Nelson Products is a price-setter that uses the cost-plus pricing approach. The products are specialty vacuum tubes used in sound equipment. The CEO is certain that the company can produce and sell 300,000 units per year, due to the high demand for the product. Variable costs are $2.30 per unit. Total fixed costs are $980,000 per year. The CEO will receive stock options if $300,000 of operating income for the year is reported. What sales price would allow the CEO to achieve the target if the cost-plus pricing method is used? (Round your answer to the nearest cent.)

4. The data set in CEOSAL2 contains information on chief executive officers for U.S. corporations. The variable salary is annual compensation, in thousands of dollars, and ceoten is prior number of years as company CEO. Write the steps using R Studio!

   1. (a) Find the average salary and the average tenure in the sample.

   2. (b) How many CEOs are in their first year as CEO (that is, ceoten = 0)? What is the longest tenure as a CEO?

   3. (c) Plot scatter plot for log(salary) and ceoten with log(salary) on the y- axis and ceoten on the x-axis. Also plot a line fit on top of the scatter plot. Based on this, do you see negative or positive relationship between log(salary) and ceoten?

   4. (d) Estimate the simple regression model
      log(salary) = β0 + β1ceoten + u

      and report your results in the usual form. What is the (approximate) predicted percentage increase in salary given one more year as a CEO?

Sterling, Inc. is a manufacturer of state-of-the-art computers. For the past ten years, Sterling has acquired all of its microchips from NoBugs Corporation, the only producer of chips meeting Sterling's high specifications. The relationship has been mutually profitable. Sterling could not have built its reputation as an industry leader without NoBugs's reliable and consistently high-quality products; Sterling's business has enabled NoBugs to grow rapidly while providing its investors with an attractive rate of return. Some months ago, several of Sterling's computers exploded shortly after installation. Upon investigation, Sterling discovered that tiny imperfections in NoBugs's microchips had aggravated a dormant design defect in the computers, causing the explosions. Analysis of the chips indicated that they were indeed below specifications and that the imperfections were caused by a slight miscalibration of NoBugs's encoding equipment. NoBugs recalibrated the equipment and promptly resumed production of perfect chips. Sterling's losses from the explosions - lost profits, out-of-pocket costs associated with compensating customers for the explosions, and injury to business reputation - are estimated to exceed $20 million. Sterling and NoBugs disagree on the amount of the loss for which NoBugs should be responsible. Sterling has a strong legal case for breach of contract against NoBugs. Sterling's CEO is considering a lawsuit. She asks you to prepare a report discussing litigation strategy and the advantages and disadvantages of litigation; and discussing pretrial planning should the company opt for litigation.

Before you go into your boss’s office (the COO) for a meeting, you hear him berating the CFO about a local building project your company is currently pursuing.

CFO: “But, Todd, according to the latest projections from the university next year, they anticipate a 22 percent decrease in enrollment. These are the very students we were targeting this complex for. This could result in an estimated loss of revenues of nearly 30 percent!”

COO: “Alex, I’m sick of this discussion. According to your numbers, we’ve already spent $200,000 on the foundation and pipe laying for the utilities to that apartment complex. You’re wanting us to abandon all the money we’ve spent on this project?”  

For the meeting, you are holding in your hand the projections you’ve just finished in order to give to the two officers in the C-suite. It shows the following:

                        Estimated population growth of community over the next 5 years = -1.4 percent

                        Estimated revenues from decreased enrollment projections = $77,000

                        Estimated variable costs from operating complex when opened = $90,000

                        Analysis of community trends: small-town atmosphere, mostly retired homeowners; not expecting growth in middle-class due to COVID-19 effects; college population decreasing

                        Confidence in above estimates= 88 percent

Upon going into the office, the two men look at you quizzically. The COO looks at you and asks your advice. What do you tell him?

The CEO of a mid-sized software company is determined to keep the hierarchy at a minimum number of levels. Will this affect the organization’s ability to control activities? What do you suggest?

