Suppose that you are part of the Management team at Porsche. Suppose that it is the end of December 2019 and a novel coronavirus that causes a respiratory illness was identified in Wuhan City, Hubei Province, China. The illness was reported to the World Health Organization and there is heightened uncertainty around the Globe.

You (as part of the management team) are reviewing Porsche’s hedging strategy for the cash flows it expects to obtain from vehicle sales in North America during the calendar year 2020. Assume that Porsche’s management entertains three scenarios:

Scenario 1 (Expected): The expected volume of North American sales in 2020 is 35,000 vehicles.

Scenario 2 (Pandemic): The low-sales scenario is 50% lower than the expected sales volume.

Scenario 3 (High Growth): The high-sales scenario is 20% higher than the expected sales volume.

Assume, in each scenario, that the average sales price per vehicle is $85,000 and that all sales are realised at the end of December 2020. All variable costs incurred by producing an additional vehicle to be sold in North America in 2020 are billed in euros (€) and amount to €55,000 per vehicle. Shipping an additional vehicle to be sold in North America in 2020 are billed in € and amount to €3,000 per vehicle.

The current spot exchange rate is (bid-ask) $1.11/€ - $1.12/€ and forward bid-ask is $1.18/€ - $1.185/€. The option premium is 2.5% of US$ strike price, and option strike price is $1.085/€. Your finance team made the following forecasts about the exchange rates at the end of December 2020:

• bid-ask will be $1.45/€ - $1.465/€ if the investors (and speculators) consider the euro (€) a safe haven currency during the pandemic.
• bid-ask will be $0.88/€-$0.90/€ if the investors (and speculators) consider the U.S. dollar ($) a safe haven currency during the pandemic

1. You decided not to hedge Porsche’s currency exposure. If the expected final sales volume is

35,000, what are your total revenues

1. if the exchange rate (bid-ask) remains at $1.11/€ - $1.12/€? Let’s call this the baseline scenario.
2. if the investors consider the euro a safe haven currency during the pandemic? How does this compare to the baseline case?
3. if the investors consider the U.S. dollar a safe haven currency during the pandemic? How does this compare to the baseline case?

2. Assume that you and the Porsche’s management team decided to hedge using forward contracts. Assume that the expected final sales volume is 35,000. What are your total benefit/cost and the percentage benefit/cost from hedging (compared to no hedging)

a) if the exchange rate (bid-ask) remains at $1.11/€ - $1.12/€?

b) if the investors consider the U.S. dollar a safe haven currency during the pandemic?

At the beginning of 2018, Whispering Winds Company acquired equipment costing $83,600. It was estimated that this equipment would have a useful life of 6 years and a salvage value of $8,360 at that time. The straight-line method of depreciation was considered the most appropriate to use with this type of equipment. Depreciation is to be recorded at the end of each year.

During 2020 (the third year of the equipment’s life), the company’s engineers reconsidered their expectations, and estimated that the equipment’s useful life would probably be 7 years (in total) instead of 6 years. The estimated salvage value was not changed at that time. However, during 2023 the estimated salvage value was reduced to $5,000.

Indicate how much depreciation expense should be recorded each year for this equipment, by completing the following table.

Sara Company imports wooden bowls from its Australian subsidiary. Per unit, this product costs the Australian subsidiary $8.00 to produce and $1.00 to ship to Sara Company. Sara Company uses bowls for home and kitchen set that it sells to U.S. furniture stores for $20 per unit. The following tax rates apply:

Australian income tax = 30%

U.S. income tax = 35% U.S.

import duty = 10% of invoice price

Requirements

1. If the wooden bowl is sold to Sara Company at a price of $16 per unit, determine the total amount of:

a) Net income.

b) Taxes and duties paid to the U.S. and Australian governments.

2. If the wooden bowl is sold to Sara Company at a price of $18 per unit, determine the total amount of:

a) Net income.

b) Taxes and duties paid to the U.S. and Australian governments.

3. Explain why the results obtained in parts (1) and (2) differ.

You have to answer all required questions correctly

Tyrex Corporation, located in New York, USA manufactures high quality porcelain shot glasses. The company has the capacity to produce 8,000 shot glasses per month. Current monthly demand is for 7,000 shot glasses at $25.00 per glass. The company pays a sales commission of 2% of its selling price. The cost data for the shot glass are as follows:

Variable product costs

Direct Material    $4 per glass

Direct Labour     $1.50 per glass

Manufacturing overhead costs      $1 per glass

Fixed Costs

Manufacturing overhead costs $84,000 per year

Recently, the 2020 Tokyo Olympic Games organising committee approached the Tyrex management. The committee expressed an interest in using Tyrex shot glasses to make commemorative shot glasses for the 2012 games. The order will be for 6,000 shot glasses, equally spread over four months. The offer price is $20 per glass. Each glass will require a special gold rim and a logo certifying official Olympic merchandise. Tyrex’s production manager estimated that the gold rim will cost $6 per glass and the embossing plate for the logo will cost $8,000. In addition, due to strict copyright concerns related to Olympic merchandise, Tyrex will have to hire an additional security person at a monthly salary of $1,000 for the four months of Olympic glass production period. Other variable costs related to the logo will be $1.00 per glass. There are no selling or other costs related to the order.

Required

(a) Assume Tyrex accepts the special order for 6,000 shot glasses. Calculate the impact on the operating income of the company for the fourmonths Olympic glass production period.

(b) List two other factors that should be considered by Tyrex before making the final decision whether to accept the special offer

(c) The CEO of Tyrex Corporation has decided to accept the Olympic order. He negotiated with a porcelain shot glass supplier to supply 500 shot glasses per month during the next four months at $15 per glass. The CEO plans to use these shot glasses solely to fulfill the regular orders that are impacted by the special order. Should the CEO accept the offer from the supplier? Explain and support your answer with computations.

(d) If Tyrex accepts the special order as well as the offer from the supplier, what is the net financial impact (compared to the current operating income)?

A U.S. company has a subsidiary in Mexico. If the company's income statement reports a loss for conversion of subsidiary accounts to U.S. dollars, the most likely explanation is that:

STEPHENSON REAL ESTATE RECAPITALIZATION Stephenson Real Estate Company was founded 25 years ago by the current CEO, Robert Stephenson. The company purchases real estate, including land and buildings, and rents the property to tenants. The company has shown a profit every year for the past 18 years and the shareholders are satisfied with the company’s management. Prior to founding Stephenson Real Estate, Robert was the founder and CEO of a failed alpaca farming operation. The resulting bankruptcy made him extremely averse to debt financing. As a result, the company is entirely equity financed, with 12 million shares of common stock outstanding. The stock currently trades at $53.80 per share. Stephenson is evaluating a plan to purchase a tract of land in the southeastern United States for $49 million. The land will subsequently be leased to tenant farmers. This purchase is expected to increase Stephenson’s annual pretax earnings by $11.5 million in perpetuity. Kim Weyand, the company’s new CFO, has been put in charge of the project. Kim has determined that the company’s current cost of capital is 10.5 percent. She feels that the company would be more valuable if it included debt in its capital structure, so she is evaluating whether the company should issue debt to entirely finance the project. Based on some conversations with investment banks, she thinks that the company can issue bonds at par value with a coupon rate of 7 percent. Based on her analysis, she also believes that a capital structure in the range of 70 percent equity/30 percent debt would be optimal. If the company goes beyond 30 percent debt, its bonds would carry a lower rating and a much higher coupon because the possibility of financial distress and the associated costs would rise sharply. Stephenson has a 21 percent corporate tax rate (state and federal).

1.If Stephenson wishes to maximize its total market value, would you recommend that it issue debt or equity to finance the land purchase? Explain.

2.Construct Stephenson’s market value balance sheet before it announces the purchase.

3.Suppose Stephenson decides to issue equity to finance the purchase.

a.What is the net present value of the project?

b.Construct Stephenson’s market value balance sheet after it announces that the firm will finance the purchase using equity. What would be the new price per share of the firm’s stock? How many shares will Stephenson need to issue to finance the purchase?

c.Construct Stephenson’s market value balance sheet after the equity issue but before the purchase has been made. How many shares of common stock does Stephenson have outstanding? What is the price per share of the firm’s stock?

d.Construct Stephenson’s market value balance sheet after the purchase has been made.

