anuary 3rd, 2013. Jonathan Allen is the CFO of Trojan, Inc., a food-catering company based in Miami, Fla. Founded in 2007, and after struggling during the difficult 2008-2009 recession years in the United states, the company found a successful niche, specializing in the delivery of top quality individual meals for the airline industry’s business class segment. The company went public in June 2012 and its stock currently trades at $35. With the success of its airline business in the US, it is looking to expand its catering services to other highend segments in other markets such as railroad and sea cruise travelers, both domestic and international. The Trojan management team believes that, as a result of this expansion plan, the stock should grow at an average rate of 8% per year for at least the next 10 years to come. As a result of this ambitious expansion program, Allen realizes that the company will need a substantial amount of additional funding, far beyond the proceeds received last year from its I.P.O. A new stock issue is obviously out of the question. Bank debt might be available but only for a relatively short-term maturity (1-3 years), and perhaps not in sufficient amounts. Trojan needs to raise about $50,000,000 for 7 years to complete its expansion program. A traditional bond issue might be an option, but the straight bond market is very crowded at the moment and Allen fears that, since Trojan is relatively young and unrated, investors may not have any interest, unless it pays a high annual coupon, 9% (the current market interest rate for 7-year money for a company similar to Trojan) , which it cannot afford at the moment. So, Allen is looking into either issuing 1) a bond with warrants, or 2) a convertible bond. Both would have a maturity of 7 years, and a total amount issued of $50,000,000 (50,000 bonds at a $1,000 par value). The issue is expected to take place at the beginning of 2014. Allen is working with a local investment bank to help the company design the most appropriate terms for each issue before making a final decision on which to choose. Bond with warrants: Each bond will have 25 warrants attached to it, with a strike price of $42. The warrant may only be exercised at the end of Year 4 or thereafter. The estimated value of each warrant should be $5 when the bond is issued (assuming no significant changes in market conditions between now and the end of the year). The investment bank will charge a one-time 3.50% flotation fee on the total amount of the issue for the bond with warrants, to be paid on the day of the issue. Convertible bond: The bond will have a conversion ratio (CR) of 20 shares per bond. The convertible bond has an annual coupon rate of 7% and is callable by the issuer at the end of Year 5 or thereafter (by callable, we mean that Trojan has the right to force the conversion from bond into stock). The investment bank will charge a one-time 4.00% flotation fee on the total amount of the issue for the convertiible bond, to be paid on the day of the issue.

1) What should be the fixed annual coupon, in US$, of the bond with warrants (please round up to the nearest dollar)? As a result, what will be the percentage coupon rate (rounded up to the nearest percentage point – i.e., no decimals)? 2) What will be the effective cost of capital to Trojan of the bond with warrant issue, if the bondholders exercise their warrants at the end of Year 4? Include all types of costs mentioned in the case, and express the cost as an annual percentage rate (to the nearest 2 decimals)? 3) What is the “floor value” of the convertible bond in Year 0? At the end of Year 5? 4) What will be the effective cost of capital to Trojan of the convertible bond, if Trojan calls the bond (i.e., forces conversion) at the end of Year 5? Include all types of costs mentioned in the case, and express the cost as an annual percentage rate (to the nearest 2 decimals)? 5) From a cost standpoint only, which issue should Trojan choose? 6) Aside from the cost factor above, what would be the pros and cons of either issue to Trojan? 7) All things considered, which of the two above issues would you recommend to Trojan, assuming they must choose between one or the other? Explain.

Silvah Leasing Ltd. (SLL) is a private company founded over 20 years ago. Its main business is providing lease financing to small to medium-size local businesses for financing their operating equipment, store fixtures, and so on.

SLL’s business is direct lease financing, and the company never takes ownership of any of the leased assets. Leasing is popular with smaller businesses since the economy has been in a recession, and leasing assets rather than buying conserves cash. Many larger financial institutions have become more active in selling leases to the smaller customers that have been

SSL’s main source of business, to increase their own revenues during the recessionary times. Equipment vendors are also increasingly providing financing with equipment sales to increase their own business.

D. Silvah owns the majority of the common shares and runs the business with three employees. There are two minority shareholders who are family members, M. Silvah and J. Silvah. Your firm has audited SLL for several years. The company’s bank demands annual audited financial statements because of SLL’s large outstanding bank loan.

How does management’s integrity impact the auditor’s risk assessment process?

