Suppose 2007 sales are projected to increase by 12.5 percent over 2006 sales. Determine the additional funds needed. Assume that the company was operating with plenty of excess capacity in 2006, that it cannot sell off any of its fixed assets, and that any required financing will be borrowed as notes payable. Also, assume that assets, spontaneous liabilities, and operating costs are expected to increase by the same percentage as sales. Use the percent of sales method to develop a pro forma balance sheet and income statement for December 31, 2007. Use an interest rate of 8 percent on the balance of debt at the beginning of the year to compute interest (cash pays no interest). Use the pro forma income statements to determine the addition to retained earnings.

Michael Rowan owns Michael’s Motor Cars in Lancaster, Pennsylvania. Michael’s motor car business is rather unique. The company is involved in selling used cars, but in a very original and new way. Over the years Michael has developed a new type of customer service. No longer must buyers go from car lot to car lot searching for their “dream car.” Michael’s Motor Cars serves as your personal car shopper. His clientele is limited to very upscale buyers, and he sells only the finest quality automobiles. Through the Internet, Michael’s customers come to him from all over the United States. However, the majority of his customers reside in the northeast region, and this allows for easier delivery and communication with his customers. Whether it’s a 2005 BMW or a 1960 Alfa Romeo, Michael has been able to deliver with little or no complications or rejections. And, typically, the clients will receive their car for less than the Kelly Blue Book value. They are nothing less than high-quality automobiles that Michael has hand-chosen and made flawless through the restoration and detailing performed on each vehicle prior to delivery. With only limited inventory and relatively low overhead, Michael is able to keep his operating costs quite low. One essential part of the automotive retail business is maintaining a strong customer referral base. Michael closely guards his very high reputation, and this allows him to maintain a network of referral clients.
Question 1. What elements of the Macroenvironment Michael’s Motor Cars faces?
Question 2. What opportunities will Michael’s Motor Cars get

Problem 2: (Revised 6.3) Magazine Advertising: In a study of revenue from advertising, data were collected for 41 magazines list as follows. The variables observed are number of pages of advertising and advertising revenue. The names of the magazines are listed as:

Here is the code help you to paste data into your R:

data6<-'Adv Revenue
25 50
15 49.7
20 34
17 30.7
23 27
17 26.3
14 24.6
22 16.9
12 16.7
15 14.6
8 13.8
7 13.2
9 13.1
12 10.6
1 8.8
6 8.7
12 8.5
9 8.3
7 8.2
9 8.2
7 7.3
1 7
77 6.6
13 6.2
5 5.8
7 5.1
13 4.1
4 3.9
6 3.9
3 3.5
6 3.3
4 3
3 2.5
3 2.3
5 2.3
4 1.8
4 1.5
3 1.3
3 1.3
4 1
2 0.3
'
data6n<-read.table(textConnection(object=data6),
header=TRUE,
sep="",
stringsAsFactors = FALSE)

a. You should not be surprised by the presence of a large number of outliers because the magazines are highly heterogeneous and it is unrealistic to expect a single relationship to connect all of them. Find outliers and high leverage points. Delete the outliers and obtain an acceptable regression equation that relates advertising revenue to advertising pages.

b. For the deleted data, check the homogeneity of the variance. Choose an appropriate transformation of the data and fit the model to the transformed data. Evaluate the fit.

Case 7-2 Solutions Network, Inc. (a GVV case)

“We can’t recognize revenue immediately, Paul, since we agreed to buy similar software from DSS,” Sarah Young stated.

“That’s ridiculous,” Paul Henley replied. “Get your head out of the sand, Sarah, before it’s too late.”

Sarah Young is the controller for Solutions Network, Inc., a publicly owned company headquartered in Sunnyvale, California. Solutions Network has an audit committee with three members of the board of directors that are independent of management. Sarah is meeting with Paul Henley, the CFO of the company on January 7, 2016, to discuss the accounting for a software systems transaction with Data Systems Solutions (DSS) prior to the company’s audit for the year ended December 31, 2015. Both Young and Henley are CPAs.

Young has excluded the amount in contention from revenue and net income for 2015, but Henley wants the amount to be included in the 2015 results. Without it, Solutions Network would not meet earnings expectations. Henley tells Young that the order came from the top to record the revenue on December 28, 2015, the day the transaction with DSS was finalized. Young points out that Solutions Network ordered essentially the same software from DSS to be shipped and delivered early in 2016. Therefore, according to Young, Solutions Network should delay revenue recognition on this “swap” transaction until that time. Henley argues against Sarah’s position, stating that title had passed from the company to DSS on December 31, 2015, when the software product was shipped FOB shipping point.