4.Suppose Stephenson decides to issue debt to finance the purchase.

a.What will the market value of Stephenson be if the purchase is financed with debt?

b.Construct Stephenson’s market value balance sheet after both the debt issue and the land purchase. What is the price per share of the firm’s stock?

5.Which method of financing maximizes the per-share stock price of Stephenson’s equity?

You graduated college six years ago with an undergraduate degree in Finance. Although satisfied with your current job, your goal is to become an investment banker, and you wonder if an MBA degree would allow you to achieve that goal. After examining schools, you have narrowed your choice to either Wilton University or Mount Perry College. Although internships are encouraged by both schools, to get credit for the internship, no salary can be paid. Other than internships, neither school will allow students to work while enrolled on the MBA program. However, thanks to a bequest from your grandmother, your savings account has enough money to cover the entire cost of the MBA program

You currently work a money management firm, earning $53, 000 annually. Your salary is expected to increase 3% per year until retirement. You expect to work for 38 more years. Your current job includes a fully paid health insurance plan. Your current average tax rate is 26%.

The Ritter College of Business at Wilton University is one of the top MBA programs in the country. The MBA degree requires 2 years of full-time enrollment at the university. Annual tuition is $58,000, payable at the beginning of each school year. Books and other supplies are estimated to cost $2,000 per year. Upon graduation from Wilton you expect to receive a job offer for about $87,000 per year, with a $10,000 signing bonus. Because of the higher salary, your tax rate will increase to 31%. Annual salary increases are expected to be at 4% per year.

The Bradley School of Business at Mount Perry College began its MBA program 16 years ago. The Bradley School is smaller and less well known than Ritter College. Bradley offers an accelerated one-year program; cost of tuition for the program is $75,000, to be paid upon matriculation. Books and other supplies are expected to cost $4,200. You think that you will receive an offer of $78,000 per year upon graduation, with an $8,000 signing bonus, resulting in an average tax rate of 29%. The salary at this job would increase 3.5% per year.

Both schools offer comparable health insurance that will cost $3,000 per year, payable at the beginning of the year. Both schools also offer graduate housing, that will result in a decrease to your current room and board expenses of $4,000 per year, whichever school you attend.

Assume the appropriate discount rate is 5.5%.

REQUIRED:

Respond to the following questions. Each response must comprise at least three complete sentences, with proper grammar and punctuation. All calculations that support your answers must be shown in their entirety. Cite any referenced materials using APA format.

1. Does your age affect your decision to get an MBA? If so, how?

2. What other, perhaps nonquantifiable, factors affect your decision to get an MBA?

3. Assuming all salaries are paid at the end of each year, what is your best option from a strictly financial standpoint?

4. A friend suggests that the appropriate analysis is to calculate the future value of each option. How would you evaluate this statement?

5. What initial salary would you need to receive to make you indifferent between attending Wilton University and staying in your current position?

6. Suppose that instead of being able to cover the cost of the MBA from your savings, you must borrow money. (The current borrowing rate is 5.4%) How does this affect your decision?

Case 10.1 Zappos Eliminates Managers

Online shoe retailer Zappos (an Amazon company) is known for its exceptional customer service, a strong culture based on 10 core values, and encouraging the individuality of employees. Tony Hsieh, Zappos CEO and co-founder, has become well known for his mantra of “delivering WOW!” to the company’s many satisfied customers and recognizing employees as a key component of the firm’s overall success.

Typically earning a spot on Fortune’s annual “100 Best Companies to Work For” list, Zappos has recently been in the news for other reasons. Several years ago, Hsieh decided to implement a new business strategy called holacracy, in which management jobs and titles are eliminated, and self-managed teams are the core of a flat organizational structure.

