The cupboard is bare.(Instructor's Note)

CASE DESCRIPTION The primary subject matter of this case concerns an entrepreneur's investment in an established business. Secondary issues examined include both a pre-investment and a post-mortem financial statement analysis of an equity investment and how a successful entrepreneur might miss important financial clues when making equity investment decisions. The case has a difficulty level of four, appropriate for a senior level course. The case is designed to be taught in two to four class hours and is expected to require four to six hours of outside preparation by students. CASE SYNOPSIS This case profiles Charles 'Chip' Riley, a successful entrepreneur in numerous business ventures, analyzing what went wrong with his purchase of the MHC Cabinet Company. He recently sold it at a loss from his original investment, and he was not happy about losing money. His intention is to do a thorough post mortem evaluation of what went wrong so it does not happen again! When he invested in MHC, Chip thought that the 'cupboard was full' but it did not take long before he began to realize that the 'cupboard was bare.' Although the financial loss was only a small portion of his net worth, the situation at MHC did not make sense. Because of his previous successes in business ventures, Chip considered himself wise in the ways of investing and he wanted to understand where he went wrong in his initial analysis of the company. Based on that analysis, MHC should have been a successful investment opportunity. This case was developed to show how a successful business experience can distort business judgment in future ventures. It is different from traditional cases that discuss successes or failures, in that it demonstrates how success in one venture can be a major influence for failure in the next venture. The case also provides students an opportunity to perform financial statement analysis both before and after a failed investment. The first part of the case illustrates how an investor might perform a less-than-complete analysis that could lead to an investment decision that proves to be wrong. The second part of the case performs a 'post-mortem' to determine what was missed in the first analysis and how the new data might have influenced the original investment decision.
INSTRUCTORS' NOTES Case Objective The objective of this case is to provide students with an opportunity to perform financial statement analysis both before and after a failed investment. The first [...]