & performing arts.
Case Interview Question #00469: The client Philadelphia Orchestra is a symphony orchestra based in
Philadelphia, Pennsylvania, United States. Founded in 1900, the Philadelphia Orchestra is one of the “Big
Five” American orchestras (the other four: New York Philharmonic, Boston Symphony Orchestra, Chicago
Symphony Orchestra, and Cleveland Orchestra). The orchestra’s home is the
Kimmel Center for the Performing Arts, where it performs its subscription concerts, numbering over 130,
in Verizon Hall.
The Philadelphia Orchestra is currently exploring the possibilities of increasing their ticket sales. So far,
they have relied heavily upon corporate donations and government grants for revenues, and they would
like to increase the proportion of revenues obtained from ticket sales. How would you help them to
accomplish that goal?
Possible Answer:
This is an “increasing revenues/sales” type of mini business cases, with the emphasis being on whether
the candidate is able to focus in quickly on the single main point of the case: supply demand curve. If the
candidate does not immediately jump to it, ask him or her to draw the supply-demand curve after some
quick discussion. The following conversation is one of the many possible discussions.

Candidate: I would like to start by looking at different sources of revenues. Since you have outlined the
problem as one of revenues alone, I am proposing not to get into the costs side of the profitability
equation until later.

Interviewer: Good. Explain what you will look at.

Candidate: Well, the way I look at it, revenues are a function of ticket price and the volume of the tickets
sold. We can look at either, or both of these in turn.

Interviewer: There is not much to be done with the volume. The tickets are always sold out.

Note to Candidate: At this point it was clear that the case giver wanted this to be a price driven case.
The interviewer did not want to discuss other ideas such as merchandising, CD’s, tours, etc. as a source
of revenue, as can be evidenced below.
Candidate: Well, in that case, let us focus on the prices then. How are the tickets priced now?

Interviewer: Yes, let’s examine the prices. Draw me a demand curve for the tickets.

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

Interviewer: Right. What does it mean for the demand curve itself?

Candidate: Kind of steep (see figure 1).

Interviewer: Good. Now, what about the supply curve?

Candidate: I don’t think the supply will vary at all. No matter what the price is, there are x number of seats
available at any given time.

Interviewer: Very good. Let’s look at the supply demand curve that you have drawn now. What if I tell you
that they are priced at P1 now?

Candidate: Well, since the equilibrium price seems to be at P, I see there is definitely some scope for
price increase.

Interviewer: Good. There were other aspects of this case, but let’s stop here for now. How do you think
you did?

Note to Interviewer:
Obviously, this is a simple case to test candidate’s understanding of basic economic theory, in particular
supply demand curve, and of course you can lengthen it if you wish. Once the candidate correctly
identifies the supply demand curve, you can stop the case.

How Much to Ask for a 5 Year Oil Field Lease?

Case Type: pricing & valuation; finance & economics.
Consulting Firm: Cognizant Business Consulting (CBC) first round job interview.
Industry Coverage: Oil, Gas & Petroleum Industry.
Case Interview Question #00463: You, a strategy consultant working at Cognizant Business Consulting
(CBC), have been hired by a wealthy client who owns a big oil field in Texas, and he does not know what
to do with it. The price of the oil is at present $100 per barrel, and it has been
that way for quite a while. Currently it costs $110 per barrel to lift the oil. Recently a major oil company
has just bid on his plot of land for a 5 year oil lease. What should he do? How much should he ask for the
5 year oilfield lease?
Possible Answer:
This is a mini business case that tests the candidate’s understanding of basic financial theory and simple
option pricing model. Since MBA candidates are expected to have taken a fundamental corporate finance
course, this case question is a fair game.
The interviewer should feel free to let the candidates wander all over the map, but he or she must arrive
at the following conclusion: one does not price the oil reserve purely based on the existing price to lift and
refine the oil. Rather, the oil company is bidding to have the option to lift the oil in the future. This then
gets into option pricing theory, Black-Scholes, etc. The underlying asset in this case is the oil itself, and
the volatility component of the Black-Scholes model comes from the volatility of the oil prices. The strike
price of the option is the cost of lifting the oil from the ground.

Chesapeake Energy Not to Drill a New Natural Gas Well

Case Type: economics & finance; add capacity; investment.
Consulting Firm: Schlumberger Business Consulting (SBC) 1st round job interview.
Industry Coverage: oil, gas & petroleum industry.
Case Interview Questions #00414: The client Chesapeake Energy (NYSE: CHK) is the second largest
producer of natural gas in the United States and the most active driller of new wells. Headquartered in
Oklahoma City, Oklahoma, the company’s operations are focused on the

development of onshore unconventional and conventional natural gas in the US.

Recently, the client Chesapeake Energy is considering adding capacity. They need to decide whether to
drill and build a new well for natural gas, which would involve a major capital investment. Should the client
pursue this venture or not?

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

 The capital investment for the new natural gas well would cost USD $300 million.
 The new well has a 10-year useful life, and would produce 3 units of natural gas a year.
 Natural gas is a relatively plentiful but finite natural resource that cannot be easily replaced.
 Natural gas is a large domestic industry in the US. Natural gas can be used for automobile fuel, but is
primarily used for heating and industrial purposes.
 Natural gas price and U.S. demand in the last 10 years will be given to you upon request:

Year Price per unit ($ million) Quantity (in units)

2000 15 110

2001 14 120

2002 16 130

2003 15 140

2004 14 150

2005 14 160

2006 13 170

2007 14 180

2008 13 190

2009 12 200

Possible Approach:
The candidate must consider the costs and benefits of the suggested action. Oftentimes valuation
questions or quantitative calculations will be involved with this type of “Go/No Go” case question.

The candidate ought to suggest plotting the demand curve and price trend for natural gas for the last 10
years from the given data. Using the set of data points provided by the interviewer, the candidate should
advise against the investment.

The annual demand has been increasing year by year for the last 10 years, but the average unit price has
been declining. If the same trend continues (Figure 1), the average price will probably decline further to
$9 million per unit over the next 10 years. Thus, average price for the next years will be ($12 + $9) / 2 =
$10.5 per unit. The projected 10-year revenues from the new well will be: $10.5 per unit * 3 units * 10
years = $315 million.

The net present value (NPV) of the projected revenue ($315 million) would not justify the required capital
investment required of $300 million.

How Much is a Medium-sized Oil Tanker Worth?

Case Type: pricing & valuation; economics & finance.
Consulting Firm: Schlumberger Business Consulting (SBC) 1st round job interview.
Industry Coverage: containers; freight delivery, shipping services; oil, gas & petroleum industry.
Case Interview Questions #00410: Your client is the wealthy investor Warren Buffett, Chairman and
CEO of Omaha, Nebraska-based multinational conglomerate holding company Berkshire Hathaway
(NYSE: BRK.A, BRK.B). Buffett has inherited an oil tanker from a distant relative. He would like to sell the

oil tanker, but knowing nothing of the oil transportation business, he needs a
better understanding of what it is worth. How would you help him value the oil tanker?
Additional Information: (to be provided to candidate if asked)
There are 3 sizes of oil tankers in the market: Large, Medium, and Small. Ships are otherwise identical.
The number of ships in the 3 categories as well as their capacity and cost are listed in the table below.
Size Small Medium Large

50,000
Capacity bbl 100,000 bbl 200,000 bbl

Cost (of one trip) $50,000 $75,000 $100,000

Number 35 15 10

Your client Warren Buffett’s ship is medium-sized.

