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Sample Case for Video
Storyboarding Exercise

Additional Information


(Time Allowed: 4 hours)

Notes:

i) Candidates must not identify themselves in answering the question.

ii) All answers must be written on official answer sheets or in official electronic files.
Work done on the question paper or on the Backgrounder will NOT be marked.

iii) Included in the examination envelope is a standard supplement consisting of
formulae and tables that may be useful for answering the question.

iv) Examination materials MUST NOT BE REMOVED from the examination
writing centre. All used and unused answer sheets, working papers,
Backgrounder, Additional Information, and the supplement of formulae and tables
must be sealed in the examination envelope and submitted to the presiding
officer before the candidate leaves the examination room.

v) Only the following models of calculators are authorized for use on the Case
Examination:

1. Texas Instruments TI BA II Plus (including the professional model)
2. Hewlett Packard HP 10bII (or HP 10Bii)
3. Sharp EL-738C (or EL-738)

Additional Information Sample Case for Video Storyboarding Exercise
2 CMA Canada
GR Hotels Corporation (GR)
Additional Information

Industry Outlook
According to the World Tourism Council, the number of tourists worldwide is expected
to climb by 6% per year in 2008 and 2009, assuming no weather catastrophes or other
significant negative world events. The forecasted growth for the Canadian tourism and
accommodations industry is 3-5% in each of the next three years.
In recent years, demand by both business and leisure travellers for upscale and luxury
hotel rooms in Canada has been increasing at a much greater pace than the demand
for rooms in mid-scale and economy hotels. This trend is the result of the growth in the
Canadian economy and the increase in the disposable incomes of travellers within and
visiting Canada. Economic forecasters predict that the growth rate of the Canadian
economy will decrease slightly in 2008 to 2.2% and then rebound in 2009 to 2.9%.
New Corporate Goals
Given the future outlook for the hotel industry in Canada, the board of directors decided
in late 2007 that GR should strive to improve the occupancy rates and attract more
business travellers. The shareholders had indicated that they are willing to invest up to
$1 million in additional common shares if management demonstrates that any proposed
investment would generate a minimum after-tax return of 15%. The board directed
Mayd to prepare a three-year plan for achieving the new corporate goals.
The entire executive management team met in early January 2008 to discuss the
boards directives. The following are excerpts from this meeting.
Mayd: We need some ideas for how we can best improve the occupancy rates and
attract more business travellers. Any ideas?
Lavioli: As you may remember, there is a parking lot beside the GR Montreal Hotel that
we have an option to purchase. If you want to attract more business guests, we should
consider building a conference centre on this land. The conference centre would
generate business for the hotel and increase the occupancy rate.
Sutton: Id like to upgrade the Toronto hotel. The demand for business facilities at
airport hotels has been increasing steadily, and we could take advantage of this trend.
We could use another brand name in order to differentiate our upscale hotel from the
Montreal hotel.
Lavioli: Id like to upgrade the Montreal hotel as well, but I need some assurances that
the hotel would generate more income if it is upgraded. I wouldnt want to get a higher
head office allocation charge as a result of these changes unless the room rates are
increased sufficiently to cover all the added costs.
Sample Case for Video Storyboarding Exercise Additional Information
CMA Canada 3
Leblanc: There will be a big impact on human resources and service levels. The current
staff may not have the required skills or be willing to make the necessary changes. For
example, if we change the restaurant menus and services to reflect those of an upscale
hotel, we would need more talented chefs and a new dress code for the staff who wait
on tables.
Mayd: Why dont you all do some research on these ideas and give what you find to
Manny [Bluenose] to analyze. We have to be sure that we can finance whatever we
recommend to the board and we need to be fully aware of how our recommendations
will affect all areas of our business.
After the executive management meeting, Bluenose briefed Chris Mell, CMA, the newly
hired controller, on the discussions and outcomes of the meeting. He assigned Mell the
task of collecting any necessary information and preparing a preliminary report
addressing how GR can best pursue the new strategic goals and generate the desired
returns for the shareholders. The following sections describe the results of the research
conducted by the various executive staff and by Mell.
Upgrading the Hotels
Gleeson consulted with Larson Leasehold Improvements Inc. (Larson), a building
improvements contracting company that operates in all major Canadian cities and has
experience with renovating hotels. Gleeson has used Larson for relatively small jobs in
the past and has found the company to be reliable. Although it is not the least expensive
contractor, the prices quoted have been reasonable and the final billings within budget.
The following information pertaining to the average investment per hotel was assembled
by Gleeson and Larson:
Set up high speed Internet access throughout hotel $ 70,000
Facilities and equipment for room service and catering of
meetings and other functions 75,000
Business centre and additional meeting rooms 110,000
Upgrade rooms and other facilities to upscale 2,420,000
Total cost to upgrade one hotel from mid-scale to upscale $2,675,000