Olaf Gundersen,the CEO of wireless telecom company. Accept the Maximum Megahertz project. What do you do if the when project costs and deadlines escalate drastically?

Windsor Park Dominica is owned and operated by a private company, Windees Ltd. You work as the Facilities Manager of the Park and the CEO of the company has asked you to evaluate whether Windees should embark on the expansion of the facility given there are plans by the Government to host Cricket World Cup in 2020. The project seeks to increase the number of seats by building four new box seating areas for VIPs and an additional 4,000 seats for the general public. Each box seating area is expected to generate $300,500 in incremental annual revenue, while each of the new seats for the general public will generate $2,500 in incremental annual revenue. The incremental expenses associated with the new boxes and seating will amount to 70 percent of the revenues. These expenses include hiring additional personnel to handle concessions, ushering, and security. The new construction will cost $15 million and will be fully depreciated (to a value of zero dollars) on a straight-line basis over the 5-year life of the project. The company will have to invest $1.5 million in additional working capital immediately, but the project will not require any other working capital investments during its life. This working capital will be recovered in the last year of the project. The company’s marginal tax rate is 15 percent.

A. What are the incremental cash flows from this project? In other words determine the free cash flow of the project over its life. (You may use the table below to work out this part of the problem)

B. What is the Net Present Value if the project is assessed at a discount rate of 15% and should the project be accepted and why?

C. What is the Internal Rate of Return of the project and should the project be accepted and why?

D. In addition to the above information, you were told that Windees Ltd. has 5,000 bonds issued and outstanding with a 7.0 percent coupon rate compounded semi-annually. These bonds have 7 years left to maturity and they currently sell for 92 percent of par value. The company has 100,000 shares issued and outstanding with a market value of $3.85 per share. The company’s stock has a beta of 1.20. The expected return on the market is 8.0 percent and the yield on the risk-free asset is currently 6.0 percent. The CEO would like to know a fair rate which can be used to assess its cost of capital. You have therefore been asked to calculate the WACC for Windees Ltd

pick from the multiple choice

Under the full goodwill method, a control premium is recognised when:

Fredericks Limited acquired the identifiable assets and liabilities of Nicole Limited for $134 000. The items acquired, stated at fair value, are: plant $72 000; inventories $40 000; accounts receivable $18 000; patents $10 000; accounts payable $16 000. The difference on acquisition is:

Xana Limited paid $110 000 for 60% of the shares in Yama Limited. At the date of acquisition Yama Limited had share capital of $100 000 and retained earnings of $36 000 and all of Yama Limited’s assets and liabilities were recorded at fair value, except for land that was recorded at an amount less than the fair value by $20 000. The company tax rate was 30%. The fair value of identifiable net assets acquired by Xana Limited amounted to:

Bonobo’s Balloons Inc. purchased the $60,000 par value bonds of Gnomes R Us on January 1, 2020. The coupon rate is 8% and the bonds mature in 5 years. The market rate of interest is 12%. The bonds pay interest semi-annually every June 30 and December 31. The bonds were purchased for $51,167.90 and were classified as available-for-sale. Bonobo’s Balloons uses the effective-interest rate method to amortize bond discounts and premiums. At December 31, 2020, the market value of the bonds was $65,000. Bonobo’s Balloons sold the bonds on January 1, 2021, for $65,000.

Instructions

1. Compute the carrying value of the investment at December 31, 2020.
2. Compute the amount of interest revenue earned on this investment at June 30, 2020.
3. Compute the amount of unrealized gain or loss recognized on December 31, 2020. In which financial statement should this amount be reported?
4. Compute the amount of gain or loss recognized on the sale of the investment at January 1, 2021. In which financial statement should this amount be reported?
5. If this investment was instead classified as held-to-maturity, how would this have affected the amount of unrealized gain or loss on December 31, 2020, and how would this have affected its reporting?

Computations:

Carrying value at December 31, 2020:

Interest revenue at June 30, 2020:

Unrealized gain/loss at December 31, 2020:

Gain or loss at January 1, 2021:

Requirement 5: