1. (a) Explain whether exchange rate risk of Hong Kong dollars is zero as it is pegged with the U.S. dollars.

2. (b) Explain how the U.S. government intervenes exchange rate indirectly to its boost economic growth.

What adverse effect might occur if bond prices remain fixed prior to their maturity?

(a) Describe the difference between centralized and decentralized management structure in controlling foreign subsidiaries.

(b) Describe the trade-off of using centralized management structure to solve agency problem.

(c) Explain the rationale of multinational companies (MNCs) to establish foreign subsidiaries under Product Cycle Theory.

(d) Describe the trade-off between acquiring existing companies and establishing new foreign subsidiaries to expand overseas.

(e) Explain how the valuation of MNC will be affected if there is political unrest in the foreign country.

ABC Company issued fixed rate bond at 9% p.a. and XYZ Company issued floating-rate bond at LIBOR + 2%. The two companies enter an interest rate swap agreement that ABC Company agreed to provide XYZ Company with variable rate payments at LIBOR + 0.5% in exchange for fixed rate payments of 10%.

(a) Explain how the bond issued by ABC Company affects its interest rate risk.

(b) Calculate the effective borrowing rates of ABC Company and XYZ Company respectively after considering interest rate swap.

(c) Identify and explain briefly ONE limitation of using interest rate swap to hedge interest rate risk.

Instructions:

Individual Work

Each person of the group is required to do the problems on paper with a pencil.   You WILL NOT receive any points on the group take home score if you do not show that you did the work or do not submit the answer before your group meeting. You are required to take a picture of your work and submit your work in Blackboard BEFORE your group meets.

Group Work

Your group will meet in person or on Zoom and determine who has the right answer and what answer you will submit. Please note that often each student has a section of the problem correct but not the entire problem correct.

Your group will prepare your group answer in Excel with proper format. This is the answer that will be graded. All members of the group that have submitted Individual Work will receive the same group grade.

One member of each group will submit the Excel sheet as a PDF in Blackboard. Please review your PDF file for formatting before you submit it.

Your PDF file should be as follows:

Page One: Group Member names, Date, Time, and Location

Page Two: Depreciation, Goodwill, and Impairment Loss

Depreciation, Goodwill, and Impairment Loss

At the beginning of 2020, Brady Inc. acquired Lincoln Technology Corporation for $600 million. In addition to cash, receivables, and inventory, the following assets and their fair values were also acquired:

The plant and equipment are depreciated over a 10-year useful life on a straight-line basis. There is no estimated residual value. The patent is estimated to have a 5-year useful life, no residual value, and is amortized using the straight-line method.

At the end of 2022, a change in business climate indicated to management that the assets of Lincoln might be impaired. The following amounts have been determined:

Required:

1. Compute the book value of the plant and equipment and patent at the end of 2022.
2. When should the plant and equipment and the patent be tested for impairment?
3. When should goodwill be tested for impairment?
4. Determine the amount of any impairment loss to be recorded, if any, for the three assets.

Is book-to-market ratio a factor?

A. Yes

B. No
C. Does it matter?

<Purchasing power parity>

Q. In a market where PPP Does Not exist, Explain the short & long run changes in the Exchange rate, Interest rate and Price, when Money Supply decreases.

Q. In a market where ppp holds, explain the short & long changes in the Exchange rate, Interest rate and Price, when the Money growth rate is decreased.

What are the pros and cons of net realizable value and dividend discount model?

The Sai Kung Inn is a small family-run hotel in the New Territories. As a family-owned business, it relies mainly on traveler recommendations and on visitors to local Sai Kung residents. In particular, it ranks in the top 10% of TripAdvisor’s accommodations in Sai Kung. The Sai Kung Inn has 12 guest rooms, and to keep the operation running efficiently it employs two full-time reception staff, and three morning housekeeping staff.

Winnie is the hotel manager and the daughter of the property owner. She is considering to adopt a balanced scorecard approach for performance evaluation. She has identified a number of potential performance measures:

1. 1) Number of items on hotel restaurant menu

2. 2) Revenue

3. 3) Percentage of reception staff completing hospitality and customer satisfaction course

4. 4) Customer satisfaction with dining options

5. 5) Average percentage occupancy

6. 6) Number of restaurant staff completing cooking training courses

7. 7) Percentage of cleaning staff completing housekeeping and hygiene courses

8. 8) Average TripAdvisor rating

9. 9) Number of guest complaints about room cleanliness

10. 10) Average number of minutes taken to process guests’ check-in

11. 11) Total profits

12. 12) Frequency and quality of room cleaning

Required:

1. (a) Using the 12 performance measures suggested above, draw a balanced scorecard diagram for The Sai Kung Inn with the four main categories of the balanced scorecard, classifying each of the performance measures into one of the four categories. Draw arrows between individual performance measures to show causal links and indicate with a “+” or “–” whether the performance measure should increase or decrease.

