January 2010, Giant Green Company pays $3,400,000 for a tract of land with two buildings on it. It plans to demolish Building 1 and build a new store in its place. Building 2 will be a company office; it is appraised at $782,000, with a useful life of 25 years and a $79,000 salvage value. A lighted parking lot near Building 1 has improvements (Land Improvements 1) valued at $440,500 that are expected to last another 18 years with no salvage value. Without the buildings and improvements, the tract of land is valued at $2,420,600. Giant Green also incurs the following additional costs:

What is the amount that should be recorded for Land?

5. A bank is financing 100% of the construction costs of a real estate development secured by a 1st mortgage on the property (land + structure). With a full draw-down of the facility, the $340K budgeted project cost is now only 75% completed vs. estimated costs to fully complete. The land was appraised at $185K based on the planned construction. Unpaid sub-trades, whose value is not yet counted in the building’s value to date, amount to $13. The expected cost over-run cannot be covered by the owners. The bank may fund the costs to complete if it is in its best interests. Alternatively, it can demolish the structure and sell the raw land for $350K on a standalone, undeveloped basis since RE prices have risen. It can then possibly sue the guarantor for any unrecovered amounts. Demolition costs of the existing structure are estimated to be $65K. Assuming the completed property could be sold at its invested cost outlay, what is the loan-to-value percentage of its two options (complete/demolish)?: *

a 88%/112%

b 54%/156%

c 71%/119%

d 109%/56%

6. A lender to a large corporation has $150 million in subordinated (“junior” vs. all other debts), unsecured bonds outstanding. “Senior” secured debentures amount to $75 million. Short-term bank debt secured by a charge over $50 million of A/R amounts (40% collectible) to $14 million. Trade suppliers are owed $34 million. The income tax authorities are owed $12 million. Unpaid payroll deductions for the state’s social security taxes are $4.5 million. Customer deposits for undelivered product orders amount to $1.5 million. The net realizable liquidation value of all assets is estimated to be $234 million after all costs. The recovery rate on the subordinated bonds will be: *

a 62%

b 89%

c 108%

d 43%

a) A manager of a firm in the area of Dukagjini region is considering to knocking down the old barn to provide much needed parking space for tractors and equipment. This project would require an immediate expense of £110,000 to remove the asbestos and to knock down the barn. Building the car park would then cost £17,000. The space created would have spare capacity, which will be rented out at £45,000 (pre-tax) per year for parking and other uses. This project also lasts five years and has no residual value at the end. The farmer is able to depreciate the total cost of removing the asbestos, knocking down the building and building the car park. This is done over the five years of the project using the straight-line method. The corporate tax rate is 28%. The nominal discount rate is 3% and all cash flows are nominal values. . At the moment the farmer is paying £3,000 per year (post-tax) to park these on a neighbour’s land.

Calculate the net present value of this project.

b) An alternative is to expand its production capacities. The only possible location is an old barn owned by the farm but not utilised because of asbestos contamination. For legal reasons the building cannot be sold or leased. At a cost of £2,000, the farmer hired an environmental expert, who produced a report with detailed plans for the removal of the asbestos in compliance with environmental regulations. To refurbish the barn—including removing the chemical substances it is expected to cost £350,000. The cheesemaking equipment costs £150,000. Starting at the end of year one, cheese production is expected to yield £170,000 yearly for five years in pre-tax revenue minus cash expenses. The firm depreciates the refurbishment cost and the cost of the cheese-making equipment over the five years of the project using the straight-line method. There is no residual value at the end of the project. The corporate tax rate is 28%. The nominal discount rate is 7% and all values are nominal values.

Calculate the net present value of this project.

c) The farmer asks for your advice on how to choose between the two projects using the information in Parts (a) and (b. What would be your advice to the farmer? Explain.

d) Why might it be appropriate to use different discount rates for different projects, such as those in Parts (a) and (b)? Briefly explain.

Saving the Glaciers

The glaciers have been disappearing from Glacier National Park in Montana and adjoining Waterton National Park in Canada. In 1850, Glacier is said to have had 150 glaciers; in 2006 there were 27. In response to this trend, various organizations petitioned for the parks to be designated endangered by being placed on the danger list of the World Heritage Committee. As one report says,

Endangered status would require the World Heritage Committee to find ways to mitigate how climate change affects the park, [the law professor who wrote the petition] said . . . Better fuel efficiency for automobiles and stronger energy efficiency standards for buildings and appliances are among the ways to reduce greenhouse pollution that contributes to warming, the petition [said].

