CASE - Forecasting for the Love Boat: Royal Caribbean Cruises in 1998

PART A - COMPREHENSIVE FINANCIAL ANALYSIS

Your task for this part of the case is to conduct a comprehensive financial analysis of Royal Caribbean Cruises and to compare their performance with Carnival Cruises. Excerpts from Royal Caribbean's 20-F filing and Carnival's 10-K filing are included as online exhibits at http://www.lundholmandsloan.com.

You will need to import the case data into eVal. (Note: case data can be imported by going to the Case Data sheet in eVal and selecting the yellow block of data for the company, and then pasting this block of data into the yellow cells at the bottom of the Financial Statements sheet using Paste Special - Values from the Edit menu.) You should compare the financial statements in eVal with the ones in the 20-F and 10-K filings so that you can see exactly what data are used to compute each ratio and make any necessary adjustments. The definitions of each ratio are given in this textbook. Note that Royal Caribbean paid a preferred stock dividend of $12.5 million in 1998 but that this amount is not in the eVal data. You will have to correct the financial statements once they are loaded into eVal.

1. Compare the growth rates of Royal Caribbean and Carnival Cruises. What are the advantages to being large in this industry?

2. Compute the 1998 net operating income, net financing expense, average net operating assets, and average net financial obligations from the financial statements in Royal Caribbean's 20-F filing.

3. Using your answers to the previous question, compute return on equity (ROE) and then decompose ROE using the advanced Dupont decomposition: ROE = RNOA + Leverage × Spread. How does your decomposition compare to the one provided by eVal?

4. Using the financial ratios provided by eVal, evaluate any trends in Royal Caribbean's return on equity, compare it with Carnival Cruise's return on equity, and discuss the main causes of any differences.

5. Now consider each of the main drivers of return on equity: margins, turnovers, and leverage. Using eVal's output as a starting point, evaluate any trends and compare Royal Caribbean with Carnival Cruises in each of these areas. Only note what is exceptional-do not discuss every possible ratio.

6. Does a dollar of revenue increase bring about a constant increase in expenses for Royal Caribbean, or do they enjoy economies of scale? Estimate any economies of scale that might be present.

7. Approximately 35 percent of Carnival Cruise's passengers also book their air travel through the cruise company (as an "air and sea" package) while only 25 percent of Royal Caribbean's passengers include the air portion in their booking. Conceptually, how will this affect your ratio comparison of the two companies and discuss how you might adjust the data to remove this distortion?

PART B - FINANCIAL FORECASTS

This part of the case asks you to forecast the financial performance of Royal Caribbean for the next three years. This is where you should bring together the industry facts given in the beginning of the case, the results of your financial analysis, and your understanding of Royal Caribbean's unique attributes gleaned from a careful reading of their SEC filings. Note that, while the events of September 11, 2001, had a dramatic effect on subsequent travel and tourism, this is largely after the periods you are forecasting. In their 2001 annual report, Royal Caribbean estimates a net cost of $47.7 million due to passenger's inability to fly to their departure locations, subsequent cancellations, and other costs incurred as a direct result of this event. Make your forecasts without regard to this event, but then subtract an extraordinary loss of $47.7 million from your final income estimate to control for this effect.

Your answers will not be graded on their accuracy but, rather, on the logic you give to support them. Use eVal to derive the forecasted financial data. Although your answers should be in the format given in eVal, your analysis should be far more detailed than a simple extrapolation from Royal Caribbean's past performance (as the eVal defaults will do). Note that Royal Caribbean paid a preferred stock dividend of $12.5 million in 1998 but that this amount is not in the Global Access data. You will have to correct the financial statements once they are loaded into eVal. (Note: case data can be imported by going to the Case Data sheet in eVal and selecting the yellow block of data for the company, and then pasting this block of data into the yellow cells at the bottom of the Financial Statements sheet using Paste Special - Values from the Edit menu.) Excerpts from Royal Caribbean's 20-F filing and Carnival's 10-K filing are included as online exhibits at www.lundholmandsloan.com.

1. Based on all the information provided in the case, forecast Royal Caribbean's gross revenue for 1999, 2000, and 2001. Please explain your reasoning.

2. Forecast the remaining portions of the income statement for 1999, 2000, and 2001. Comment only on the forecast components that differ significantly from past trends or ratios-do not discuss each line item if you don't have anything substantive to say.

3. Forecast complete balance sheets for the end of 1999, 2000, and 2001. Comment only on the forecast components that differ significantly from past trends or ratios-do not discuss each line item if you don't have anything substantive to say.

4. Can Royal Caribbean afford to purchase the ships that it has on order in the next three years? How do you anticipate that these acquisitions will be financed?

5. For this question, do not use eVal (because it is easier not to). Suppose your analysis indicated that Royal Caribbean will spend $810,261 thousand on additions to property and equipment in 1999. Given this, estimate the ending balance of property and equipment for 1999.

6. For this question, do not use eVal (because it is easier not to). Suppose your analysis indicated that Royal Caribbean's 1999 ending balance of customer deposits was $515,308 thousand. Estimate the amount of cash collected from customers in 1999.

Answer the question number 1, 2, 3 of Part B "Financial Forecasts".

Attachment:- Assignment Files.rar