This note was prepared by Professor Kenneth A. Merchant for the sole purpose of aiding classroom instructors in the use of The
P
latinum Pointe Land Deal case. It provide
s
analysis and questions that are intended to present alternative approaches to
deepening students comprehension of business issues and energizing classroom discussion.
Marshall School of Business
University of Southern California
The Platinum Pointe Land Deal
Teaching Note
Purpose of Case
This case illustrates an elaborate pre-action review, a proposal to buy a significant piece of land
on which to build homes. Students can study and critique this capital budgeting-like analysis,
Suggested Assignment Questions
1. Evaluate Robinson Brothers Homes land acquisition process. What suggestions do you
have for improving it, if any?
2. If Harry Hepburn adds a little optimism to his projections, is he acting unethically?
Case Analysis
The homebuilding company described in the case, Robinson Brothers Homes (RBH), spends
considerable effort in preparing formal land acquisition proposals. The proposals examine the
proposed building project from every angle, including housing development type, construction
Merchant & Van der Stede, Management Control Systems, 3rd edition, Instructors Manual
Second, and this is not described in the case, the proposals are prepared in great detail to enable
the recruitment of a joint venture partner. RBH seeks joint venture partners for most of their
projects. They do so both to raise capital and to limit the companys risk on any given project.
But perhaps even more important, they recruit joint venture partners to obviate the need to
consolidate the project into their financial statements. The joint venture partner takes a (barely)
controlling interest in the project. Then under the rules of FASB Interpretation No. 46
(Consolidation of Variable Interest Entities) (commonly referred to as FIN 46), RBH can
account for the project using the equity method, keeping the debt off the balance sheet.
The case is not written to allow for a discussion of the details of FIN 46 and its application to
the homebuilding industry, but it is an interesting tangent that instructors can go down if they
are so inclined. FIN 46 was developed to in response to companies use of off-balance-sheet
It is useful spending some time discussing the origin of the IRR requirements, which are
described in case Exhibit 2. This particular scheme is unique to RBH, but all homebuilders use
something similar. Finance theory tells us that projects with higher risk should promise higher
returns. RBHs procedure requires the identification of risk in four areas: political, development,
market, and financial/financing. The risk of each project in each of these four areas must be
rated as low, moderate, or high. The table at the bottom of Exhibit 2 shows how the ratings
translate into a project IRR requirement. The logic built into this procedure comes from the
many years of experience of RBHs executives, in reviewing land deals. But it is somewhat
arbitrary. Why, for example, does high political risk lead to an 8% IRR requirement, while high
financing risk leads only to a 6% IRR requirement?
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RBHs top executives have some control over the preparation of these projections. They have
many years of experience in the industry, and they can make their own judgments about the
projects prospects. And they know the managers who are preparing the projections. They know
The Ethical Question
Harry Hepburns contemplation of the addition of a little optimism to his projections adds an
ethical issue to the case. The discussion of this question can be organized using the same
multistep method used for the other ethical discussions.
Determine the facts:
Who, what, where, when, and how:
The key actor is Harry Hepburn, one of RBHs division presidents.
The homebuilding market is starting to turn down. To sell its houses, Harrys division has
Define the ethical issues:
Stakeholders: Harry Hepburn
Division personnel
Major ethical principles:
2. Fairness
3. Duties and obligations (e.g., right to know, good work situation)
4. Virtues (e.g., integrity, honesty)
Ethical issues:
The interesting feature of playing games with forecasts is that no lying is involved. There is no
fraud, and there is no distortion of material facts. What Harry is thinking about doing is just
altering his apparently historical approach to forecasts, which was probably to provide best-
Decision alternatives and their probable consequences:
1. Harry submits the forecast as planned. Harry can argue forcefully that the project is in
the best long-term interest of RBH but, presumably, this argument will fail. It will be
2. Harry makes the forecast more optimistic. While top management probably has good
long-term control over land acquisition decisions, it might be difficult for them to detect
Harrys deviation in optimism in this one case unless they are quite familiar with the
specifics of this location. Thus, they will likely approve the project. Similarly, it is likely
that a joint venture partner could be located. With the project funded, a division layoff could
Compare the alternatives with the ethical principles and choose the best
alternative:
One good way to approach the ethical issue is to discuss the ethical merits of the alternatives
one model at a time. If objective observers use a utilitarian lens, what conclusion would they
draw? What if they use a fairness lens, and so on? The models will not necessarily all lead to the
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Pedagogy
This case can be used just with the focus on control of investments in land, which is critical in