Demand in the oil tanker industry is flat, at 3,000,000 Barrel (bbl) per year.

Assume that ships last forever (no depreciation). A used ship costs exactly the same as a new one.

Each ship is independently owned and operated. Each ship is capable of exactly one trip per year.

Possible Solution:

The interviewer told me (the interviewee) that discounted cash flow (DCF) tends to be the only method
MBAs use in valuation cases. Therefore, it is important to first point out that you have thought broadly
about the question before launching into the numbers: “There are 3 or 4 different ways to value the ship.
One would be to discount the expected future cash flows. Another would be to attach an established
industry multiple to sales or earnings. Another would be to use comparable deals, e.g. cargo ships in
another industry, to establish such a multiple. Another would be to take the price of a new tanker and
depreciate it to the proper degree. Depending on what we find, one method may be more useful than the
others.”
The key is to recognize that this is an industry with excess capacity. An annual demand of 3,000,000 bbl
supports all 10 large ships, 10 of the 15 medium ships, and none of the 35 small ships. Market clearing
price will be set at $0.75 per barrel, the marginal cost of the medium ship. That makes yearly profits for
the client’s medium ship = $75,000 – $75,000 = 0. In that case, the client’s oil tanker is worth nothing.

How can the client fix this? If a medium ship is truly worth $0 (or at least close to $0), the best move
would be to buy out the excess capacity: i.e. buy 5 more medium ships. In this scenario, the client could
scrap the extra five ships, and having removed excess capacity could raise prices to ~ $0.99 per barrel,
or any amount less than the $1.00 per barrel offered by the small ships.

So, what’s the client’s ship worth now? It would make yearly profits of $99,000 – $75,000 = $24,000.
Assuming stable demand (which is the case here), this cash flow could be discounted as a perpetuity,
assuming a reasonable interest rate (say 5%). In that case the value could be estimated at $24,000 / 5%
= $480,000.

Interviewee’s Comments:
This pricing & valuation case is less about deriving a numerical answer than it is about showing that you
can think broadly about the interplay between market conditions and value.

The candidate should recognize the cyclical nature of the oil & gas industry. CAPACITY is the central
issue to consider. The client’s purchase of excess capacity is essentially a call option on the industry, a
bet that demand will remain constant or perhaps increase. Also, the candidate should know the risks and
rewards of this strategy.
In a commodity market where there is excess capacity and where competitors have varying marginal cost
(MC), the market clearing price will likely be set at MC of the middle cost competitor, such that capacity
matches demand as closely as possible. Removing excess capacity raises the market clearing price
(assuming demand is constant).

Newport News Shipbuilding to Build a New Tanker

Case Type: finance & economics.
Consulting Firm: Booz Allen Hamilton (BAH) first round summer internship interview.
Industry Coverage: freight delivery, shipping services; containers.
Case Interview Question #00367: Your client Newport News Shipbuilding (NNS) was the largest
privately-owned shipbuilder in the United States. Located in Newport News, Virginia, Newport News
Shipbuilding was later purchased by defense company and naval vessels builder Northrop Grumman

(NYSE: NOC) in 2001, and was known as Northrop Grumman Shipbuilding

Newport News or NGSB-NN.
Your client Newport News Shipbuilding is one of the few shipbuilders in the world that have the capacity
to build tankers (a large ship designed to transport liquids in bulk. Major types of tank ship include the oil
tanker, the chemical tanker, and the liquefied natural gas carrier). Presently, suppose there are only a
total of three tankers in the world. The client wants to know if they should build a new tanker. What would
you advise them?
Possible Answer:
Basically, this case is to test a candidate’s understanding of microeconomics, or more specifically the
relationship betweensupply and demand. Essentially, the candidate needs to address four questions:

1. What would happen to tanker or shipping price if world supply of tankers was increased by 25%?
2. Are there any other producers that can build tankers or is our client a monopoly producer?
3. If there were other tanker producers, what would be their likely response if our client were to undertake
this project?
4. How much worldwide demand for tankers is out there?

I began my analysis by drawing a basic supply and demand diagram (ECON 101?), as shown in Figure 1:

Before I addressed questions 2 and 3 listed above, the interviewer stated that he would like me to
construct a supply curve from actual data and gave me the following table:

Tanker MC ($/K ton capacity) Capacity (K tons)

1 0.02 50

2 0.03 30

3 0.01 20

I initially (wrongly) plotted the three points using Marginal Cost (MC) as price and capacity as quantity
(Figure 2):

The interviewer gave me a clue and told me to plot the points using cumulative quantity to derive the
shape of the curve:
MC ($/K ton capacity) Capacity (K tons)

0.01 0-20

0.02 20-70

0.03 70-100

From the plot, I inferred a straight-line supply curve (drawn here as Figure 3). The interviewer asked me
to draw the actual, incremental supply curve implied by the data. This is actually a step function rather
than a straight line (Figure 4):

Our client’s decision to produce depends on the amount of demand and the marginal cost of producing a
fourth tanker.

Candidate: So, what is current worldwide demand for tankers?

Interviewer: Demand is at 70K tons.

Conclusion: MC at 70k tons is 2 cents per kilo ton.

Recommendations for Client:

I recommended that the client: build a fourth tanker, if the client can produce a tanker at a marginal cost
of no more than 2 cents per kilo ton; otherwise, don’t build.

Interviewee’s Comments:
Remember the importance of getting your pencil to paper and to draw some graphs!
Brazil to Withdraw from International Tin Cartel
Case Type: finance & economics; industry analysis.
Consulting Firm: Cornerstone Research 2nd round job interview.
Industry Coverage: mining & metals production; international trade.
Case Interview Question #00347: The International Tin Council (ITC) was an organization which acted
on behalf of the principal tin producers in the world to buy up surplus tin stocks to maintain the price at a
steady level. The organization was established in 1956, following on from the work of the

International Tin Study Group, which was established to survey the world
supply and demand of tin.
Essentially ITC is a tin mining cartel consisting of four biggest tin producing countries: Indonesia, China,
Brazil, and Russia. Every year the four governments get together to decide how much tin to produce
according to demand forecasts, and allocate the production quota evenly among them. Now, Brazil is
thinking about withdrawing from the cartel. The President of Brazil comes to you for advice. What would
you tell her?
Possible Answer:
This case is to test your understanding of basic microeconomics concepts. I need to determine if it is
more profitable for Brazil to mine according to the guidelines of the cartel, or on their own.

