Problem:
Case Study: CUC International, Inc. (A). Harvard Business School 9-192-099.
Management of CUC is concerned that CUC shares are currently undervalued. Based on this background prepare a memo that addresses the following issues.
1. Provide possible reasons why investors might be pessimistic about CUC's ability to maintain current levels for three key parameters underlying the business:
a) the cost of soliciting a potential new member,
b) the hit rate, or fraction of solicitations that are converted to new members, and
c) the renewal rate, or fraction of members who renew for another year.
2. One proposal mentioned in the case is that CUC switch its accounting method and write-off the membership acquisition costs in the year they are spent. That is, rather than capitalize the $2,937 mentioned in the illustration as an asset called Unamortized Member Acquisition Costs, CUC should expense the entire amount in that year. What impact would such a change in the accounting method have on CUC's financial statements for the year ended 1/1988? Would such a change cause investors to revise upward their expectations of any of the three key parameters?
3. What do you think of the other methods mentioned in the case that CUC could use to communicate with investors?
4. Can you think of any other approaches that CUC management could use to convince investors that their stock is substantially undervalued?
Summary of problem:
The question belongs to Finance and it is a Harvard Case Study titled CUC International, Inc. (A). Questions about the case study such as the reasons why investors might be pessimistic about CUC's ability to maintain current levels, proposals to switch accounting methods, etc have been answered in the solution in detail.