But some denounced the petition as unnecessary and unsupported by scientific data, while one group of scientists estimated that if climate trends continue, Glacier Park’s glaciers will disappear completely by 2030.

Justify your answers: Suppose the glaciers’ melting would have no appreciable effect on the environ- ment except that they would no longer exist. Would conservationists still be justified in trying to save the glaciers? If so, how could they justify their efforts? If not, why not? Suppose the glaciers could be saved only if the government spends $10 billion on pollution controls—money that would have to be taken away from social programs. Would this cost be worth it? Why or why not? Using the utilitarian Theory

SYN 960 Business Government & Society

Albright College

Application Test #1

Read the following case below and then answer the questions following the case.

Case: A Brawl in Mickey’s Backyard

Outside City Hall in Anaheim, California—home to the theme park Disneyland—dozens

of protestors gathered in August 2007 to stage a skit. Wearing costumes to emphasize their

point, activists playing “Mickey Mouse” and the “evil queen” ordered a group of “Disney

workers” to “get out of town.” The amateur actors were there to tell the city council in a

dramatic fashion that they supported a developer’s plan to build affordable housing near

the world-famous theme park—a plan that Disney opposed.

“They want to make money, but they don’t care about the employees,” said Gabriel de

la Cruz, a banquet server at Disneyland. De la Cruz lived in a crowded one-bedroom apartment

near the park with his wife and two teenage children. “Rent is too high,” he said. “We

don’t have a choice to go some other place.”

The Walt Disney Company was one of the best-known media and entertainment companies

in the world. In Anaheim, the company operated the original Disneyland theme park,

the newer California Adventure, three hotels, and the Downtown Disney shopping district.

The California resort complex attracted 24 million visitors a year. The company as a whole

earned more than $35 billion in 2007, about $11 billion of which came from its parks and

resorts around the world, including those in California.

Walt Disney, the company’s founder, had famously spelled out the resort’s vision when

he said, “I don’t want the public to see the world they live in while they’re in Disneyland.

I want them to feel they’re in another world.”

Anaheim, located in Orange County, was a sprawling metropolis of 350,000 that had

grown rapidly with its tourism industry. In the early 1990s, the city had designated two square

miles adjacent to Disneyland as a special resort district, with all new development restricted

to serving tourist needs, and pumped millions of dollars into upgrading the area. In 2007, the

resort district—5 percent of Anaheim’s area—produced more than half its tax revenue.

Housing in Anaheim was expensive, and many of Disney’s 20,000 workers could not

afford to live there. The median home price in the community was more than $600,000,

and a one-bedroom apartment could rent for as much as $1,400 a month. Custodians at the

park earned around $23,000 a year; restaurant attendants around $14,000. Only 18 percent

of resort employees lived in Anaheim. Many of the rest commuted long distances by car

and bus to get to work.

The dispute playing out in front of City Hall had begun in 2005, when a local developer

called SunCal had arranged to buy a 26-acre site in the resort district. (The parcel was directly

across the street from land Disney considered a possible site for future expansion.)

SunCal’s plan was to build around 1,500 condominiums, with 15 percent of the units set

aside for below-market-rate rental apartments. Because the site was in the resort district,

the developer required special permission from the city council to proceed.

Affordable housing advocates quickly backed SunCal’s proposal. Some of the unions

representing Disney employees also supported the idea, as did other individuals and groups

drawn by the prospect of reducing long commutes, a contributor to the region’s air pollution.

Backers formed the Coalition to Defend and Protect Anaheim, declaring that “these

new homes would enable many . . . families to live near their places of work and thereby

reduce commuter congestion on our freeways.”

Disney, however, strenuously opposed SunCal’s plan, arguing that the land should be

used only for tourism-related development such as hotels and restaurants. “If one developer

is allowed to build residential in the resort area, others will follow,” a company

spokesperson said. “Anaheim and Orange County have to address the affordable housing

issue, but Anaheim also has to protect the resort area. It’s not an either/or.” In support of

Disney’s position, the chamber of commerce, various businesses in the resort district, and

some local government officials formed Save Our Anaheim Resort District to “protect our

Anaheim Resort District from non-tourism projects.” The group considered launching an

initiative to put the matter before the voters.