Candidate: What are the relative production costs of each of the countries?
Interviewer: Brazil and Russia have a 10% cost advantage over Indonesia and China (Alternatively, you
may be asked how you would find out the production costs of each country).

Candidate: What volume does each country produce and sell, historically?

Interviewer: Last year, Brazil and Russia both produced twice as much as Indonesia and China (you may
get actual numbers, but very often you will get broad generalizations like these).

Candidate: What is the demand curve facing the producers?

Interviewer: A basic downward sloping demand curve (drawn as such on a piece of paper).

I wanted to derive the price implied by the supply and demand curves. The KEY to this question is to
derive the world supply curve. The basic concept is from ECON 101: supply curve is the sum of marginal
cost (MC) curve of all producers. Here we only have four producers.
Based on what I found out from my questions, I know that the supply curve will be a step function and can
compare the price with Brazil’s marginal cost. Based on Brazil’s cost position on that supply curve, I can
decide whether Brazil will be better off producing on their own.

Recommendations for Client:

I recommended that Brazil go it alone, based on their favorable cost position, and the fact that the
remaining countries did not have enough volume to “open the flood-gates” in an attempt to punish me for
leaving the cartel.

Interviewee’s Comments:
My answer was right on, but I did not mention the possibility of non-cartel producers who could fill the
world supply or the effect of other substitute products of tin such as aluminium, synthetic polymer,
plastics, etc.

Notes:
Game theory suggests that cartels are inherently unstable, as the behaviour of members of a cartel is an
example of a prisoner’s dilemma. Each member of a cartel would be able to make more profit by breaking
the agreement (producing a greater quantity or selling at a lower price than that agreed) than it could
make by abiding by it. However, if all members break the agreement, all will be worse off.

There are several factors that will affect the firms’ ability to monitor a cartel:

 Number of firms in the industry

 Characteristics of the products sold by the firms
 Production costs of each member
 Behaviour of demand
 Frequency of sales and their characteristics
CarMax to Tighten Car Loans & Auto Finance Policy
Case Type: math problem; new business; finance.
Consulting Firm: Capital One 2nd round job interview.
Industry Coverage: automotive, motor vehicles; retail; financial services.
Case Interview Question #00334: Our client CarMax (NYSE: KMX) is a used car retailer and dealership
headquartered in Richmond, Virginia, USA. Their business has been stagnating in recent years. They are

located in a low to middle-income area and in the past have only sold cars to
customers who are willing to pay 100% of the cost up-front or can obtain bank financing. In order to boost
sales, CarMax is considering offering car loans to customers that the dealership itself will finance.
To be eligible for a loan, customers must undergo a complete credit check (which we assume to be
accurate). The credit check rates potential car buyers on a scale of 0 to 100, where 0 corresponds to a
0% chance of paying off the loan and 100 corresponds to a 100% chance of paying the loan in full. Each
loan only lasts 1 year in which payments are made monthly and the entire loan will be paid off in 1 year’s
time. Buyers ultimately fall into two categories, those that pay off the loan entirely, and those that default.
The Question: What should be the cutoff level where CarMax decides to give potential buyers the loan?
What issues might cause you to alter this cutoff-level?

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

 Average cost of a used car to CarMax: $6,000.
 Average price of car sold to customer: $7,000.
 Minimum down payment for all customers: $1,000.
 Average loan defaulter makes three months of payments before defaulting.
Possible Answer:
Although this case looks like a typical “starting a new business/service” case, I did not really use any
framework because this case is more of a question of establishing where the break-even marks would lie.
I did all the calculations on the average.

Candidate: So what is the average cost of each car and how much does our client CarMax sell them for?
Interviewer: The dealership’s average cost per car is $6,000. We sell them for an average of $7,000.

Candidate: What is the minimum down payment? Do all customers default at an amount relative to their
credit report (i.e. a potential buyer with an 80 credit rating will pay the down-payment and 80% of the
remaining loan)? How much do we make on the loans?

Interviewer: The minimum down payment is $1,000 regardless of credit rating. The average default is
after three months. Assume we make nothing on the loans; they are only used to entice in additional
customers.

At this point, I stated to crank through some of the math. We make a profit margin of only $1,000 on each
car. For this to be worthwhile we must make more on additional cars sold and paid for in full than what we
lose in loan defaulters.

 Net profit to the dealership for a good loan: $7,000 – $6,000 = $1,000.
 Total loss to the dealership for a default: $6,000 (average cost of car) – $1,000 (down payment) –
$1,500 (three months payment before default) = $3,500.
This means that we need to have 4 good loans

for every 1 bad loan to turn a profit/not lose

money. If 4/5 of loans must be good, then a credit rating of 80 should be our cutoff. At this point I drew the
following graph for the interviewer to illustrate my point and to discuss other issues to consider:

I would probably be tempted to raise the cutoff above 80, at least in the beginning. This is for two
reasons:

(1) We are not sure how successful our client will be with this process, so it would be better to start more
conservatively and if successful, ramp up the operation.
(2) At the 80 cutoff we are working very hard for diminishing profits, where at the 90 cutoff the potential
rewards are much higher.

Alternative solution and other possible issues to consider:

 Another possible solution would be to lower the cutoff level for higher risk loans but raise the
minimum down payment required. This would change our risk profile.
 Look at the cash flow situation of the client. If a few unexpected bad loans in a row would bankrupt
our client, then we may want to raise the cutoff.
 Examine expected economic conditions looking forward. If we sense that the economy will be poor in
the future, we also may want to increase the cutoff point.
 The use of warranties or add-ons, paid at the time of purchase, that force customers to pay more up-
front would also allow us to lower the cutoff levels. For example, it we allow a customer to purchase a
two-year warranty for $1,000 that is paid for in full at the time of purchase, it reduces our overall risk
exposure.
Capital One Auto Finance to Revamp Loan Issuing System
Case Type: new business; math problem; finance.
Consulting Firm: Capital One 2nd round job interview.
Industry Coverage: financial services; banking.
Case Interview Question #00329: Capital One Financial Corp. (NYSE: COF) is a McLean, Virginia,
United States-based bank holding company specializing in credit cards, home loans, auto loans, banking,
and savings products. Based in Plano, Texas, Capital One Auto Finance (COAF) is the auto loans
division of Capital One. It is the largest Internet auto lender, as well as one of the
top US auto lenders overall.
The COAF division has a loan-issuing operation that requires the following steps:

 The car loan application is generated at a branch office.

 A complete applicant background check is performed at the branch office.
 The application and background check are sent to a loan processing office.
 The background check is updated and verified (this takes much less time than original check).
 The car loan is either approved or denied.
Recently, Capital One Auto Finance division is considering getting rid of the first background check and
only relying on the loan processor’s check to speed the process. If the loan processor does the whole
check with the proposed new software system, the check takes one additional hour per application at the
processor’s office. Should Capital One Auto Finance implement the revised new system or not? Why?

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

1. General:

 Number of auto loan applicants is roughly ~100,000 per year.

 Average value per car loan is $10,000.
 Given: Average profit margin for a “good” loan: $0.20 per dollar loaned.
 Given: Average marginal loss for a “bad” loan: $0.50 per dollar loaned.
2. Original system:
 Default rate under the original system: 10%.
 Processing costs under the original system: $100/application.
 Given: Acceptance rate under the original system: 45%.
 50% of the applicants pass the first background check.
 90% pass the second background check.
3. Proposed new system:

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

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

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

Interviewer’s Comments:
This case obviously tests your analytical skills. Do not attempt to answer this question without working
through the calculations on a piece of paper. If your math skills are poor, this strategy could easily
backfire, making you look stupid. This case is relatively straightforward, but make sure that you have all
the information necessary to develop an answer.
Capital One Cross Selling Prepaid Phone Card?
Case Type: new product; finance & economics.
Consulting Firm: Capital One final round job interview.
Industry Coverage: telecommunications; financial services.
Case Interview Question #00256: Suppose you have just been appointed the manager of the Cross
Sells team at Capital One (NYSE: COF). You and your team are responsible for evaluating opportunities
to market non-credit card products to our credit card customers. This usually involves products from

outside vendors that we can sell to our customers at a premium.

One potential cross-sell opportunity that is sitting on your desk right now is the Prepaid Phone Card—a
piece of plastic you can use to pay for long distance telephone calls. Users of the card would call an 800
number, enter the card’s PIN, and then enter the destination telephone number. The outside vendor
tracks card usage and minutes remaining. Your responsibility is to determine if the product will be
profitable for Capital One and how to maximize this profit.
First, take a few moments to determine what are the most important factors that will help you decide to
accept or reject the Phone Card cross-sell.

Questions to Consider:

Following is a list of some of the most important questions to consider:

 How much does each Phone Card cost Capital One?
 Are there any other costs involved, such as a set-up fee?
 Are there any constraints on how many minutes each Phone Card has?
 Are there any constraints on how much we can sell the cards for?
 How much do competitors charge for the Phone Cards?
 How much do our cross-sell products usually sell for?
 How many customers usually buy our cross-sell products?
 What distribution channels are available for marketing the Phone Cards to our customers?
 How much would this marketing cost?
Here are some other questions you might have thought of, but for simplicity’s sake, we will not consider
their implications during the remainder of the case:

 How does the Phone Card opportunity compare with other cross sells we are considering? Maybe the
product is profitable, but there’s another, even more profitable product we could offer instead.
 How do our customers feel about receiving cross sell offers? Are there any who have told us that
they do not want to receive these offers? If so, our market size may be somewhat limited.
 Does offering a Phone Card to a credit card customer have any impact on their profitability as a credit
card customer? If they buy the Phone Card, we will charge the fee to their Capital One credit card,
and if they carry a balance (i.e. don’t pay off their bill every month), then we can earn interest on the
price of the Phone Card.
 If a customer purchases a Phone Card, might that purchase indicate something about the customer’s
credit risk that we wouldn’t otherwise have known? Maybe the customers who would want to buy
Phone Cards are the ones whose phones have recently been turned off for non-payment! If this is
true, then offering this cross-sell would be even MORE attractive, since it would help us to identify
these customers before they “charge off” (i.e. default on their credit card debt).
Assumptions
Luckily, the vendor who wants to sell us the Phone Cards has already provided a lot of the information
you need in an introductory e-mail. The e-mail has several key points:

 The phone card may be sold at any price, and other companies have sold the cards for up to $0.75
per minute.
 The card may be sold with any number of minutes on it.
 Capital One must pay $0.20 per minute sold.
 Capital One must pay $2.00 per card sold for account set-up, which includes card materials, the
vendor’s system programming, and postage.
 The vendor notes that the Phone Card could be a good addition to Capital One’s cross sell program,
which ordinarily offers products in the $5 to $30 price range.
Question #1: Let’s assume that Capital One has decided to sell 60-minute Phone Cards at a price of $30
each. How much profit do we make on each card sold?
Possible Answer: Capital One’s profit per card is $16. For your reference, the equation is shown below:
Profit per card sold = (Revenue per card) – (Expense per card) = $30 – (($0.20/min * 60 min) + $2.00) =
$16

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

Response Rate: The percent of customers you solicit who decide to purchase the Phone Card will vary
considerably as well. And as you might suspect, cost and response rate are often positively correlated-the
more a marketing effort costs, the more people respond to it, and vice versa. For example, a lot of people
might respond to a direct mail solicitation, but far fewer would respond to the statement question. After all,
it’s hard to miss a letter in your mailbox, but you could easily overlook a line or two at the bottom of your
statement. Plus, if we send out a letter, we have a lot of room to include persuasive text and beautiful
photos discussing the benefits of the Phone Card, but if we decide to go with a statement question, we
have only two short lines of text to make the sale. Having more space and flexibility to promote the
product would have a big impact on what percent of people choose to buy it.

Additionally, there are lots of other factors you might have thought of that also deserve consideration. A
few are outlined briefly below:

 Time to Market: It takes a lot more time to use some of these channels than others. If we thought a
lot of other companies were going to increase their marketing of Phone Cards in the near future, we
might decide to use a channel that gets us to market fastest.
 Operational Impact: Going with one channel might take a few hours of a single person’s time,
whereas another channel might require us to mobilize an entire department for a week. Although this
sort of implication can be included in the “cost” consideration above, it is also valuable to consider it
separately.
 Customer Perception and Preference: Some customers don’t like receiving telemarketing calls from
us, so we need to consider this when formulating our marketing campaigns.
Question #5: The decision of which distribution channel to use is a very interesting one, but it is too
lengthy to consider here. Let’s assume that you decide to use the statement insert channel. Each insert
will cost you $0.04, which includes everything—all the way from the graphic designer’s time, to the cost of
printing them, to the cost of stuffing them in envelopes. And don’t worry—our postage costs won’t go up.
We already send all of our customers statements anyway, and since we are very careful to make the
inserts extremely lightweight, we won’t incur any incremental postage costs from marketing this product.
Assuming that we must sell 60-minute cards for $30, what response rate would be required to break even
on the insert?

Hint: “Breaking even” means that you neither gain money nor lose money on a project—your total profit is
$0. The break-even point for a given variable is a very useful figure in business, since it tells you the point
when you start making (or losing!) money.

Possible Answers: There are a number of different ways you could have chosen to solve this break-
even problem, but the answer is the same no matter which way you do it.
Method 1: Assume that you mail 100 inserts, and then determine how many people would have to
respond for the profit to equal zero.

Let R = the number of responders, net profit = 0 = (Revenue per card sold) – (Expense per card sold) =
$30*R – [($0.20*60)*R + $2.00*R + (100*$0.04)] = 30R – 12R – 2R – 4, 16R = 4, R = 0.25 people per
hundred, so R = 0.25%

Method 2: Same as method 1, except you don’t assume a certain number of customers.

