Professional Documents
Culture Documents
Leda Pires
Songhua Qi
Agenda
Business Description and services provided
Financial Analysis
Answers to questions 1- 5
Questions?
COMPANYS MISSION
Note: If membership lapsed before the advances had been recovered, PPLS
deducted 50% of unearned services from future commissions to the sales associate.
Legal Services Provided
Open panel memberships Closed panel memberships
Question 1
Offering a wide range of legal expenses insurance incurred
by members through family plan or membership premiums.
Multi-level program that encouraged buyers to become
salespeople (commissions as incentives).
Critical risks:
Too much dependence on associates
Management lags
Brand maintenance
Uncollectible risk
Based on the post-1995 commission formula and information in the
case on pricing and commission rates, calculate the cash inflows for
premiums and cash outflows for commissions for years 1 to 3 that
would arise from the sign-up of 1,000 new members at the beginning of
year 1. Assume that: (a) actual member renewal rates are 75% for both
years 2 and 3, and (b) 25% of recoverable commission advances in each
of the years 2 and 3 are expected to prove uncollectible.
Question 2
Cash Flows Year 1 Year 2 Year 3
Outflows: 229,000*25%*3= 0 0
Post 1995 flat 25% $171,750
commission rate
Question 3
Do you agree with Fortunes criticism of PPLSs method for
reporting commissions? Why or why not? Compute the net
income and EPS effect if PPLS expensed all commissions
immediately for 1996 thru 1998.
Question 4
We agree with Fortunes criticism:
1. PPLSs method spreads the commissions out over a three-year period
=>makes earnings growth look stronger
2. PPLSs method assumes that most of the new members will continue to
renew their contract (cancellation rate => not appropriate)
3. PPLS may not recover the commissions
Commissions Expenses 28,142 22,891 18,381 Commissions Expenses 24,261 16,717 11,476
Net Income 27,373 13,905 5,867 Net Income 30,210 17,523 10,263
Earnings Per Share $1.17 $0.60 $0.26 Earnings Per Share $1.29 $0.76 $0.46
Question 5
1. Try to enhance the persistency rate of its
memberships and reduce the high cancellation rate.
(eg. carefully check the members profile before
signing contract).