Reference no: EM132528587

Bloomberg BusinessWeek reports "CEO Qian and Chairman Lu Zhengyao (Luckin Coffee) employed a strategy they used with CAR Inc., a vehicle rental business, more than a decade ago: burning money -- $130 million in a year -- from investors to grab market share quickly. The company lured patrons with generous discounts: first-time customers got a free cup of coffee and six vouchers for 50% off future purchases. While that raised concerns among some analysts, the strategy proved successful in boosting the stock price. In January, shares reached $50, more than double its IPO price.

Luckin Coffee operated about 4,500 stores in China by the end of 2019, with plans to reach 10,000 locations by the end of next year in a market valued by Euromonitor at $5.8 billion in 2018.

Trouble emerged earlier this year, however. The shares plunged after Muddy Waters tweeted Jan. 31 that it had a short on the stock after receiving what it called a "credible," unattributed 89 page report that alleged accounting issues with the chain and a broken business model. Luckin Coffee denied the allegations."

-What is the impact of discounts in the forecast of cash flows in the short-term against a scenario of no discounts?

Select one:

a. Assuming no major changes of demand, cash flows are higher without price discounts

b. Assuming no major changes of demand, cash flows are lower without price discounts

c. The discounts do not affect cash flows as the discounts are an accounting measure that is not reflected in cash flow statements