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TitleMckinsey Cases
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Option 3: Keep operating as is

Option 4: Keep operating and invest in the new technology

Question #2: How would you figure out the current value of the coffin business? Provide the following

additional information if the candidate asks for it clearly and directly.

Market Size – If the candidate asks for the size of the market, first make him/her brainstorm about

different ways to determine market size. A good candidate should come up with at least 4 different ways,

such as:

 Calculate from the market’s total population, population growth, and birth rate.

 Review of death records for a period of time.

 Take sample of the number of obituaries in paper serving given population base.

 Calculate from total population, average life expectancy.

Question #3: Now make the candidate calculate the market size, giving them the following data:

 Population of Moldova: 4 million

 Population Growth: 0%

 Average Life Expectancy: 75 years

 Age Distribution: assume a flat age distribution, i.e. same number of people at every age.

 Burial Customs: 75% of deaths are buried in coffins.

Possible Answer:

(4 million) x (1/75) * (75%) = 40,000 coffins purchased per year.

Note that the candidate needs to quickly realize that every year, 1/75th of the total population will turn 76

and therefore (on average) will die.

Question #4: Now make the candidate calculate the value of Moldovan Coffins’ business, giving them

the following data:

Price – Coffins are priced at $5,000 for a hand-made high-end coffin.

Costs – Material accounts for 10% of the direct cost, while labor accounts for the other 90%. COGS is

$4,800 per coffin. Fixed costs for the business are $700,000 per year. Assume all assets are fully

depreciated and ignore taxes.

Competition – The client Moldovan Coffins has a 10% market share and a relative market share of about

1 (if asked, you may explain that relative market share is the ratio of the company’s market share to that

of its nearest competitor.)

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Market Trends, Regulation, etc. – If asked about any exogenous factors, simply tell the candidate to

assume that the market is expected to continue as it currently is.

Possible Answer:

The candidate needs to calculate the value of the business now. This is a pure mathematical exercise.

 Margin per coffin = $5,000 – $4,800 = $200

 Contribution Margin = $200 per coffin x 40,000 coffins x 10% market share = $800,000

 Profit = Contribution Margin – Fixed Costs = $800,000 – $700,000 = $100,000

Assuming a discount rate of 10% (candidate can assume anything reasonable here as long as they are

consistent later), a perpetuity with cash flows of $100,000 per year has a present value of $100,000 / 0.1

= $1 Million. So the current business is worth $1M whether they keep it or sell it.

Question #5: So now what is the value of the company if it were shut down and the assets were sold?

Additional Information to give if asked:

Assets – Since the firm has been building coffins by hand, the fixed assets are essentially only the land

and improvements. These are owned outright by the company.

When the candidate asks for the value of the land, have them brainstorm ways that they might determine

this. They should come up with at least 3 good ways, such as:

 Look for comparable real estate and determine recent selling price.

 Find comparable commercial real estate and determine the rent per square foot, then discount the

cash flows generated by renting the property.

 Determine rate of appreciation for property in the area and then apply to book value of current land

and improvements.

Give the candidate the following information and have them calculate the value of the property:

 Book Value of Land: $20,000

 Book Value of Improvements: $80,000

 Years Owned: 48

 Average Real Estate Appreciation: 6% / year

Possible Answer:

Using the “rule of 72″, a 6% growth rate will double the investment every 72/6 = 12 years. Since the

property was held for 48 years, the current value will be $100K * (2 x 2 x 2 x 2) = $1.6M.

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