Platinum Pointe Land Deal, The |
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Finance/Financial Management |
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Organizational Behavior |
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Intermediate |
7 |
Available.
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$9.00
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In early December 2006, Harry Hepburn, president of the Southern
California Division of Robinson Brothers Homes, was faced with a
significant challenge. The markets his division served had slowed
considerably. To sell its homes, the division often had to make
significant price concessions. But construction costs were continuing
to rise, so margins were getting squeezed. It was clear that the
division was not going to achieve its 2006 sales and profit plan. But
what was worse, corporate executives were recommending a significant
downsizing of the division in 2007 to wait until the housing market
rebounded. Harry resisted this idea. He thought he had assembled a
great employee team. The division's performance had been outstanding
during the good years in the early 2000s. He wanted to keep his team
intact. But that required finding a continuing stream of good projects
for them to work on.
One promising project on the horizon was called Platinum Pointe. It was
a large project that promised to provide over $100 million in revenue
and nearly $14 million in profits in the 2008-2011 time period. It
would keep a lot of employees productively busy. Harry really wanted to
do the project. However, the financial projections suggested that the
project would not quite earn the returns that the corporation required
for projects with this level of risk. He contemplated preparing
projections that were a “little more optimistic” to ensure that the
project would be approved.
THE COMPANY
Robinson Brothers Homes (RBH) was a medium-sized homebuilder. The
company built single-family and higher-density homes, such as
townhouses and condominiums. By 2006, RBH built almost 2,000 homes per
year. Because it was much smaller than the largest homebuilders who had
economies-of-scale advantages,1 RBH focused on building higher
quality/higher price homes for first and second move-up buyers. In
2006, the average closing sales price for an RBH home was slightly more
than $400,000.
RBH's stock had been traded publicly since 1995. The company had been
highly profitable throughout the past decade, but finances were
expected to be much tighter in 2007 because of the home-building
slowdown that had started in early 2006. The stock price had declined
almost 50% from the all-time peak in 2005.
RBH's organization was comprised of a headquarters staff located in
Denver, Colorado, and 15 divisions located in most of the metropolitan
areas of the Central, Mountain, and Southwest areas of the United
States. The headquarters staff was small, comprised mainly of
specialists in the areas of finance, accounting, legal, information
systems, sales and marketing, and customer service, and their staffs.
Assignment
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?
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