After the severe 2008 stock market crash, an increasing number of publicly traded firms announced stock buyback (repurchase) programs. Most analysts are also predicting that many firms will use the money saved due to the 2018 tax law which lowered highest corporate tax rate from 35% to 21% to repurchase their stock or pay dividends. Please explain what benefits or rationale, if any, firms see in stock repurchases and how would investors react to these repurchase programs. You would want to use your understanding of chapter 14 stock repurchase discussion in your answers

In-Charge is a publicly listed firm that provides technology allowing customers to monitor their credit and debit card use, set spending limits and activate and de-activate cards through apps on mobile devices. The company recently struck deals with key payment processing companies to adopt this technology in order to prevent fraud. In-Charge is entering a fast growth phase, which is expected to last for 5 years. The following table contains reported income statement information for the recent year 2018 (all numbers are in $1,000s):

Detailed projections (in $1,000s) for the years 2019-2023 are given below:

• Expected growth in revenues is 100% per year.
• Operating profit (EBIT) equals 50% of revenues in each of the years 2019-2023.
• The increase in net working capital equals 25% of revenues in each of the years 2019-2023.
• Gross investments in fixed assets equal $1,200 in each of the years 2019-2023.
• The amount of depreciation is equal to $700 in each of the years 2019-2023.

In-Charge currently has 2 million shares outstanding and has a debt ratio (D/V) of 50% in market value terms. The firm has a BBB bond rating and its equity beta equals 1.90. The interest rate on T-bonds equals 2.5%, the expected yield on BBB-rated bonds is 4% and the market risk premium is 5%. Finally, you can assume that all cash flows will be realized at the end of the year and that the firm is subject to a 40% marginal corporate tax rate. With this information answer the following four questions.

1. Determine the relevant Free Cash Flows for a valuation of the firm for the years 2019-2023 (in

$1,000s). Show your calculations.

2. Calculate the weighted average cost of capital for In-Charge. Show all your calculations.

3. Determine In-Charge’s business risk (or asset beta). Show all your calculations.

4. Now suppose that In-Charge wants to immediately change its leverage to 25% with a corresponding cost of debt of 3%. If we assume that In-Charge maintains a constant growth rate of 2% after 2023, what is In-Charge’s share price?

IV.   CASE STUDY NO. 1 ABCABLE, INC.

ABCable, Inc. is a publicly traded cable provider. Among its current services are providing cable services, including television, Internet access and local telephone service. ABCable experienced rapid growth in all markets beginning in the late 1990s and continuing through now.

While revenues continue to grow, income is showing signs of declining to a level beneath that expected by analysts who follow the company. ln an analysis of why, Sally Bens, financial vice president, discovered that maintenance of cable systems has become an increasingly large cost­ particularly in new cable coverage areas. She pointed out to Bill Jones, the president, that in the relatively new areas maintemirice is high, particularly when viewed from the perspective that the areas currently have few customers. Jones has suggested that it doesn't seem right to face such high expenses when ''everyone knows we will have a larger customer base in a few years in those areas.''

Shortly thereafter, Bens and Jones decided to transfer out of Cable Maintenance Expense and into the Capitalized Cable account enough of these expenses to enable net income to meet analysts' forecasts. Documentation in some cases was created indicating a correction of an error and in some cases no documentation was created to support the entries.

Subsequently, these types of transactions were posted quarterly, on an "as needed" basis. Bens rationalized that it was indeed unfair to expense so much of the maintenance cost in rapidly growing areas. Jones didn't give it a lot of thought other than to periodically remind Bens of how important meeting EPS growth rates was.

The above scheme does not meet generally accepted accounting principles and led to materially misstated financial statements. Under generally accepted accounting principles, these transactions should have been expensed. Thus, the ABC able overstated assets and income.

1.   ls this an example of fraudulent financial reporting or misappropriation of assets?

2.   SAS No. 99 requires a number of inquiries of management, the audit committee, internal auditors, and others. Which, if any, individuals responding to these inquiries might be likely to reveal this scheme to the auditors?

3.   This is an example of management override. What types of procedures does SAS No. 99 prescribe for management override? Which, if any, of these procedures would have a possibility of detecting the scheme?