Let R = response rate, net profit = 0 = (Revenue per card sold) – (Expense per card sold) = $30 –
[($0.20*60) + $2 + ($0.04/R)] = 30 – 12 – 2 – (0.04/R), (0.04/R) = 16, 16R = 0.04, R = 0.25%

Method 3: Break even occurs when (Profit per piece mailed) = (Marketing cost per piece mailed).

Response rate R = (# of cards sold / # of pieces mailed), You can multiply any expression by (1/R)*R, or
(# pieces mailed/ # cards sold)*(# cards sold/# pieces mailed), since this expression is equal to 1. Recall
from the assumptions that marketing cost per piece mailed = $0.04, so (Profit/piece mailed)*(# pieces
mailed/# cards sold)* (# cards sold/# pieces mailed) = $0.04.

After you cancel out “pieces mailed” from the first two elements of the equation above, you get the
following equation: (Profit/card sold)*(# cards sold/# pieces mailed) = $0.04.

This evaluates to (Profit/card sold) * R = $0.04, since R = (# cards sold/# pieces mailed). Recall from
earlier in the case that the profit per card (without marketing expense) is $16, therefore, $16R = $0.04, R
= 0.25%

Any way you look at it, the answer is the same—if more than 0.25% of customers who receive the Phone
Card offer decide to purchase a card, then we will make a profit. If fewer than 0.25% of customers
respond, then we will lose money.
Does 0.25% sound like a reasonable expectation? Although it’s impossible to tell in advance what the
actual response rate would be, 0.25% sounds achievable, so the Phone Card cross sell is definitely worth
testing.

Final Note: Actual case interviews are dynamic, one-on-one interactions with an interviewer—not just
some problems laid out on paper. You are encouraged to ask intelligent questions and engage in
discussion around the problem. We’re not just looking for great analytical skills—communication counts,
too.
You may find that Capital One’s case interviews have a more quantitative focus than the cases given by
other firms. This is intentional—Capital One’s cases are examples of the sort of work people do at Capital
One every day. By discussing actual problems taken from everyday work, job candidates get a taste of
what working at Capital One is really like.

Thermo Fisher Concerned By High Working Capital Requirement

Case Type: finance & economics.
Consulting Firm: Deloitte Consulting second round job interview.
Industry Coverage: healthcare: hospital & medical.
Case Interview Question #00254: Your client Thermo Fisher Scientific (NYSE: TMO) is a large medical
equipment manufacturer and life sciences supply company that was created in 2006 by the merger of
Thermo Electron and Fisher Scientific. 46% of the company’s sales are in life sciences, 20% in

healthcare, and 34% in industrial/environmental and safety.

The client has called you in because it feels its working capital requirements are much higher than those
of its competitors. How would you help Thermo Fisher solve its problem?

Additional Information:
This is a financial accounting case focused on a medical device company. The discussion should be
conversational but exacting on details. There are no handouts so the candidate should rely on the general
data given/created by the interviewer. The basic objective of this case is to test knowledge of the Balance
Sheet and how it applies to business operations.

Note to Interviewer: Read this information well before you administer the case. Manage the case
discussion and allow the candidate to formulate a plan based on the assumptions and key evidence
provided below (case-specific). Offer prompts when necessary and provide the following information if
he/she responds correctly and directly to the stimulus offered.
Part #1: Financial Data – Have the candidate identify the current assets (CA) and current liabilities (CL).
Possible Answer:

Current assets consist of cash, inventory, and accounts receivable and current liabilities consist of
accounts payable and short term debts.
Part #2: Company Information – In this part the interviewer should provide background information on
the client company.
The company Thermo Fisher Scientific is made up of three divisions. The high inventory problem can be
traced to a division acquired by the client about two years ago. The division manufactures equipment for
arthroscopic surgery, namely capital equipment and blades which sell are similar to razors and razor
blades, just much more sophisticated and expensive.

Part #3: Inventory – Ask the candidate to discuss possible reasons why inventories might be so high.
Possible Answer: sales, poor forecasting, obsolescence.
Part #4: Reasons for Inventory problem – Explain to the candidate that technology has been changing
rapidly and the rate of obsolescence is extremely high. As earlier sales forecasts (shortly after the
acquisition) had been overly optimistic, the client now finds itself loaded with obsolescent finished goods
inventory. Then ask the candidate to recommend correction actions to remedy the problem.
Possible Answer: Determine appropriate levels of inventory such that excess inventory is reduced and
customer demands are met. Factors that should be considered – Product demand, manufacturing lead
times, customer expectations on order lead times.
Part #5: Next Steps – Tell the candidate that the client has 2.5 years of capital equipment finished goods
inventory while NONE needs to be carried since these items can be manufactured after receiving the
order (i.e. The finished good product is no longer sold.) Then have the candidate wrap up the
conversation.
Possible Answer:
With respect to technology, while certain aspects of the product may have changed substantially, other
are just as likely to have stayed similar to what was previously used and could be salvaged. One could
dismantle the product and reuse parts to manufacture the new devices. Selling off the inventory to
distributors in less advanced healthcare markets is another way to salvage some of the investment.
Alternately write off the non salvageable component parts.

Candidate’s Notes: Working capital consists of current assets minus current liabilities, then look at each
element of CA and CL to find the problem. Interviewer pressed for a list of CA’s and CL’s before we talked
more about the company details.
Belgium Considers Privatizing National Lottery to Cut Debt
Case Type: industry analysis; organizational behavior; economics.
Consulting Firm: Booz Allen Hamilton (BAH) final round job interview.
Industry Coverage: government & public sector; entertainment.
Case Interview Question #00248: Suppose you are a senior executive at Booz Allen Hamilton (BAH).
The other day you met the Belgian Minister of State Owned Enterprises and he asked you whether it
would be a good idea to privatize the National Lottery in Belgium (i.e. also to liberalize the market and to

open it to the competition).

Before accepting the engagement, you perform a quick analysis of the situation in order to see whether
the idea is worth spending more time on or not. Remember, your firm has a reputation of excellence to
maintain and does not want to be involved in any projects that could potentially fail. What is your
recommendation? Do you accept the project? Why is it a good or a bad idea to privatize Belgium’s
National Lottery?
Additional Information:
Here are some background facts about the National Lottery industry in Belgium and previous
privatizations.

The National Lottery enjoys a monopoly and offers different products. For all of them, the probability to
win is fixed by the Government, as is the price of each ticket. By now, half of the bets must be returned to
players. The other half goes to charities or development projects (that have to be financed anyway) after
the distribution and administrative costs have been paid. Lottery tickets are distributed through
newspapers kiosks and supermarkets who receive a fixed amount per ticket sold. Lottery gains are tax-
free.

In the recent years, the Belgian Government has privatized the telecom market and it has been a huge
success. The incumbent and the new entrants make much more money than before. The Belgian
Government is trying to reduce its debt and is looking for other privatization opportunities.

Possible Answer:

Interviewer: How would you approach this case?

Candidate: I would look at the Net Present Value (NPV) of selling the National Lottery now versus the
NPV of the future profits if the Lottery is not sold.