It is estimated that the equivalent of 1.5 months worth of business would be lost
while the hotel is undergoing renovations to upgrade from mid-scale to upscale.
The average estimated useful life of the improvements is 8 years.
The average charge from an Internet service provider is estimated to be $2.00 per
day per room that uses the service. Industry statistics show that, in hotels that
provide Internet access, 50% of guests currently use this service. Most upscale
hotels include the charge in the room rate; however, a few charge a user fee of up to
$7 per day for Internet service.
Additional Information Sample Case for Video Storyboarding Exercise
4 CMA Canada
Bluenose indicated that, if any hotel is upgraded to upscale, the non-room revenues
(e.g. restaurants, events/services, etc.) would increase in the same proportion as the
room revenues, and the variable service delivery costs would continue to be 38.5% of
all revenues. In addition, guests would spend 10% more on meals and drinks as a result
of adding room service. Annual fixed service delivery costs would increase by 30%, and
annual head office operating costs for promotion, booking, and administration would
increase by 20% regardless of whether one or both hotels are upgraded.
Rames indicated that, for upscale hotels in Montreal and Toronto, the industry average
daily room rates are $150 and $160, respectively, and the industry average occupancy
rates are 72% and 75%, respectively. He feels that, if any of the GR hotels are
upgraded to an upscale class, an initial investment of $250,000 per hotel for advertising
would be required.
Option to Purchase Land in Montreal
In 2005, GR spent $200,000 to purchase a three-year non-transferrable option to buy a
parking lot beside the Montreal hotel for $750,000. At the time, the land was appraised
at $920,000 and the board of directors believed that the land value would appreciate
sufficiently in three years to make this a very good investment. The board must decide
whether to exercise the option before it expires in May 2008. Currently, the land has an
estimated value of $1.1 million. If purchased, GR could sell the land for a quick profit, or
use it for expansion.
After consulting with a local property planner, Lavioli determined that a conference
centre could be built on the land, which would consist of various-sized meeting and
banquet rooms as well as its own catering facilities. In addition to the cost of the land,
Lavioli provided the following estimated costs:
Building costs (40-year useful life) $7.0 million
Furnishings and equipment (8-year useful life) $1.5 million
Fixed annual operating costs $1.0 million
Variable service delivery % of revenue 50%
Increased annual head office promotion, booking,
and administration costs $0.8 million