Created by software engineer Brian Robertson, holacracy replaces a typical vertical hierarchy with a series of self-managed work circles that operate with a certain amount of overlap when it comes to employees’ roles. Each circle is led by people called “lead links,” responsible for making sure the team gets its work done; however, these leads have little or no formal authority and cannot force employees to do anything they don’t want to do.

In 2013, Zappos’ HR department was the first group to implement the new holacratic approach. But Hsieh thought the implementation process was too slow, and the company was left operating with both the old management structure for some departments and new work teams in other parts of the organization. So Hsieh decided to “rip the band-aid off” and accelerate the implementation of holacracy throughout the entire organization. Effective April 30, 2015, in an effort to eliminate the company’s management hierarchy, there would be no more people managers, and certain departments within the organization (e.g., merchandising, finance, technology, and marketing) would be phased out and those jobs would transfer to roles in the appropriate work circles.

As part of the process, Hsieh sent a lengthy e-mail to employees, explaining why he believed holacracy was important and how it would help spark innovation. Recognizing that not everyone would thrive in a team atmosphere, Hsieh offered employees the opportunity to leave the company with a minimum of three months of severance pay and paid health care benefits for a specific period of time. For some Zappos veterans, the offer was even more generous: one month of pay for Page 278every year worked at the company. To date, more than 30 percent of the company’s 1,600 employees have either taken the offer to leave or left on their own to seek employment elsewhere.

Hsieh hopes holacracy will help employees operate more like entrepreneurs and less like cogs in a bureaucratic structure. He also thinks this new team approach could help create unlikely collaborations that could lead to more innovation and creativity in the organization.

The changeover has not been without obstacles. In addition to losing experienced employees (including former managers), the new approach continues to cause confusion among employees who were use to seeking advice and direction from their supervisors—who are now gone or who are now co-workers in the flat organizational structure. Also, in the coming year, former managers who have new roles at the company will, in all likelihood, experience pay cuts because their responsibilities as managers have been eliminated in the new team approach. Some critics say there is little or no motivation for people to stay at Zappos if there is no opportunity for advancement up the corporate ladder.

Although he regrets not implementing holacracy sooner, Hsieh says it’s too early to tell whether the self-managed teams approach will be a success. (Holacracy’s creator says it takes between 5 and 10 years before a company will know whether the new team approach will be successful.) Hsieh firmly believes that the company’s core values and strong culture provide a solid foundation for such an exciting and bold move to self-managed teams. However, Zappos’ employees don’t seem convinced that the team experiment will lead to success. In addition to losing nearly one-third of its employees, for the first time in eight years, Zappos did not earn a spot on Fortune’s “100 Top Companies” list in 2016, where employees’ positive evaluations of their company count heavily in the final rankings.

Questions

Do you think the new self-managed team approach at Zappos helps employees become more innovative in their new roles? Explain.

If you were Hsieh, how would you respond to critics who say people have little or no incentive to stay with Zappos because there is no opportunity for advancement?

If you were a manager at Zappos, would you take the offer to leave the company?

The Big Easy Company is a fictitious conglomerate with divisions in the retailing, manufacturing, and insurance industries. The retailing division consists of a chain of office supply stores known as Super Broke. You are the divisional controller of Super Broke. Pricing and product-line strategy decisions at Super Broke are made by the CEO, Steve Rogers, with input from the Vice President of Marketing. Fallout’s VP of Marketing has just resigned, and the CEO wants to reevaluate the pricing and product-line strategy decisions for each division. Big Easy’s CFO has asked you to complete this assignment for Super Broke without her assistance. For the purpose of deciding about pricing and product-line strategy at Super Broke, you are to provide the CEO with an interactive report presenting the sales and profits of Super Broke for the last three years. Be sure to compare sales and profits side-by-side in the same chart. You want the CEO to get the best impression of Super Broke’s performance.

. Write a one-page memo to the CEO describing the data and how Tableau can be used to assist management in making additional pricing and product line strategy decisions. Note - The memo should not read like a marketing piece for Tableau. The focus of the memo is the output of your review of the data, your recommendations to the CEO, and how Tableau could be used to make additional decisions.

I just need an idea on how to start and what to include. Thank you.