Interviewer: Very good start. How would you evaluate the NPV of selling now?

Candidate: Well, I guess it would be the discounted value of the future cash flows that a private operator
would earn.

Interviewer: So far so good. What would influence the future cash flows?

Candidate: The demand. Is there any way to boost the overall demand for the Lottery in Belgium?
Interviewer: No, the market is stable and saturated. Let me rephrase my question: how would the cash
flow from a private operator be different from those of the National Lottery?

Candidate: If the demand does not change, we could perhaps be more efficient and reduce our costs.

Interviewer: Indeed, but the National Lottery is already run independently from the Public Administration
and is considered quite efficient. What else?

Candidate: I guess the private operators would have to pay taxes. Their cash flows would be lower than
those currently earned by the National Lottery that does not have to pay taxes. Therefore, the NPV of the
future cash flows would be lower than in the current situation. So I recommend that the Government does
not privatize the Lottery because the selling price would be lower than the NPV of keeping it.

Interviewer: Not so fast! You said they would have to pay taxes. Correct. Taxes are collected by the
government, so it should compensate for the lower selling price. So taxes are not the issue here. What
else would you consider in a liberalized market?

Candidate: I expect the different companies to compete.

Interviewer: Indeed. What would be the consequences?

Candidate: Since the only way for competitors to differentiate themselves is to return a higher percentage
of the bets to the players, I am afraid that they would enter in a destructive war that would reduce their
margins. If that is the case, their future cash flows would decrease. The consequence is that the NPV is
also reduced as well as the taxes collected on their earnings. So the Government would be worse off
privatizing the Lottery business.

Interviewer: Home run! So would you accept the project?

Candidate: No, I think our firm can create more value on other projects.

Note: This is a final round case given by a partner. It is a conceptual case. There are no numbers. The
goal of this case is to apply concepts from microeconomics. This case is controversial as different people
can come up with different answers. Therefore, it is more important to develop a consistent set of
arguments than to reach the solution. Please acknowledge that other arguments could be developed. The
interviewer should not try to force the interviewee to come too quickly but rather let him/her develop all
his/her points. Then, ask him/her to proceed by elimination in order to come to a final recommendation.
General Dynamics Concerned About Falling Stock Price
Case Type: finance & economics; reduce costs.
Consulting Firm: KPMG Consulting first round internship interview.
Industry Coverage: aerospace & defense.
Case Interview Question #00242: The client General Dynamics Corporation (NYSE: GD) is a major
American military aircraft manufacturer and defense contractor. The company’s former Fort Worth
Division manufactured the F-16 Fighting Falcon, the most-produced Western jet fighter. Recently General

Dynamics is worried that their stock price is falling. How would you go about
investigating the cause of the decline and help them improve their share price?
Possible Solution:
The candidate should recognize that stock price is based on expectations of future profits. This insight will
lead directly to a profitability (revenues/costs) framework. The candidate should mention both the revenue
side and the cost side as potential reasons why profits (and share price) might be falling.

Good questions to hone in on a particular area are: Have prices of the client’s military aircraft been
falling? Has the client been selling fewer airplanes? Have component costs risen? Have there been
significant capital expenditures or maintenance expenditures? There are many similar questions one
could ask.
The interviewer should mention that the military aircraft industry has been contracting due to cutbacks in
military defense spending. This environment would limit prospects for improving revenue and focus
discussion on costs.

There are a variety of ways to cut costs: cutting fixed costs by closing plants, automating more of the
operation, using more common parts among plane models, managing inventory better, training operators
to be more efficient. The main point here is to think broadly. Remember that costs are not only a function
of the materials and equipment, but also of the work practices, available technology, and skill of the
workers.

In this particular case, the recommendation to the client was to try to merge with another player to realize
some economies of scale. When told that there are five major players (Lockheed Martin, Boeing, Northrop
Grumman, General Dynamics, Raytheon Company) and a number of small players in the military aircraft
market, it was easy to see that not all would survive a market contraction. The client General Dynamics
later acquired several smaller players and one year after these acquisitions, the share price started rising
again.

What Factors Determine World Price of Crude Oil?

Case Type: finance & economics.
Consulting Firm: McKinsey & Company first round job interview.
Industry Coverage: Oil, Gas, Petroleum Industry.
Case Interview Question #00167: What factors determine the world price of crude oil?
Possible Answer:
Consider the influence of the capital markets and how future spot oil prices and speculation in the market
impact international oil prices. Prices in general economic terms are a function

of supply and demand in the market.

Demand: Explore the factors aside from price that would effect demand such as new technology, import
quotas, wars, etc. It turns out that global demand for oil is inelastic meaning that changes in prices have
less of an effect on quantity demanded. If this is the case, fluctuations in supply will have a greater impact
on the price.
Supply: Examine the impact of the various regional suppliers and their cost structures (for example, high
cost in the U.S., low cost in the Middle East).
At this point, you may recommend drawing a simple graph. The low cost producers such as Saudi Arabia
would be at the lower left end of the supply curve while high cost producers such as the U.S. would be far
to the right on the quantity produced x-axis. Thus, we can conclude that Saudi Arabia, assuming that it
has the capacity to produce more than it currently is, controls the price of oil. However, its production is
limited by OPEC rules. If, however, they use their excess capacity to control price (as in the case of the
Persian Gulf War), the pricing power lies in their hands. Oil prices did not skyrocket during the war
because Saudi Arabia promised to increase production to a level that eclipsed the global pre-war level.

Another Possible Answer:

The international price of oil is determined by three major factors: demand, supply, market sentiment.

Demand Side Factors:

Weather. Cold weather increases consumption. The world is getting hotter. The 14 hottest years in history
have been in the last 25 years. The warmer the climate – the less oil is consumed for heating, but the
more oil is consumed for air conditioning.

Economic growth – The stronger the growth, the more oil is consumed (mostly for industrial purposes).
The incredible economic development of countries like China and India and the emergence of car-owning
middle classes in many developing countries enhanced demand and contributed to the current crisis.

Ecological concerns and economic considerations lead to the development of alternative fuels and the
enhanced consumption of LNG (Liquefied natural gas) and coal, at oil’s expense. Even nuclear energy is
reviving as does solar energy.
Wars increase oil consumption by all parties involved.

Supply Side Factors:

Oil exploration budgets are growing and new contracts have just been signed in the Gulf area (including
Iraq), Brazil, and Canada. The more exploration, the more reserves are discovered and exploited, thereby
increasing the supply side of the oil equation.

Lifting of sanctions on Iraq, Iran and Libya will increase the supply of oil.

When there is an economic crisis in certain oil producers (Russia, Nigeria, Venezuela, Iraq) it forces them
to sell oil cheaply, sometimes in defiance of the OPEC quotas. This was the case in the late 1990s.

OPEC agreements to restrict or increase output and support price levels should be closely scrutinized.
OPEC is not reliable and its members are notorious for reneging on their obligations. Moreover, OPEC
members represent less than half the oil produced globally. Their influence is limited.