Background

Solutions Network, Inc., became a publicly owned company on March 15, 2011, following a successful initial public offering (IPO). Solutions Network built up a loyal clientele in the three years prior to the IPO by establishing close working relationships with technology leaders, including IBM, Apple, and Dell Computer. The company designs and engineers systems software to function seamlessly with minimal user interface. There are several companies that provide similar products and consulting services, and DSS is one. However, DSS operates in a larger market providing IT services management products that coordinate the entire business infrastructure into a single system.

Solutions Network grew very rapidly during the past five years, although sales slowed down a bit in 2015. The revenue and earnings streams during those years are as follows:

Young prepared the following estimates for 2015:

The Transaction

On December 28, 2015, Solutions Network offered to sell its Internet infrastructure software to DSS for its internal use. In return, DSS agreed to ship similar software 30 days later to Solutions Network for that company’s internal use. The companies had conducted several transactions with each other during the previous five years, and while DSS initially balked at the transaction because it provided no value added to the company, it did not want to upset one of the fastest-growing software companies in the industry. Moreover, Solutions Network might be able to help identify future customers for DSS’s IT service management products.

The $15 million of revenue would increase net income by $1.0 million. For Solutions Network, the revenue from the transaction would be enough to enable the company to meet targeted goals, and the higher level of income would provide extra bonus money at year-end for Young, Henley, and Ed Fralen, the CEO.

Accounting Considerations

In her discussions with Henley, Young points out that the auditors will arrive on January 15, 2016; therefore, the company should be certain of the appropriateness of its accounting before that time. After all, says Sarah, “the auditors rely on us to record transactions properly as part of their audit expectations.” At this point Henley reacts angrily and tells Young she can pack her bags and go if she doesn’t support the company in its revenue recognition of the DSS transaction. Young is taken aback. Henley seems unusually agitated. Perhaps he was under a lot more pressure to “meet the numbers” than she anticipated. To defuse the matter, Sarah makes an excuse to end the meeting prematurely and asks if they could meet on Monday morning, after the weekend. Henley agrees.

Over the weekend, Sarah calls her best friend, Shannon McCollough, for advice. Shannon is a controller at another company and Sarah would often commensurate with Shannon over their mutual experiences. Shannon suggests that Sarah should explain to Paul exactly what her ethical obligations are in the matter. Shannon thinks it might make a difference because Paul is a CPA as well.

After the discussion with Shannon, Sarah considers whether she is being too firm in her position. On the one hand, she knows that regardless of the passage of title to DSS on December 31, 2015, the transaction is linked to Solutions Network’s agreement to take the DSS product 30 days later. While she doesn’t anticipate any problems in that regard, Sarah is uncomfortable with the recording of revenue on December 31 because DSS did not complete its portion of the agreement by that date. She has her doubts whether the auditors would sanction the accounting treatment.

On the other hand, Sarah is also concerned about the fact that another transaction occurred during the previous year that she questioned but, in the end, went along with Paul’s accounting for this transaction. On December 28, 2014, Solutions Network sold a major system for $20 million to Laramie Systems but executed a side agreement with Laramie on that date which gave Laramie the right to return the product for any reason for 30 days. Even though Solutions Network recorded the revenue in 2014 and Sarah felt uneasy about it, she did not object because Laramie did not return the product; her acceptance was motivated by the delay in the external audit until after the 30-day period had expired. Now, however, Sarah is concerned that a pattern may be developing.

Questions

1. Should Sarah follow Shannon’s advice? What if she does and Paul does not back off? What additional levers can she use to influence Paul and make her values understood?
2. What is the most powerful and persuasive response to the reasons and rationalizations Sarah needs to address? To whom should the argument be made? When and in what context?

Case 7-2 Solutions Network, Inc. (a GVV case)

“We can’t recognize revenue immediately, Paul, since we agreed to buy similar software from DSS,” Sarah Young stated.

“That’s ridiculous,” Paul Henley replied. “Get your head out of the sand, Sarah, before it’s too late.”