The five-person city council was split on the issue. One council member said that if

workers could not afford to live in Anaheim, “maybe they can move somewhere else . . .

where rents are cheaper.” But another disagreed, charging that Disney had shown “complete

disregard for the workers who make the resorts so successful.”

Sources: “Disneyland Balks at New Neighbors,” USA Today, April 3, 2007; “Housing Plan Turns Disney Grumpy,” The New

York Times, May 20, 2007; “In Anaheim, the Mouse Finally Roars,” Washington Post, August 6, 2007; and “Not in Mickey’s

Backyard,” Portfolio, December 2007.

1. Using Disney as the focal organization, identify all the relevant stakeholders to this case.

2. For each of the stakeholders above, clear explain their respective “interest” or claim to the situation using evidence from the case. Also, indicate if each stakeholder is in

favor of, or opposed to, SunCal’s proposed development.

3. What sources of power do each of the relevant stakeholders identified above have in this case?

4. Based on the information you have included in your stakeholder analysis/map, what do you believe is the socially responsible decision for Disney? Justify your solution by applying either the ownership theory of the firm or the stakeholder theory of the firm.

1) Which of the following is not a required disclosure about each major class of capital assets?

A. Beginning-of-year and end-of-year balances showing accumulated depreciation separate from historical cost.

B. Capital acquisitions and sales or other dispositions during the year showing the date and method of acquisition or disposition.

C. Depreciation expense for the current period with disclosure of the amounts charged to each function in the statement of activities.

D. Disclosures describing works of art or historical treasures that are not capitalized and explaining why they are not capitalized.

2) The City of Oak Park constructed a new storage facility using the city's own public works employees. Construction costs were incurred in the amount of $900,000, plus $25,000 in interest on short-term notes used to finance construction. What amount should be capitalized in the government-wide statements?

A. $900,000.

B. $925,000.

C. $875,000.

D. $0.

3) Equipment that had been acquired several years ago by a special revenue fund at a cost of $40,000 was sold for $15,000 cash. Accumulated depreciation of $30,000 existed at the time of the sale. The journal entry to be made in the governmental activities journal will include all of the following except:

     A. A debit to Cash for $15,000.

     B. A debit to Accumulated Depreciation for $30,000.

     C. A credit to Equipment for $40,000.

     D. A credit to Other Financing Sources for $5,000.

4) GASB standards require that general capital assets be recorded in the government-wide statements at:

A. Historical cost.

B. Fair value at the financial statement date.

C. Estimated cost at the financial statement date.

D. None of the options are correct.

5) Which of the following is not true for capital projects funds?

A. Capital projects funds use a Construction Work in Progress account to record costs until the project is completed.

B. Encumbrance accounting is generally used.

C. Capital projects funds use the modified accrual basis of accounting.

D. Capital projects funds have a project-life focus.

6) The liability for general obligation bonds should be recorded in the:

A. General Fund.

B. Capital projects fund.

C. Governmental activities journal.

D. Debt service fund.

7) Which of the following debt service funds would normally have the largest balance in its Fund Balance account?

A. Serial bond debt service fund.

B. Deferred serial bond debt service fund.

C. Irregular serial bond debt service fund.

D. Term bond debt service fund.

8) Which of the following is a true statement regarding in-substance defeasance of bonds?

A. The government must place cash or other assets in an irrevocable trust sufficient to pay all future interest and principal payments for the debt being defeased.

B. The government must agree to maintain sufficient cash and investment balances in its debt service fund to cover all interest and principal payments for the debt being defeased.

C. The government must pledge to transfer amounts to an escrow agent prior to the due date for each interest and principal payment for the debt being defeased.

D. The government must agree to maintain sufficient unrestricted cash and investments in its governmental funds to cover all interest and principal payments for the debt being defeased.

The Empire is building another Death Star. The inputs are capital, labor, raw materials, and robots. The construction manager increases the input robots and discovers that output actually falls. What does this imply about cost?

Consider the assumptions that framed the analysis. Removing a hotel from the secondary competition and add it to the primary competition. What effect does taking out a Hotel from secondary competition has on the overall analysis? On Demand Base , changes in overall penetrations, changes in the market segment penetrations for the individual hotels, market segment mix for the entire market, and demand.