New oil exploration technology and productivity gains allow producers to turn a profit even on cheaper oil.
So, they are not likely to refrain from extracting and selling oil even if its price declines to 5 US dollars a
barrel.

Privatization and deregulation of oil industries (mainly in Latin America and, much more hesitantly, in the
Gulf) increases supply. Recent moves in countries like Venezuela, Russia, and Bolivia to re-nationalize
their oil industries and unrest in countries like Nigeria raise global oil prices owing to uncertainty and
increased political risk.

Market Sentiment:
The mere belief that oil demand will increase dramatically at some point in the future can result in a
dramatic increase in oil prices in the present as speculators and hedgers alike snap up oil futures
contracts. Of course, the opposite is also true. The mere belief that oil demand will decrease at some
point in the future can result in a dramatic decrease in prices in the present as oil futures contracts are
sold (possibly sold short as well).

Price volatility induced by hedge funds, future contracts and other derivatives trading has increased lately.
But, as opposed to common opinion, financial players have no preference which way the price goes, so
they are neutral.

How Many Stories to Build Manhattan Apartments?

Case Type: new business; finance & economics.
Consulting Firm: PA Consulting Group second round job interview.
Industry Coverage: Property & Real Estate.
Case Interview Question #00158: Your rich uncle, Chairman of the real estate development company
LeFrak Organization, passed away in 2003 and left you a piece of prime real estate in lower Manhattan in
New York City. If you were building apartments on the property, how many stories high would you build?

Possible Answers:
This case is very similar to the “How Many Stories in Trump Tower Chicago” case, so look at those
suggestions also. This is a starting new business and financing decision type of cases and is all about
options, opportunity costs, and net present value (NPV). Profit maximization is the ultimate goal.
Questions and issues you should raise include:
 Is there an existing building on the property or is it empty land?
 Are there any liens or mortgages on the property?
 Are there any factors that might threaten ownership or development?
The first decision is whether or not to build apartments at all. Considering that the property is located in
lower Manhattan, it may be that you can make more money by simply keeping the land or by selling the
property to someone else who values the property more than you do.

The second decision is whether to build apartments versus office buildings, homes, houses, etc. You
would need to ask if the property is zoned for apartment buildings. Are there limits on how high
apartments in this area can be? What is the neighborhood in lower Manhattan like? Are there any condos,
apartments or slums?

Solution: If you are indeed going to build apartment buildings and have freedom to make them as high as
you want, then the number of floors is a marginal revenue/marginal cost question. The marginal revenue–
marginal cost method of profit maximization is based on the fact that total profit in a perfectly competitive
market reaches its maximum point where marginal revenue equals marginal cost. You build an additional
floor if its marginal revenue is greater than its marginal cost.
Goldman Sachs Capital to Invest in Royal Caribbean
Case Type: private equity, investment; finance & economics; mergers & acquisitions; math problem.
Consulting Firm: Capital One first round job interview.
Industry Coverage: Financial Services; Tourism, Hospitality & Lodging; Transpoortation.
Case Interview Question #00142: Your consulting team has been retained by Goldman Sachs Capital
Partners, the private equity arm of Goldman Sachs (NYSE:GS). Based in New York City, New York, GS
Capital Partners is focused on leveraged buyout and growth capital investments
globally. It has raised approximately $39.9 billion since inception across seven
funds and has invested over $17 billion.
To diversify its assets, GS Capital Partners is considering purchasing one of two cruise lines: “Carnival
Cruise Lines” operates in the Mediterranean and has an initial cost of $25 million, while “Royal Caribbean”
operates in the Caribbean and has an initial cost of $50 million. Both cruise lines are profitable, and
Goldman Capital has an ROA (Return On Assets) of 20%. Which one would you advise Goldman to
choose? How would you start your analysis? What factors do you need to consider?
Possible Answers:

Factors/Issues to Consider:
 What is the primary goal/motive for the purchase (asset diversification, extension of existing business
line, improving profitability, etc.)?
 What are any potential synergies or core competencies that Goldman Sachs Capital can leverage to
this business?
 Are there any environmental factors, e.g., political, international, economic such as inflation,
exchange rates, tax rates, demand cycles?
 What is each cruise line’s useful life? (Assume 10 years.)
Assume all of the above does not significantly impact your analysis and go with the choice that will yield
the highest Net Present Value (NPV). Assume tax rate is 60% for “Carnival Cruises” in the Mediterranean
and 40% for “Royal Caribbean” in the Caribbean.

Comparison of two choices

Carnival Cruises Royal Caribbean

Operation Revenues

# of Passengers 100K per year 100K per year

Average Fare $500 per passenger $500 per passenger

Annual Revenue $50M $50M

Operation Costs

Fuel $1M $500K

Labor $2M $8M

Food $40.8M $20.4M

Docking $.15M $75K

Annual Cost $43.95M $28.975M

Annual Profit $6.05M $21.025M

Tax Rate 60% 40%

After Tax Profit $2.4M $12.6M

PV@20% discount rate over 10 years $10M $52.8M

Initial Cost ($25M) ($50M)

Net Present Value (NPV) ($15M) $2.8M

Therefore, choose “Royal Caribbean” for sure.

Fidelity to Invest in Hartford Group Common Stock

Case Type: finance & economics; pricing & valuation.
Consulting Firm: Oliver Wyman 1st round job interview.
Industry Coverage: Financial Services; Insurance: Life & Health; Insurance: Property & Casualty.
Case Interview Questions #00109: Your client is the treasurer in Fidelity Investments, one of the largest
mutual fund groups in the world. She is in charge of managing a portfolio of investments in addition to her
treasury responsibilities. Recently, she has asked for your advice about the purchase of a large

position in the Hartford Financial Services Group (HIG, a large insurance and
financial services company), whose stock is listed on NYSE.
HIG is currently selling for $22.97 per share (as of September 15, 2010). The treasurer’s investment
analyst predicts that the stock will pay a dividend of $0.25 for the foreseeable future. Current quarter
earning per share (EPS) for HIG is 15 cents. Short-term treasury bills are yielding 2.5 percent, and
long-term T-bills are yielding 4.5 percent right now. The treasurer is contemplating the purchase of 15000
shares of HIG common stock and wants your help in determining a fair market price.
How would you go about determining a fair price for HIG?

Possible Answers:

$22.97 per share.

According to Efficient-market hypothesis (EMH), prices on traded assets (e.g., stocks, bonds, or property)
already reflect all past publicly available information (interest rate, dividend payout, earning potential, etc).
Thus, the currently traded price is the fair price. At first sight, this case is a pricing problem. What the
interviewer really wants to test on is your basic knowledge of finance & economics.

How to Explain Net Present Value (NPV)?

Case Type: finance & economics.
Consulting Firm: NERA Economic Consulting 1st round job interview.
Industry Coverage: Financial Services.
Case Interview Questions #00091: Assume that I have no mathematical ability. How would you explain
the concept of Net Present Value (NPV) to me?
Possible Answers:
me: First I would take a $100 bill out of my pocket. Well, actually, more like 3 $20s, 1 $10, 1 $5,

a bunch of $1s and some laundry change that equaled $100. I would give you
an option of taking the $100 now or a year from now. Most people would want the money now rather than
wait for it. The idea of forgoing current consumption is the 1st principle of NPV.

Next I would try to get you to put a value on having the $100 today vs. a year from now. I might tell you
that there is one investment opportunity that, if you had the $100 today, would enable you to turn the
$100 into $200 by the end of the year. There is also a 2nd opportunity where you could turn the $100 into
$1000 at the end of the year. Under which investment scenario would you be willing to pay more for the
$100? The idea of opportunity cost, what you could do with the $100 if you had it today, is the 2nd
principle of NPV.

Interviewer: If I had two boxes on my desk and I told you that the NPV inside of both boxes was the same,
what else would you want to know before selecting a box?
me: I would want to see the cash flows. I would prefer to get more money sooner rather than later.

I would also want to know the time horizon of the two projects/investments. A shorter time horizon is
preferable.
I would also want to see how you incorporated risk into your NPV calculations. Did you do this in the cash
flow calculations, attempting to attach probabilities to the cash flows or perhaps calculating best case,
worst-case, and likely case scenarios, or did you do this in the discount rate by assessing your next best
investment opportunity? In either case, if I thought that you had underestimated the risk in one of the NPV
calculations then I would recalculate the NPV, revising it downward.

Export-Import Bank Assess Cost-Revenue Curve

Case Category: finance & economics.
Consulting Firm: First Manhattan Consulting Group 1st round job interview.
Industry Coverage: International Trade.
Case Interview Questions #00090: The Export-Import Bank of the United States (a.k.a. Ex-Im Bank, is
the official export credit agency of the United States federal government) has a new business opportunity.
They can import a popular consumer product from Europe at a price of

$20/unit. The shipping rates are as follows: $10/unit for the first 100 units,
$20/unit for the next 50 units, and $30/unit for all units above 150. This business opportunity will have
fixed overhead expense of $1000. Ex-Im Bank can then sell the product for $45/unit in the U.S. and can
sell as many as they import.
Can you draw the marginal cost-marginal revenue graph and the total cost-total revenue graph for this
business opportunity?
Possible Answers:
1. The Marginal Cost-Marginal Revenue Graph

Marginal Cost (MC): $30 for first 100 units, $40 for next 50 units, $50 for units above 150.
Marginal Revenue (MR): $45 for all units.

Ideally you would want to produce at the point where MR = MC. In this case however, MR is greater than
MC for the 1st 150 units. ($45 > $30 and $45 > $40) At unit #151, however, MC = $50, which is greater
than MR = $45. In this situation, then, 150 units is the number that you would want to sell.

2. The Total Revenue-Total Cost Graph:

Total Revenue (TR) starts at the origin and is a straight line increasing by $45/unit. Total Cost (TC) starts
at $1000 for 0 units. It is a straight line from 0-100 units, increasing by $30/unit. It then increases by
$40/unit between 100-150 units, and $50/unit above 150 units.
How Many Stories in Trump Tower Chicago?
Case Type: market sizing; finance/economics.
Consulting Firm: Cambridge Associates 1st round job interview.
Industry Coverage: Property & Real Estate.
Case Interview Questions #00063: Your client for this case is American business magnate, real estate
developer, chairman and president of The Trump Organization Mr. Donald Trump. Trump is also the
founder of Trump Entertainment Resorts, which operates numerous casinos and hotels all over the world.

The year is 2001. Donald Trump just announced that he is going to build a new skyscraper in downtown
Chicago (Trump International Hotel and Tower), but he is not sure how many stories to make it. How
would you help him decide?

Possible Answer:
Note: This case is very similar to the “How Many Stories to Build Manhattan Apartments” case, so look at
those suggestions also.

Essentially, this is a market sizing and financing decision case that requires the job candidate to analyze
economic supply and demand. Clearly you don’t want to lose money on the deal. Rebuilding will house
tenants, who will pay to reside there. The costs of building and maintaining the structure (both fixed and
incremental by story) need to be compared to revenue generating capacity of the project. When marginal
revenue equals marginal cost you stop adding stories.
By the way, stood at a height of 1,389 feet (423 m) including its spire, Trump Tower Chicago ended up
having 98 stories with 2 floors below ground.

Are Small Oil Tankers Really Worth Nothing?

Case Type: pricing & valuation; economics & finance.
Consulting Firm: Ernst & Young (EY) 1st round job interview.
Industry Coverage: containers; freight delivery, shipping services; oil, gas & petroleum industry.
Case Interview Questions #00052: Your rich uncle has just passed away and left you with 3 small oil
tankers in the Persian Gulf. How do you determine how much these small oil tankers are worth?

Possible Answer:
This problem involves the interplay of Supply and Demand forces to determine the value of the oil
tankers.
1. Supply:
The nature of tanker supply will be revealed by defining the different tanker types (in layman’s terms:
small, medium, and large) in the industry and the cost related prices associated with employing each
type. In effect, a step function supply curve results for the industry with each step a different tanker type.

2. Demand:

Demand for the services of tankers is assumed fairly inelastic due to refinery economics dominating the
purchase decision.
Conclusion:
It will turn out (by carefully creating the supply/demand curves) that at the given level of demand, only
large and medium tankers are put into supply. This renders your late uncle’s small oil tankers suitable
only for scrap at the present time.

Vogue to Maximize Profits by Optimizing Delivery Number

Case Type: improve profits; math problem; economics.
Consulting Firm: Towers Watson 2nd round job interview.
Industry Coverage: Publishing, Mass Media & Communications.
Case Interview Questions #00031: Vogue is a fashion and lifestyle magazine that is published monthly
in 18 national and one regional edition by Condé Nast Publications, a worldwide magazine publishing
company with main offices in New York, Chicago, Miami, Madrid, Milan, Tokyo, London, Paris, and

Moscow. Total annual circulation for Vogue magazine is about 1,250,000 as of

2010.
The chief publisher of Vogue is trying to decide how many magazines she should deliver to each
individual distribution outlet in order to maximize profits. She has massive amounts of historical data for
sales volumes through these outlets and a well constructed internal accounting system. How should she
go about computing an appropriate number?

Possible Solution:
The best way to tackle this optimization case (without going into a huge quantitative analysis of Economic
Order Quantity EOQ) is not so much to start asking questions as to set out an outline for analysis and fill
in as you go.
It should be observed immediately that to maximize profits, marginal revenues would be set equal to
marginal costs. The marginal revenue for a magazine would be its cover price times the probability that it
will be sold. The probability of sale, with an appropriate confidence interval, could be established in some
manner from the historical sales data. The marginal costs could be obtained from the internal accounting
data.

A detailed discussion of the application of these concepts from basic microeconomics and statistics may
be necessary.