The property planner estimates that the conference centre could be ready for business
by January 2009. Expected annual total revenues for the conference centre would
range from $5.5 million to $7.3 million, depending on the average number of events held
in the centre each day.
There are numerous other mid-scale, upscale, and luxury hotels close to the GR
Montreal Hotel. Lavioli expects that the conference centre will increase the average
occupancy rate at the GR hotel to 65-70%.
Sample Case for Video Storyboarding Exercise Additional Information
CMA Canada 5
Other Information
1. The Bank of Newfoundland is willing to refinance the existing mortgages for up to
70% of the estimated value of the hotels, at an annual interest rate of 7%. As well, it
is willing to hold a mortgage of up to $7 million to build a conference centre next to
the GR Montreal Hotel.
2. In a memo to Bluenose, Mayd requested that current market values of the hotels be
determined and recorded in the financial statements. Bluenose directed Mell to
address Mayds request in the preliminary report. The estimated market values
obtained from a real estate expert and the outstanding mortgages for the two hotels
are provided in Appendix A.
3. One-half of the head office costs are allocated to each hotel for reporting and
performance evaluation purposes. A summary of various financial and business
information by hotel for the past three years is provided in Appendix B.
4. In gathering the information on improving the hotels, Gleeson included a general
estimate for room service equipment. Because Gleeson and Rames do not get
along, Rames asked Mell to convince Gleeson to purchase the new equipment from
RR Supplies Inc., a new company owned by Rames cousin. In return, Rames
guaranteed Mell that any member of his family could stay at a GR Hotel free of
charge for up to two weeks any time during the next year Rames would book it as
a promotional expense.
5. The company has hired a new manager of human resources. Under her direction,
one third of staff has been given a performance review by their supervisors during
the last two months. For many of them, this was their first performance review in two
or three years.
6. By chance, Mell discovered that payroll cheques were being generated and mailed
to a former GR employee who had quit six months ago. The ex-employee did not
alert GR of this error and continued to cash the cheques. No record of employment
had been prepared.
7. Rames is interested in introducing a points program to generate repeat business.
Guests would be awarded 5 points per dollar spent in the hotel and earn a free
nights stay once they accumulate 10,000 points.
8. The $200,000 paid for the option to purchase the land in Montreal is included in net
capital assets recorded on the balance sheet.
9. The present value factors for 40 periods at 15% are 0.00373 for a dollar and 6.6418
for an annuity.
Additional Information Sample Case for Video Storyboarding Exercise
6 CMA Canada
Required:
As Chris Mell, CMA, prepare a report for Mayd, advising him on how to address the
issues discussed at the management meeting as well as any other organizational
issues and concerns requiring his attention. Include details of your analysis, supported
recommendations, and an action plan to implement your recommendations. In
undertaking this task, you will need to take into consideration your background
knowledge of the company as well as the additional information provided above.
Sample Case for Video Storyboarding Exercise Additional Information
CMA Canada 7
Appendix A
GR Hotel Market Values and Mortgages Outstanding January 2008

Current Market Value Mortgage Outstanding
Montreal hotel $10,080,000 $4,553,000
Toronto hotel 11,020,000 4,003,000
Total $21,100,000 $8,556,000


Appendix B
GR Financial and Business Information by Hotel

Montreal Hotel Toronto Hotel
Room Information 2007 2006 2005 2007 2006 2005
Number of rooms 280 280 280 290 290 290
Average occupancy 59% 61% 59% 65% 63% 59%
Average daily room rate (ADRR) $95 $94 $90 $105 $103 $100
Revenue per available room (RPAR) $56 $57 $53 $68 $65 $59

Income Before Taxes (000s):
Montreal Hotel Toronto Hotel
Revenues: 2007 2006 2005 2007 2006 2005
Rooms $5,728 $5,860 $5,427 $ 7,224 $ 6,869 $ 6,245
Restaurant 2,578 2,637 2,442 3,757 3,572 3,247
Events/services 1,060 1,084 1,004 1,373 1,305 1,187
Merchandise and other 114 118 108 159 150 138
Total revenues 9,480 9,699 8,981 12,513 11,896 10,817
Variable service delivery 3,650 3,734 3,458 4,817 4,580 4,165
Fixed service delivery 3,250 3,250 3,250 4,250 4,250 4,250
Total operating costs 6,900 6,984 6,708 9,067 8,830 8,415
Gross profit 2,580 2,715 2,273 3,446 3,066 2,402
Allocated head office costs:
Promotion and booking 562 549 355 562 549 355
General and administration 1,134 1,133 966 1,134 1,134 966
Interest expense 293 299 305 293 299 305
Amortization 215 214 209 215 214 209
2,204 2,195 1,835 2,204 2,196 1,835
Income before taxes $ 376 $ 520 $ 438 $ 1,242 $ 870 $ 567