Frosty Co. is a publicly traded, medium-sized manufacturing firm that produces refrigerators, freezers, ice makers, and snow cone machines. During the past three years, the company has struggled against increasing competition, sluggish sales, and a public relations scandal surrounding the departure of the former Chief Executive Officer (CEO) and Chief Financial Officer (CFO). The new CEO, Jane Mileton, and CFO, Doug Steindart, have worked hard to improve the company's image and financial position. After several difficult years, the company now seems to be resolving its difficulties, and the management team is considering new investment opportunities. The team hopes that diversification into a line of professional ice cream makers, and perhaps a line of consumer products, will help the company continue its recent growth and effectively compete with future competitors.

In order to raise the funds needed for these new investments, Frosty Co.'s Board of Directors has approved a seasoned equity offering (SEO). The discussions regarding the new investment opportunities and the equity offering have been kept quiet until a positive set of financial statements can provide strong evidence that the company has turned around, leading to an increase in the company's stock price.

INTRODUCTION

After a full week of carefully examining financial statements, Simon was exhausted. He had become Frosty Co.'s corporate controller only a month ago, after several years as an auditor at a public accounting firm, and was excited about the move to corporate accounting. The first few weeks had gone well, as Simon met his accounting staff and settled into his new responsibilities. Then, he had started reviewing Frosty Co.'s financial statements for the prior year to make sure they correctly followed GAAP, and to familiarize himself more with the company and industry. Unfortunately, his relative inexperience with the industry and Frosty's accounting procedures had required him to spend more time on the review than he had anticipated.

He still had a few questions about the financial statements, but he needed to start preparing for the upcoming SEO. He decided that he would talk to his staff about his lingering questions tomorrow morning, just before his meeting with the CEO and CFO. The three of them were to discuss the upcoming audit and the earnings announcement and how they would impact the proposed SEO. He rubbed his tired eyes and headed home to get a little sleep.

MEETING OF THE ACCOUNTING STAFF: 10:30AM

Simon looked up as the divisional controllers, Elsa Pilebody and John Mortenson, came into his office. Elsa worked with Frosty Co.'s fridge and freezer division; John worked with the ice maker and snow cone machine division. So far, Simon had enjoyed working with them, especially since neither of them seemed to resent him stepping in as their new boss. They were both smiling as they came through the door, and their good-natured teasing started almost before they had finished shaking hands.

“Sorry we're a little late,” Elsa started, “but John had to stop for the last jelly donut.”

“I did not!” John said indignantly. He looked at Simon. “It was chocolate.”

Because of his busy schedule that day, Simon got down to business instead of joining the banter as he normally would have done. “Thanks for coming by, Elsa and John. We have several issues to discuss before I have to meet with Jane and Doug this afternoon.” He paused for a second. “I've spent the past week going over the financial statements. Overall, they look well done, but I need clarification on a few details. To start with, I want to discuss the construction project we began last year.”

“That's our big project at the moment. We're building a new factory that should be done next summer,” Elsa said. “Construction is going well, and we've been careful to capitalize all of the expenditures.”

Simon shook his head. “That's the problem. I think we capitalized more than we should have. More specifically, it looks like we capitalized all of the interest on our most recent bank loan.”

“We did,” Elsa replied. “Since we're using all of the loan proceeds to build the new factory, we felt it was appropriate to capitalize all of the interest.” John nodded in agreement.

“I disagree,” said Simon. “Here's a breakdown of the payments we made on our new building and a list of our outstanding long-term debt (see tables below). Did we take out any of these loans specifically for the new factory?”

Elsa shook her head. “No, we took out the new loan, Loan 2, for general expansion, then decided the most appropriate use of the funds would be for the new factory.”

Simon frowned. “Why are we capitalizing the interest on Loan 2 if it wasn't originated specifically for the new factory?”

“Well, if the capital from the loan is eventually used on a specific construction project, then I think we should be able to capitalize the interest on that loan as part of the historical cost of the

2

project. Of course,” Elsa frowned, “maybe we are capitalizing too much. Perhaps we need to calculate avoidable interest to determine the amount of interest that should be capitalized.”

