Quantitative analysis for E Catalogs

E-CATALOGS

Jane and Alberto founded E-Catalogs, Inc., a firm that specializes in the design and maintenance of Internet catalogs for small consumer businesses. They are considering going public. E-Catalogs employs 30 individuals, with the majority of them computer programmers. Many of the employees have followed the high-technology market very closely and have decided that since high-technology firms are more understood and valued in the U.S. than in other countries, E-Catalogs should issue its stock only in the U.S. Five million shares of E-Catalogs will comprise this new issue.

Jane and Albert know that many steps have to be completed in the process of making an initial public offering. They also know that they need to complete the process within 30 weeks because they need the new capital fairly soon to ensure that E-Catalogs has the resources to capture valuable new business from its competitors and continue growing. They also value a speedy initial public offering because they believe that the window of opportunity for obtaining a good stock price is presently wide open - the public is wild about shopping on the Internet, and few companies offering Web page design services have gone public.

Because the 30-week deadline is breathing down their necks, Jane and Alberto decide to map the steps in the process of making an initial public offering. They listed each major activity that needs to be completed, the activities that directly precede each activity, and the optimistic, most likely and pessimistic times needed to complete each activity. This list is shown in Table 1.

Jane and Alberto heard that their most fierce competitor, Soft Sales, is also planning to go public. They fear that if E-Catalogs does not complete its initial public offering before Soft Sales, the price investors are willing to pay for E-Catalogs will drop since investors will perceive Soft Sales to be a stronger, more organized company. Jane and Alberto decide that they want to determine the cost and probability of completing the process of issuing new stock within 24 weeks or at least some time earlier than 30 weeks. They think such a goal is possible if they throw more resources--workers and money-into some activities. The list of activities that can be shortened, the maximum time by which an activity can be reduced, the additional cost of the reduction, and the normal cost are provided in Table 2. For example, Activity A has a normal cost of $8,000 if the activity is completed in 3 weeks [expected time - normal time]. If this activity could be reduced by 1.5 weeks [maximum time by which Activity A could be reduced], then an additional cost of $6,000 would be incurred resulting in a total cost of $14,000 for this activity. If an activity cannot be reduced, a zero appears under Maximum Weeks.

Table 1: Activities, Immediate Predecessors, Activity Times (weeks)

ID Activity Immediate Predecessor Optimistic Time Most Likely Time Pessimistic Time
A Evaluate the prestige of each potential underwriter None 1 3 5
B Select a syndicate of underwriters Evaluate the prestige of each potential underwriter 1 1.6 4
C Negotiate the commitment of each member of the syndicate Select a syndicate of underwriters 1 2 3
D Negotiate the "spread" for each member of the syndicate. Select a syndicate of underwriters 1.5 3 4.5
E Prepare the registration statement, including the proposed financing and information about the firm's history existing business, and plans for the future. Negotiate both the commitment and spread for each member. 2 6 7
F Submit the registration statement to the Securities and Exchange Commission (SEC). Prepare the registration statement. 1 1 1
G Make presentations to institutional investors and develop the interest of potential buyers. Submit the registration statement to the SEC. 4 6 8
H Distribute the preliminary prospectus, affectionately termed the red herring. Submit the registration statement to the SEC. 1.5 3.3 4.5
I Calculate the issue price. Submit the registration statement to the SEC. 4 5 6
J Receive deficiency memorandum from the SEC. Submit the registration statement to the SEC. .5 4 6
K Amend the registration statement and resubmit it to the SEC. Receive deficiency memorandum from the SEC. 1 1 1
L Receive registration confirmation from the SEC. Amend the registration statement and resubmit it to the SEC. 2 3 4
M Confirm that the new issue complies with the "blue sky" laws of each state. Make presentations to institutional investors and develop the interest of potential buyers. Distribute the preliminary prospectus, affectionately termed the red herring.
Calculate the issue price.
Receive registration confirmation from the SEC. 1 2 3
N Appoint a registrar. Receive registration confirmation from the SEC. 2 2 2
O Appoint a transfer agent. Receive registration confirmation from the SEC. 3 3.5 4.6
P Issue final prospectus that includes the final price and any amendments to all purchaser offered securities through the mail. Confirm that the new issue complies with the "blue sky" laws of each state.
Appoint a registrar.
Appoint a transfer agent 2.5 4.5 5
Q Phone interested buyers Confirm that the new issue complies with the "blue sky" laws of each state.
Appoint a registrar.
Appoint a transfer agent. 3 4 5

Table 2: Activities, Normal Cost, Reduction Times, and Crash Cost

ID Activity
Normal Cost
($) Maximum Weeks Additional Crash Cost ($)
A Evaluate the prestige of each potential underwriter 8000 1.5 6000
B Select a syndicate of underwriters 4500 .5 3000
C Negotiate the commitment of each member of the syndicate 9000 0 0
D Negotiate the"spread" for each member of the syndicate. 12000 0 0
E Prepare the registration statement, including the proposed financing and information about the firm's history existing business, and plans for the future. 50000 2 30000
F Submit the registration statement to the Securities and Exchange Commission (SEC). 1000 0 0
G Make presentations to institutional investors and develop the interest of potential buyers. 25000 3 35000
H Distribute the preliminary prospectus, affectionately termed the red herring. 15000 1.2 7000
I Calculate the issue price. 12000 1.5 16000
J Receive deficiency memorandum from the SEC. 0 0 0
K Amend the registration statement and resubmit it to the SEC. 6000 .5 3000
L Receive registration confirmation from the SEC. 0 0 0
M Confirm that the new issue complies with the "blue sky" laws of each state. 5000 .5 3300
N Appoint a registrar. 12000 1 7000
O Appoint a transfer agent. 13000 1 7000
P Issue final prospectus that includes the final price and any amendments to all purchaser offered securities through the mail. 40000 2.5 50000
Q Phone interested buyers 9000 1.5 11000

Jane and Alberto are planning on reviewing the tasks and desired dates and preparing a report on the feasibility of the time line. As part of the report they intend to include the following items:

1. A Gantt chart for the activities and explanation of its use.

2. The network (PERT) diagram based upon the initial information described in the case.

3. Explanation of the time it will take to complete the project with the normal times given (i.e., establish a baseline time).

4. Based upon the baseline projections, discuss the probabilities of completing the project at various times.

5. Use the expected activity times as the normal times to calculate the baseline projection and incorporate crash times to show differences in completion times.

6. Provide a thorough discussion of the probabilities and how they change when crashing takes place.

7. Prepare a cash flow table (by week). Assume cost of capital is 10%. Discuss the impact of cash flow on decisions about early start and late start.

8. Suggest other factors that might influence the decision regarding final schedule.
This second case follows the same format as the first case. Please refer to the case information provided on Blackboard.