New Macomb Wholesale Distributor made the following transactions in year 7.
Record all the transactions in general journal form.

feb 8th Bought inventory on account from Fountain Mfg. company for $18,600.00. terms 3/15, net 60.

feb 10th Paid $375 to Hare transport for shipping charges for inventory we are acquiring

feb 13th Sold merchandise on acct. to Alixx Co. for $92,500. All on acct. sales are with terms 1/10, net 30.
This merchandise cost us $55,500.

feb 16th Fountain Mfg. company issued us a 350.00 credit memo related to our purchase made on feb. 8th.

feb 17th Sold merchandise on acct. to Tyrone Sports Co. for $10,300. This merchandise cost us 9,455.

feb 19th Fully paid what is owed to Fountain Mfg.

feb 20th Alixx Co. returned 1/4 of what they purchased on the 13th.

feb 21st Alixx Co. fully paid what they owe us.

Mar 1st Tyrone Sports fully paid what they owe us.

Question 1

A US company that has purchased inventory from a German supplier would be exposed to a net exchange gain on the unpaid balance if

a-The amount to be paid was denominated in dollars

b-The Dollar weakened in relation to the Euro and the Euro was the denominated currency

c-The Dollar strengthened relative to the Euro and the Euro was the denominated currency

d-The company signed a forward contract for the purchase of Euros

Question 2

When the affiliated companies sell on credit the commercial balances, the accounts receivable and the intercompany payables:

a-Appear only in the books of the parent in the consolidated statements

b- They appear only in the books of the subsidiary in the consolidated statements

c-Appear in the books of both the parent company and the subsidiary in the consolidated statements

d-They do not appear in the consolidated statements

Question 3

You are the controller of company P and you have been asked to review this situation to see if it is in the best interest of the company. Company P would like to sell bonds to obtain financing. Company P has an 80% interest in company S and interest rates are down. Company S is smaller than company P and has a lower credit rating. Company P wants to reduce interest costs on company debt S. You have decided

a-Intercompany debt is eliminated when the consolidated statements are prepared so it would be a good idea

bThe intercompany debt would not be eliminated when the consolidated statements are prepared, therefore, it shows a high current relation with the parent company.

c-The intercompany debt would not be eliminated when the consolidated statements were prepared, which would show a high current ratio with the subsidiary

d-A parent can not incur debt for a subsidiary

Question 4

A sign of significant influence in the accounting of capital investments would be:

a-Shared management, employees or technology between the investment and the investor

b-Shared external auditor.

c-Greater percentage of ownership by third parties.

d-Great decrease in the market price per common share

Question 5

A company has purchased, for 50,000 FCs, an electric generator from a foreign company. The exchange rates were 1 FC = $ 0.90 on the delivery date and 1 FC = $ 0.76 when the payment was paid. What is the final value registered if the two-transaction method is used?

a- $ 38,000

b- $ 40,000

c- $ 45,000

d- $ 50,000

Question 6

A arm's length transaction, which would be reflected in the consolidated financial statements, would include:

a-A loan to the president of the subsidiary company

b-The purchase of material from a supplier abroad

c-The sale of fixed assets that are no longer needed to the subsidiary

d-Sales of inventory to a subsidiary

Question 7

The equity method of investment accounting would apply in which situation:

a-When 20-50% of preferred shares are owned

b-When a threshold of 15-20% of the ownership of ordinary shares is reached.

c-When consolidation is impracticable.

d - When less than 20% of the ordinary shares are owned, if the investor can exercise a significant influence over the operations of the investees.

Question 8

An economic advantage of a business combination includes

a-Use of duplicate assets

b-Create separate management teams

c-Coordinated marketing campaigns

d-Combination of levels horizontally within the marketing chain

Question 9

Assuming that the functional currency of a foreign subsidiary is not the local currency, which of the following accounts would be re-evaluated at the historical rate?

a-Accounts Payable

b-Notes payable in the long term

c-Lands

d-Sales Income

Question 10

Callie was admitted to the Adams & Beal Partnership four years ago. The association has a deficiency at the end of the year for the current year. How could this deficiency be accounted for?

a-Use the profit and loss ratios to absorb the deficiency

b-Do not account for the loss in the incurred year, this can be compensated with the income in future years

c-Do not account for the loss in the incurred year, this could be compensated with the income in future years or recovered to compensate the income in previous years

d-The losses are not transmitted to the individual partners of an association

This an American History question:

What were some main events in the post-Civil War Era that might enable us to draw a straight line to the Progressive Era?