“You are right that generally we would need to calculate avoidable interest before capitalizing any interest,” Simon answered. “But in this case, we don't need to do that. I believe GAAP allows interest to be capitalized only if a specific construction loan is used.”

“Well, I still think that we should be able to capitalize at least some of the interest. But I'll do some research to make sure.”

Date Expenditure Spent The Amount of Expenditure

February 15 $90,000

April 1 $125,000

June 30 $200,000

October 1 $300,000

November 15 $585,000

Liabilities Amount Annual Interest Rate

Bond A $678,000 7.1%

Loan 1 $650,000 6%

Loan 2 $1,000,000 7%

Answer the following questions based on the information above: Capitalizing interest on the new factory:

1) During the year, Frosty Co. paid all of the interest accrued on Bond A and Loan 1, but only $50,000 of the interest accrued on Loan 2. Using one journal entry, summarize how Frosty originally recorded the accrued interest on all three long-term debts.

2) Assuming John and Elsa are right that the new loan meets the standards for capitalizing interest, calculate avoidable interest.

3) What correcting entries would need to be made to properly record interest on Frosty Co.'s construction project if John and Elsa are right?

4) What would be the effect of interest adjustments on net income, assuming that Frosty Co.’s income tax rate is 30 percent?

Publicly-traded companies need to file their annual financial statements in the SEC’s repository called “EDGAR System”. The annual report file is called the 10-K. Find and open the latest annual financial statements 10-K (usually it’s a pdf file). Then, search for the pay-ratio disclosure (use a keyword search). Financial statements from 2018 have to disclose the following information that you will enter below for PSB HOLDINGS INC/WI (Ticker Symbol: 3PSBQ):

1. CEO Salary (Cash) compensation (in dollars), CEO Bonus (in dollars), CEO Stock awards (in dollars), CEO Options awards (in dollars), CEO Non-equity incentive plan compensation (in dollars), CEO Change in pension value and nonqualified deferred compensation earnings (in dollars), All other CEO compensation (in dollars).
2. Median Employee compensation
3. Pay Ratio

You and your team are financial consultants who have been hired by a large, publicly-traded electronics firm, Brilliant Electronics (BI), a leader in its industry. The company is looking into manufacturing its new product, a machine using sophisticated state of the art technology developed by BI’s R&D team, overseas. This overseas project will last for five years. They’ve asked you to evaluate this project and to make a recommendation about whether or not the company should pursue it. BI’s management team needs your recommendation and the analysis used to arrive at it by no later than December 3, 2019.

The following market data on BI’s securities are current:

Debt: 210,000 6.4 percent coupon bonds outstanding, 25 years to maturity, selling or 108 percent of par; the bonds have $1000 par value each and make semi-annual payments

Common Stock: 8,300,000 shares outstanding, selling for $68 per share; beta=1.1

Preferred Stock: 450,000 shares of 4.5% preferred stock outstanding, selling or $81 per share

Market: 7 percent expected market risk premium; 3.5 percent risk-free rate

The company bought some land three years ago for $3.9 million in anticipation of using it as a toxic dump site for waste chemicals, but it built a piping system to safely discard the chemicals instead. The land was appraised last week for $4.4 million on an after-tax basis.   In five years, the after-tax value of the land will be $4.8 million, but the company expects to keep the land for a future project. The company wants to build its new manufacturing plant on this land; the plant will cost $37 million to build.

At the end of the project (the end of year 5), the plant can be scrapped for $5.1 million. The manufacturing plant will be depreciated using the straight-line method.

The company will incur $6,700,000 in annual fixed costs excluding depreciation. The plan is to manufacture 15,300 machines per year and sell them at $11,450 per machine; the variable production costs are $9,500 per machine. Selling price and costs are expected to remain unchanged over the life of the project.

BI uses PK Global (PKG) as its lead underwriter. PKG charges BI spreads of 8% on new common stock issues, 6% on new preferred stock issues, and 4% on new debt issues. PKG has included all direct and indirect issuance costs (along with its profit) in setting these spreads. BI’s tax rate is 35 percent. The project requires $1,300,000 in initial net working capital investment to get operational. Assume BI raises all equity for new projects externally (that is, BI does not use retained earnings).