Sarah Young is the controller for Solutions Network, Inc., a publicly owned company headquartered in Sunnyvale, California. Solutions Network has an audit committee with three members of the board of directors that are independent of management. Sarah is meeting with Paul Henley, the CFO of the company on January 7, 2016, to discuss the accounting for a software systems transaction with Data Systems Solutions (DSS) prior to the company’s audit for the year ended December 31, 2015. Both Young and Henley are CPAs.

Young has excluded the amount in contention from revenue and net income for 2015, but Henley wants the amount to be included in the 2015 results. Without it, Solutions Network would not meet earnings expectations. Henley tells Young that the order came from the top to record the revenue on December 28, 2015, the day the transaction with DSS was finalized. Young points out that Solutions Network ordered essentially the same software from DSS to be shipped and delivered early in 2016. Therefore, according to Young, Solutions Network should delay revenue recognition on this “swap” transaction until that time. Henley argues against Sarah’s position, stating that title had passed from the company to DSS on December 31, 2015, when the software product was shipped FOB shipping point.

Background

Solutions Network, Inc., became a publicly owned company on March 15, 2011, following a successful initial public offering (IPO). Solutions Network built up a loyal clientele in the three years prior to the IPO by establishing close working relationships with technology leaders, including IBM, Apple, and Dell Computer. The company designs and engineers systems software to function seamlessly with minimal user interface. There are several companies that provide similar products and consulting services, and DSS is one. However, DSS operates in a larger market providing IT services management products that coordinate the entire business infrastructure into a single system.

Solutions Network grew very rapidly during the past five years, although sales slowed down a bit in 2015. The revenue and earnings streams during those years are as follows:

Young prepared the following estimates for 2015:

The Transaction

On December 28, 2015, Solutions Network offered to sell its Internet infrastructure software to DSS for its internal use. In return, DSS agreed to ship similar software 30 days later to Solutions Network for that company’s internal use. The companies had conducted several transactions with each other during the previous five years, and while DSS initially balked at the transaction because it provided no value added to the company, it did not want to upset one of the fastest-growing software companies in the industry. Moreover, Solutions Network might be able to help identify future customers for DSS’s IT service management products.

The $15 million of revenue would increase net income by $1.0 million. For Solutions Network, the revenue from the transaction would be enough to enable the company to meet targeted goals, and the higher level of income would provide extra bonus money at year-end for Young, Henley, and Ed Fralen, the CEO.

Accounting Considerations

In her discussions with Henley, Young points out that the auditors will arrive on January 15, 2016; therefore, the company should be certain of the appropriateness of its accounting before that time. After all, says Sarah, “the auditors rely on us to record transactions properly as part of their audit expectations.” At this point Henley reacts angrily and tells Young she can pack her bags and go if she doesn’t support the company in its revenue recognition of the DSS transaction. Young is taken aback. Henley seems unusually agitated. Perhaps he was under a lot more pressure to “meet the numbers” than she anticipated. To defuse the matter, Sarah makes an excuse to end the meeting prematurely and asks if they could meet on Monday morning, after the weekend. Henley agrees.

Over the weekend, Sarah calls her best friend, Shannon McCollough, for advice. Shannon is a controller at another company and Sarah would often commensurate with Shannon over their mutual experiences. Shannon suggests that Sarah should explain to Paul exactly what her ethical obligations are in the matter. Shannon thinks it might make a difference because Paul is a CPA as well.

After the discussion with Shannon, Sarah considers whether she is being too firm in her position. On the one hand, she knows that regardless of the passage of title to DSS on December 31, 2015, the transaction is linked to Solutions Network’s agreement to take the DSS product 30 days later. While she doesn’t anticipate any problems in that regard, Sarah is uncomfortable with the recording of revenue on December 31 because DSS did not complete its portion of the agreement by that date. She has her doubts whether the auditors would sanction the accounting treatment.

On the other hand, Sarah is also concerned about the fact that another transaction occurred during the previous year that she questioned but, in the end, went along with Paul’s accounting for this transaction. On December 28, 2014, Solutions Network sold a major system for $20 million to Laramie Systems but executed a side agreement with Laramie on that date which gave Laramie the right to return the product for any reason for 30 days. Even though Solutions Network recorded the revenue in 2014 and Sarah felt uneasy about it, she did not object because Laramie did not return the product; her acceptance was motivated by the delay in the external audit until after the 30-day period had expired. Now, however, Sarah is concerned that a pattern may be developing.

Questions

1. Should Sarah follow Shannon’s advice? What if she does and Paul does not back off? What additional levers can she use to influence Paul and make her values understood?
2. What is the most powerful and persuasive response to the reasons and rationalizations Sarah needs to address? To whom should the argument be made? When and in what context?

Solutions Network, Inc. (a GVV case)
Question:

   
    Should Sarah follow Shannon’s advice? What if she does and Paul does not back off? What additional levers can she use to influence Paul and make her values understood?

“We can’t recognize revenue immediately, Paul, since we agreed to buy similar software from DSS,” Sarah Young stated.

“That’s ridiculous,” Paul Henley replied. “Get your head out of the sand, Sarah, before it’s too late.”

Sarah Young is the controller for Solutions Network, Inc., a publicly owned company headquartered in Sunnyvale, California. Solutions Network has an audit committee with three members of the board of directors that are independent of management. Sarah is meeting with Paul Henley, the CFO of the company on January 7, 2016, to discuss the accounting for a software systems transaction with Data Systems Solutions (DSS) prior to the company’s audit for the year ended December 31, 2015. Both Young and Henley are CPAs.

Young has excluded the amount in contention from revenue and net income for 2015, but Henley wants the amount to be included in the 2015 results. Without it, Solutions Network would not meet earnings expectations. Henley tells Young that the order came from the top to record the revenue on December 28, 2015, the day the transaction with DSS was finalized. Young points out that Solutions Network ordered essentially the same software from DSS to be shipped and delivered early in 2016. Therefore, according to Young, Solutions Network should delay revenue recognition on this “swap” transaction until that time. Henley argues against Sarah’s Page 474 position, stating that title had passed from the company to DSS on December 31, 2015, when the software product was shipped FOB shipping point.
Background

Solutions Network, Inc., became a publicly owned company on March 15, 2011, following a successful initial public offering (IPO). Solutions Network built up a loyal clientele in the three years prior to the IPO by establishing close working relationships with technology leaders, including IBM, Apple, and Dell Computer. The company designs and engineers systems software to function seamlessly with minimal user interface. There are several companies that provide similar products and consulting services, and DSS is one. However, DSS operates in a larger market providing IT services management products that coordinate the entire business infrastructure into a single system.

Solutions Network grew very rapidly during the past five years, although sales slowed down a bit in 2015. The revenue and earnings streams during those years are as follows:
Year    Revenues (millions)    Net Income (millions)
2010    $148.0    $11.9
2011        175.8        13.2
2012        202.2        15.0
2013        229.8        16.1
2014        267.5        17.3

Young prepared the following estimates for 2015:
Year    Revenues (millions)    Net Income (millions)
2015 (projected)    $262.5    $16.8
The Transaction

On December 28, 2015, Solutions Network offered to sell its Internet infrastructure software to DSS for its internal use. In return, DSS agreed to ship similar software 30 days later to Solutions Network for that company’s internal use. The companies had conducted several transactions with each other during the previous five years, and while DSS initially balked at the transaction because it provided no value added to the company, it did not want to upset one of the fastest-growing software companies in the industry. Moreover, Solutions Network might be able to help identify future customers for DSS’s IT service management products.

The $15 million of revenue would increase net income by $1.0 million. For Solutions Network, the revenue from the transaction would be enough to enable the company to meet targeted goals, and the higher level of income would provide extra bonus money at year-end for Young, Henley, and Ed Fralen, the CEO.
Accounting Considerations

In her discussions with Henley, Young points out that the auditors will arrive on January 15, 2016; therefore, the company should be certain of the appropriateness of its accounting before that time. After all, says Sarah, “the auditors rely on us to record transactions properly as part of their audit expectations.” At this point Henley reacts angrily and tells Young she can pack her bags and go if she doesn’t support the company in its revenue recognition of the DSS transaction. Young is taken aback. Henley seems unusually agitated. Perhaps he was under a lot more pressure to “meet the numbers” than she anticipated. To defuse the matter, Sarah makes an excuse to end the meeting prematurely and asks if they could meet on Monday morning, after the weekend. Henley agrees.

Over the weekend, Sarah calls her best friend, Shannon McCollough, for advice. Shannon is a controller at another company and Sarah would often commensurate with Shannon over their mutual experiences. Shannon suggests Page 475 that Sarah should explain to Paul exactly what her ethical obligations are in the matter. Shannon thinks it might make a difference because Paul is a CPA as well.

After the discussion with Shannon, Sarah considers whether she is being too firm in her position. On the one hand, she knows that regardless of the passage of title to DSS on December 31, 2015, the transaction is linked to Solutions Network’s agreement to take the DSS product 30 days later. While she doesn’t anticipate any problems in that regard, Sarah is uncomfortable with the recording of revenue on December 31 because DSS did not complete its portion of the agreement by that date. She has her doubts whether the auditors would sanction the accounting treatment.

On the other hand, Sarah is also concerned about the fact that another transaction occurred during the previous year that she questioned but, in the end, went along with Paul’s accounting for this transaction. On December 28, 2014, Solutions Network sold a major system for $20 million to Laramie Systems but executed a side agreement with Laramie on that date which gave Laramie the right to return the product for any reason for 30 days. Even though Solutions Network recorded the revenue in 2014 and Sarah felt uneasy about it, she did not object because Laramie did not return the product; her acceptance was motivated by the delay in the external audit until after the 30-day period had expired. Now, however, Sarah is concerned that a pattern may be developing.

Question:

   
    Should Sarah follow Shannon’s advice? What if she does and Paul does not back off? What additional levers can she use to influence Paul and make her values understood?

Pole Position, a retailer at Destiny Mall, has a variable cost of $5 per lap driven. It has identified two segments of customers: Hard-Core drivers and Just-For-Fun drivers. For simplicity, throughout this problem, assume there is exactly one customer in each of the two segments. Market research has revealed how each segment values the experience, depending on how many laps are raced:

8. Suppose Pole Position offers customers two options: Package A provides a customer a 3-lap race for $42.99; Package B provides a customer a 8-lap race for $86.99.

1. Which package would a Hard-Core driver buy?
2. Which package would a Just-For-Fun driver buy?
3. How much profit would Pole Position earn from this pricing strategy consisting of a menu of two packages?.
4. How does the profit from 8c compare to the profits from the previous pricing strategies?

QUESTION 1

What is the Marginal Revenue at a quantity of 5?

QUESTION 2

What is the Marginal Cost at a quantity of 7?  

QUESTION 3

Using the MR-MC rule, what is the profit maximizing quantity this firm should produce?

QUESTION 4

How much profit do they make at this quantity?

Propensity Score Matching or Weighted Least Squares

A highly paid consulting firm did a study to determine if privately-held financial firms hire fewer women than publicly-held firms. The consulting firm randomly picked 500 privately-held firms and 500 publicly-held firms to interview Among the publicly-held firms, 450 of the 500 firms respond to the survey. The following table gives the results of the study:

Since the non-responding firms may not have been a random sample, the estimates of the percent of women in each type of firm may be biased. Find the bounds on the proportion of women hired in each type of firm if all firms had responded. (You should have upper and lower bounds for both publicly-and privately-held firms.)

Mike Jackson and Terrence Jensen are the owners of J&J Air, and they recently decided to expand the company. Recently hired financial analyst, Gus Christie, has been instructed to locate an underwriter who can help the firm sell $35 million in new 10-year bonds. The bonds will be used to finance construction as part of the firm's expansion. Valerie Harper is an underwriter with the investment banking firm of Warren & Zevon. After Gus contacted her, Valerie briefed him regarding various bond features J&J should consider, along with an appropriate coupon rate for the anticipated bond issue.

Gus is aware of the bond features, although he is uncertain regarding the costs and benefits of some features. Accordingly, he remains unsure about how each of these features might influence the bond issue's coupon rate. Assume you are Valerie's assistant, and she has asked you to draft a memo to Gus that clearly describes the effect of each of the following bond features on the coupon rate of the new bond issue. She also instructed you to describe the advantages and disadvantages of each feature.

1. The security of the bond; i.e., whether the bond has collateral.
2. The seniority of the bond.
3. The presence of a sinking fund.
4. A call provision with specified call dates and call prices.
5. A deferred call accompanying the call provision.
6. A make-whole call provision.
7. Any positive covenants. Also, discuss several possible positive covenants J&J Air might consider.
8. Any negative covenants. Also, discuss several possible negative covenants J&J Air might consider.
9. A conversion feature (note that S&S Air is not a publicly traded company).
10. A floating rate coupon.