2. (b) Winnie believes that The Sai Kung Inn’s occupancy rate is lower than her competitors because The Sai Kung Inn charges slightly higher prices and does not attract guests who prefer cheaper accommodation. Winnie believes that in order to improve the financial performance of The Sai Kung Inn, the company should focus on improving customer satisfaction to justify higher prices, instead of reducing costs to compete on price. She would like to improve the rank on TripAdvisor to be the top-rated accommodation in Sai Kung, by focusing on operational and staff improvements. Help Winnie develop two new performance measures to build into her balanced scorecard. For each performance measure you suggest, identify which category it would fit into, how to measure it, and how it relates to the organization goal.

Slick Company is considering a capital project involving a $225,000 investment in machinery and a $45,000 investment in working capital. The machine has an expected useful life of 10 years and no salvage value. The annual cash inflows (before taxes) are estimated at $90,000 with annual cash outflows (before taxes) of $30,000. The company uses straight-line depreciation. Assume the federal income tax rate is 40%.

The company’s new accountant computed the net present value of the project using a minimum required rate of return of 16% (the company’s cost of capital). The accountant’s computations follow:

Required:

a.   Are the accountant’s computations correct? If not, compute the correct net present value.

b.   Is this capital project acceptable to the company? Why or why not?

Between net realizable value and dividend discount model, is one method better than the other? why and why not?

       SkyTech Ltd. is expected to pay a per-share dividend next year of $30. The market’s consensus is that the firm’s dividend growth rate of 2% per year will be maintained in the foreseeable future. SkyTech’s cost of equity is 10% per year.

(a) What is the price of a share of SkyTech?                                

(b) Suppose SkyTech’s internal view is that it has an expected average yearly dividend growth     of 2% because its return on equity is 8% and management retains 25% of earnings. What is       the earnings per share of SkyTech next year? What is the present value of growth opportunities per share of SkyTech?                                                        

(c)    Suppose SkyTech is about to announce that it will increase its retention ratio to 50%,       effective immediately. If the market is still unaware of SkyTech’s decision, what will be the new value of the stock after the change in policy? How would you invest to profit    from this fact?                                                              

(d)    If the dividend policy of SkyTech Ltd. has not shown a clear relationship to its earnings growth, what other absolute valuation model can you use to value the company? What cash flows should be used in the valuation?                                  

Bob is considering purchasing a two-year endowment policy with a $1,000 face amount at the beginning of his 50. The probability of Bob dying between 50 and 51 is 0.00550, and that between 51 and 52 is 0.00611. The annual interest rate is 6 percent. (1) Calculate the net level premium for this two-year endowment policy. (2) Show that this premium is just sufficient to fund benefits over the two years at the assumed interested and mortality rates. (3) Ignoring expenses, what would the policy’s cash value equal after one year? (Round to two decimal places when calculating your answer.Bob is considering purchasing a two-year endowment policy with a $1,000 face amount at the beginning of his 50. The probability of Bob dying between 50 and 51 is 0.00550, and that between 51 and 52 is 0.00611. The annual interest rate is 6 percent. (1) Calculate the net level premium for this two-year endowment policy. (2) Show that this premium is just sufficient to fund benefits over the two years at the assumed interested and mortality rates. (3) Ignoring expenses, what would the policy’s cash value equal after one year? (Round to two decimal places when calculating your answer.

Analyze CSR initiatives at Boxwood Company

Boxwood Company is a wholesale plant nursery that is considering implementing two CSR initiatives. Information about these initiatives is summarized as follows:

a. Determine which performance perspectives each CSR initiative would best fit under on the balanced scorecard.

  CSR initiatives best fit under the internal processes performance perspective.

b. Determine the initial investment cost of each initiative.

Replacing old fans initiative: $

Replacing ATVs initiative: $

c. Determine the yearly cost savings of each initiative.

Replacing old fans initiative: $

Replacing ATVs initiative: $

d. Determine how many years it will take for each initiative to pay off its initial investment cost. Round your answers to two decimal places.

Replacing old fans initiative:

Replacing ATVs initiative:

e. Assuming that the new fans have an estimated useful life of 25 years and that the ATVs have an estimated useful life of 8 years, determine which initiatives should be adopted.

a. The project of installing new fans can be adopted.

b. The project of installing new ATV’s can be adopted.

c. Both the projects of installing new fans and ATV’s can be adopted.

d. The project of new fans can be adopted and ATV’s can be rejected.

What limits the usefulness to managers of fixed budget performance reports? How can these limits be overcome? Provide a hypothetical example of budgeting which incorporates flexibility.