(i) Briefly summarize Zoom’s strategy for driving new customer acquisitions. [4 points]
(ii) List one key success factor and one significant risk associated with Zoom’s strategy for driving new customer acquisitions. [6 points]
1. Key success factor
2. Significant risk
Problem 2. Accounting Analysis
(i) Summarize how Zoom recognizes revenue associated with subscription agreements. [3 points]
(ii) Assume that instead of using its current accounting policies for subscription revenue, Zoom instead recognized revenue when it has the right to invoice under a subscription agreement. Estimate the Revenue that Zoom would have reported for the fiscal year ended January 31, 2021. [6 points]
(iii) Summarize how Zoom accounts for ‘sales and marketing’ costs. [3 points]
(iv) Assume that instead of using its current accounting policy for ‘sales and marketing’ costs, Zoom instead took the portion these costs that are expensed as incurred and capitalized these costs in the fiscal year incurred and then amortized these costs on a straight-line basis over the subsequent two fiscal years. Estimate the Income from operations that Zoom would have reported for fiscal year ended January 31, 2021. [6 points]
(v) If you were a CFO with no business ethics and wanted to manage earnings up to beat a quarterly estimate, what are two ways you could do that. Explain why an unscrupulous manager would choose to use your two methods. What are the journal entries involved in your earnings management or manipulations? [6 points]
(vi) Which of the above two accounting methods for sales and marketing costs do you think better reflects their underlying economics? Briefly explain your answer. [3 points]
Problem 3. Financial Analysis
(i) Estimate the average number of days that elapses between the right to invoice customers and the recognition of the associated revenue for sales by Zoom and RingCentral in their most recent fiscal year. [8 points]
Average Number of Days for Zoom =
Average Number of Days for RingCentral =
(ii) On average, does Zoom receive cash from its customers before or after it recognizes the associated revenue? Briefly explain your answer. [3 points]
(iii) Compute the gross margin ratios for Zoom and RingCentral in their most recent fiscal years. [4 points]
Gross margin Ratio for Zoom =
Gross margin Ratio for RingCentral =
(iv) Provide one likely explanation for the difference between the two ratios that you
computed above. [4 points]
(v) For the past three years, Zoom has consistently reported cash from operating activities that is over twice as large as net income. List two of the primary reasons for this difference. [6 points]
Problem 4. Forecasting
(i) The analyst model forecasts that Zoom’s net margin will decline from 25.3% in the year ending 01/21 to 12.1% in the year ending 01/25. Identify the key driver(s) of the reduced margin. [5 points]
(ii) The analyst model forecasts that Zoom’s current liabilities will grow from 1,260 at 01/21 to 4,543 at 01/25. Briefly evaluate the plausibility of this forecasting assumption. [5 points]
(iii) The analyst model forecasts that Zoom’s ‘Operating cash flow’ will be 2,680 for the year ended 01/25. What does the analyst model forecast that Zoom will do with this operating cash flow? [5 points]
Problem 5. Valuation Analysis
In this problem, we will value Zoom using the residual income valuation model and the financial forecasts in the analyst model. Use a discount rate (cost of equity) of 6%.
(i) Compute Zoom’s forecast residual income for the years ended 01/22 and 01/23. [4 points]
01/22 Residual Income:
01/23 Residual Income:
(ii) Using the information from Zoom’s balance sheet, compute the total number of Class A and Class B common shares outstanding as of January 31, 2021 (in millions of shares). [3 points]
(iii) Use the residual income valuation model to value Zoom’s common equity per share at 01/21 by using your answers from parts (i) and (ii) above along with any other required information. Assume that residual income grows at 3% for all years beyond 01/23. [6 points]
(iv) If you carefully estimated the value of Zoom’s common equity per share as of 01/21 using the discounted free cash flow model and made the same assumptions as in part iii above, would your estimate of value be higher, lower or the same as your answer to iii? Explain what valuation, finance, and/or accounting features/properties/theories support your answer. [4 points]
(v) Do you agree with the 6% discount rate used? Estimate the current discount rate implied by the S&P 500’s aggregate market price as of the close of trading on May 10th , 2022. [6 points]