Who was included in this vision of Progressivism and who was left out? Why?

A random sample of 40 students taken from a university showed that their mean GPA is 2.94 and the standard deviation of their GPAs is .30. Construct a 99% confidence interval for the mean GPA of all students at this university

Suppose that at a large university 30% of students are involved in intramural sports. If we randomly select 12 students from this university, what is the probability that no more than 4 of these students are involved in intramural sports?

The following ten key terms were listed under “Income or Loss From A Business”.

(Go to the bottom of this question for the answer sheet)

1.  Accrual Basis            

2.  Crowdfunding           

3.  Hobby Farmer          

4.  Business Income      

5.  Reserve                   

6.  Restricted Farm Loss

7. Net Business Income

8. Year ended December 31  

9. Investment Portfolio (mutual funds) 

10. Cash Basis  

The following list contains 13 potential definitions for the preceding key terms.

A.  Income that is earned through active business activity.  This would include amounts earned by producing goods, selling goods or services, or delivering services.

B.  A method of accounting for income based on cash receipts and cash disbursements.

C.  Income that is earned through active business activity.  This would include amounts earned by producing goods, selling goods or services, or selling capital assets.

D.  Funding large events with crowds in attendance in order to support specific products which the business sells.

E.  A deduction in the calculation of net business income or net taxable capital gains.

F.  The period that is covered by a taxpayer’s return.  

G.  A self-sustaining integrated set of activities and assets conducted and managed for the purpose of providing a return to investors

H. The net of inclusions less deductions, related to business income

I.   An amount of resources set aside to provide for future obligations.

J. Funding a project, venture or business by raising funds from a large number of people, usually in small amounts and usually via the internet.

K. A method of accounting for income based on recording assets when the right to receive them is established and liabilities when the obligation to pay them arises.

L. A farmer who operates a farm as a hobby but has a reasonable expectation of making a profit.

N. A part-time farmer who does not have a reasonable expectation of profit.

O. None of the above definitions apply.  (This answer can be used more than once.

Conch Republic Electronics

Conch Republic Electronics is a midsized electronics manufacturer located in Key West, Florida. The company president is Shelley Couts, who inherited the company. When it was founded over 70 years ago, the company originally repaired radios and other household appliances. Over the years, the company expanded into manufacturing and is now a reputable manufacturer of various electronic items. Jay McCanless, a recent MBA graduate, has been hired by the company’s finance department.

One of the major revenue-producing items manufactured by Conch Republic is a personal digital assistant (PDA). Conch Republic currently has one PDA model on the market, and sales have been excellent. The PDA is a unique item in that it comes in a variety of tropical colors and is preprogrammed to play Jimmy Buffett music. However, as with any electronic item, technology changes rapidly, and the current PDA has limited features in comparison with newer models. Conch Republic spent $750,000 to develop a prototype for a new PDA that has all the features of the existing PDA but adds new features such as cell phone capability. The company has spent a further $200,000 for a marketing study to determine the expected sales figures for the new PDA.

Conch Republic can manufacture the new PDA for $155 each in variable costs. Fixed costs for the operation are estimated to run $4.7 million per year. The estimated sales volume is 74,000, 95,000, 125,000, 105,000, and 80,000 per each year for the next five years, respectively. The unit price of the new PDA will be $360. The necessary equipment can be purchased for $21.5 million and will be depreciated on a seven-year MACRS schedule. It is believed the value of the equipment in five years will be $4.1 million.

As previously stated, Conch Republic currently manufactures a PDA. Production of the existing model is expected to be terminated in two years. If Conch Republic does not introduce the new PDA, sales will be 80,000 units and 60,000 units for the next two years, respectively. The price of the existing PDA is $290 per unit, with variable costs of $120 each and fixed costs of $1,800,000 per year. If Conch Republic does introduce the new PDA, sales of the existing PDA will fall by 15,000 units per year, and the price of the existing units will have to be lowered to $255 each. Net working capital for the PDAs will be 20 percent of sales and will occur with the timing of the cash flows for the year; for example, there is no initial outlay for NWC, but changes in NWC will first occur in year 1 with the first year’s sales. Conch Republic has a 35 percent corporate tax rate and a 12 percent required return.

Shelly has asked Jay to prepare a report that answers the following questions.

Questions

1.            What is the payback period of the project?

2.            What is the profitability index of the project?

3.            What is the IRR of the project?

4.            What is the NPV of the project?