Wilford Brimley and Direct Response Advertising at PolyMedica Corporation
Case number:
A01-10-0017
Abstract
James Amphlett, a financial analyst at Xenon Capital LLC, was asked to evaluate PolyMedica Corporation, whose shares Xenon was considering adding to its Growth Service portfolio. PolyMedica was a rapidly growing provider of diabetes testing equipment to senior citizens who were covered by Medicare. PolyMedica promoted its products through direct response advertising in late night television commercials, often featuring veteran character actor, Wilford Brimley. Financial analysts were critical of the company’s accounting policy of capitalizing and amortizing direct response advertising expenditures to acquire new customers.
Teaching
To understand how a company makes money, its strategy for achieving this, and the implications for the company’s financial performance,
To analyze a company’s growth, its ability to generate cash flows, and its financial performance,
To evaluate a company’s accounting methods and their impact on a company’s financial performance,
To develop a communication and disclosure strategy for dealing with critics of the company’s accounting policies.
Specifically, students are asked to consider several issues in the case. First, students are asked to explain how PolyMedica Corporation makes money, to evaluate its business strategy for accomplishing this objective, and to evaluate how successful execution of this strategy is likely to be observable from the company’s financial performance. Second, students are asked to analyze the company’s cash flow situation, and recent financial performance, including its profitability, asset management, and leverage. Third, students are asked to consider the quantitative impact on the company’s financial statements of capitalizing and amortizing direct response advertising outlays. Students are also asked to evaluate whether PolyMedica used accounting methods that were consistent with generally accepted accounting principles (GAAP). Fourth, students are asked to estimate the net present value (NPV) of PolyMedica’s direct response advertising outlays. Finally, students are asked to consider the communication and disclosure issues the company faced in responding to analyst criticism of its method of accounting for direct response advertising.
The case has been used successfully in MBA programs to cover corporate financial reporting issues, and in bank training programs focused on credit analysis and quality of earnings issues.
To analyze a company’s growth, its ability to generate cash flows, and its financial performance,
To evaluate a company’s accounting methods and their impact on a company’s financial performance,
To develop a communication and disclosure strategy for dealing with critics of the company’s accounting policies.
Specifically, students are asked to consider several issues in the case. First, students are asked to explain how PolyMedica Corporation makes money, to evaluate its business strategy for accomplishing this objective, and to evaluate how successful execution of this strategy is likely to be observable from the company’s financial performance. Second, students are asked to analyze the company’s cash flow situation, and recent financial performance, including its profitability, asset management, and leverage. Third, students are asked to consider the quantitative impact on the company’s financial statements of capitalizing and amortizing direct response advertising outlays. Students are also asked to evaluate whether PolyMedica used accounting methods that were consistent with generally accepted accounting principles (GAAP). Fourth, students are asked to estimate the net present value (NPV) of PolyMedica’s direct response advertising outlays. Finally, students are asked to consider the communication and disclosure issues the company faced in responding to analyst criticism of its method of accounting for direct response advertising.
The case has been used successfully in MBA programs to cover corporate financial reporting issues, and in bank training programs focused on credit analysis and quality of earnings issues.
Case number:
A01-10-0017
Subject:
Accounting and Control
Year:
Setting:
U.S.
Length:
9 pages
Source:
Library