The weighted average flotation cost is the sum of the weight of each source of funds in the capital structure of the company times the flotation costs, so:

f_T = ($564.4/$827.65)(0.08) + ($36.45/$827.65)(0.06) + ($226.8/$827.65)(0.04) = 0.0682, or 6.82%

Thus the initial investment is increased by the amount of flotation costs:

                  (Amount raised)(1 – 0.0682) = $37,000,000   

                  Amount raised = $37,000,000/(1 – 0.0682) = $39,708,092

1. Calculate the firm’s current cost of capital using the information provided.

2. Calculate the project’s cost of capital (the appropriate discount rate to use to evaluate BI’s new project) assuming the capital structure will remain the same if the project is undertaken.

This project is somewhat riskier than a typical project for BI; therefore, management has asked you to use an adjustment factor of 12% to account for this increased riskiness (that is, to add 12% to the firm’s cost of capital) to estimate the project’s required rate of return.

(NOTE: Flotation costs do not have to be considered when calculating the required rate of return for each class of security – they are addressed in this problem by adjusting the cost of the initial investment to $39,708,092 from $37,000,000).

3. Calculate the project’s annual cash flows, taking into account all the relevant cash flows.

   1. Calculate the project’s initial Time 0 cash flow, taking into account all relevant cash flows.

   2. Calculate the project’s annual operational cash flows (OCF) over the life of the project.

   3. Calculate the project’s terminal (last year of the project) cash flow. Include all relevant cash flows.

(Note: You can present the cash flows from Year 0 to Year 5 in a table format)

4. What is the NPV and IRR of the project?

XYZ manufactures and distributes leather furniture to various companies in Europe. On April 2, 2006, XYZ entered into a sales contract with a company in Germany to sell 1,000 sofas. The contract price is €2,000 per sofa. Five hundred sofas are to be delivered in May 15, 2006, and the remaining half is to be delivered on December 20, 2006. Payment is due in two instalments, with half due on August 31, 2006, and the remaining half due January 30, 2007. However, the customer has the right to cancel the contract with 30 days' notice.

XYZ entered into a forward contract to hedge against the euro exchange rate for €1 million, each coming due on January 30, 2007. XYZ has an October 31 year-end.

Delivery of the furniture occurred on the dates specified and the company collected the receivables due

and settled the forward contract January 30, 2007.

The exchange rates were as follows:

Required:

Assume that the forward contract is designated as a cash flow hedge, since the sale is highly probable. Prepare the journal entries to record the sales and the hedge. Use the net method to record the journal entries. XYZ reports under IFRS.

The CEO of a large electric utility claims that 80 percent of his 1,000,000 customers are very satisfied with the service they receive. To test this claim, the local newspaper surveyed 100 customers, using simple random sampling Among the sampled customers, 74 percent say they are very satisfied.
a)[1 pt] Is this a right-tailed, left-tailed, or 2 -tailed test?
b) [2 pts] Find the value of the test statistic =
b) [2 pts]Find the p-value [round to 3 decimals]
c) I[1 pt]If the level of significance is 5%, what is your decision? Explain
d){1 pt] Do the statistics support the CEO's claim that 80% are satisfied? Explain.

1. & 2. The following data are taken from the unadjusted trial balance of the Westcott Company at December 31, 2017. Complete the work sheet following adjustment. (Enter their balances in the correct Debit or Credit column.)
  
Use the following adjustment information to complete the work sheet.

1. Depreciation on equipment, $22
2. Accrued salaries, $14
3. The $25 of unearned revenue has been earned
4. Supplies available at December 31, 2017, $17
5. Expired insurance, $13

-really struggling with this chart. I have a few filled out, but I am stuck, please help! thank you

The third worksheet ("Ex. 3") contains 2 4x4 matrices, plus space for a third. Write a program that will read the first 2 matrices into array "B" and "C" . Create a 3rd array, "A" that is the result of matrix B + matrix C (i.e |A| = |B| + |C|). Output that array in the indicated cells (upper left = cell K1) To do this, use the rule for array addition for each matrix element: aij = bij + cij where i and j indicate the location (row, column) of the matrix element. NOTE: You must use arrays to get credit for this exercise. Keep close track of which loop is representing which index.