Risk Assessment- Exercise #1

Social Konnections Inc. (SKI or the “Company”) is a global Internet company that runs Social Konnections, a large social media networking Web site. SKI has experienced steep growth since its launch in 2005, and the Company went public in 2007. SKI currently has over 500 million active users who visit the site to connect with others, express themselves, and play games.

Last year, substantially all of SKI’s revenue came from advertisers who market their products and services to SKI’s active users through advertisements placed on the Web site or its various mobile platforms.

The founder of the company serves as the CEO and is also on the chairman of the board of directors. The CFO is also one of the co-founders of the company. Both have been serving in these roles since 2005.

In Q1 of the current fiscal year, SKI acquired Corporate Collaborations (CC), an entity that manages private and public social media networks for corporations. CC’s customers are primarily national and global companies whose employees connect over its platform. In addition to hosting private social media networks for corporations, CC provides services to develop the networks it manages. CC’s revenues are earned through the performance of multiyear revenue contracts with its customers. In the current year, CC is expected to produce approximately 20 percent of SKI’s consolidated revenue.

SKI’s investors are focused on the growth prospects of the Company’s legacy open social media platform operations and its new corporate revenue unit. The Company’s MD&A disclosures include (1) various user and revenue metrics to help financial statement users assess its traditional operations and (2) backlog information to help users assess CC’s operations.

Advertising Revenue

SKI creates advertising space on its Web site and mobile applications and sells the space to advertisers either directly, or through advertising agencies. According to Mr. Cook, the

amount an advertiser pays is dependent on the number of views the ad receives or the number of user clicks (depending on the type of advertisement defined in the underlying contract) and the revenue is recorded in the period in which the views or clicks are made.

Ms. Drew has learned that simple advertising can be purchased directly from SKI through SKI’s advertising Web site at standard rates, with the advertisements and terms input directly into the Company’s ad delivery platform. However, most advertising revenue is generated directly through the advertising sales team, which has the ability to help advertisers develop more sophisticated advertising campaigns. Management has established minimum pricing and volume thresholds for these advertisements; however, the sales staff is given significant latitude in securing contracts with customers. Extra commissions are paid to sales individuals who sign longer-term contracts that meet minimum revenue targets.

Once a contract is signed, the ad development department creates the ad content and obtains the customer’s approval. The approved ad and the contract are electronically sent to the ad scheduling department, and the advertisement is uploaded into the Company’s ad delivery platform. The ad delivery platform is a robust system and is designed to capture all the nuances associated with the contract. For example, an advertiser may wish to have its ads displayed only to users whose IP addresses are from a specific geographic location, or the contract may be structured to provide the advertiser with variable pricing or incentives (such as a set of free advertisements) once a certain level has been paid for. In summary, the delivery platform captures all the relevant pricing information associated with the contract to allow for real-time revenue recognition according to the terms of the contract. After the contract is entered into the system, a summary of the contract setup is provided to the sales manager that worked with the customer. The sales manager then reviews the contract setup for accuracy.

The Company’s ad delivery platform automatically tracks the advertising activity each day and reports the activity to its customers, who are then billed weekly for the aggregate ad activity.

Ms. Drew’s Concern

Ms. Drew is concerned about several things she has learned regarding the appropriateness of management’s revenue recognition policies.

Financial Statements

Balance Sheet:

*Assets consist primarily of cash, land/building, patents, goodwill, and other assets.

** As you plan your audit this is the latest financial information available.

Controls

The Company’s has various controls in place. The CFO performs a checklist on a monthly basis to review the performance of the company. The CFO reports to the CEO every quarter. The CEO reports to the chairman of the board of directors once a year before the financial statements are prepared and released to the public.

The company has over 10 thousand employees around the world, of which 4 thousand work at the headquarters. All employees receive the company’s code of ethics that was prepared in 2005 when the company was founded. The CEO was in recent trouble when he posted controversial messages on the social platform that offended people of a certain group. The company has One hundred different controls across the company and across the world related to operations of the company and revenue.

The company uses 10 different IT systems as the company is growing quickly it has had to adopt and adds new systems whenever they are needed.

The leaders of one of the main divisions recently left to go work for Facebook, and has not been replaced for the last 4 months.

Controls have changed a lot since last year because the company is so dynamic and the environment is so fast paced. Employees are always trying to keep up with the new systems and new controls.

Audit

Because of SKI’s continued growth, the audit committee has requested that the Company choose a new audit firm with experience in auditing public technology companies.

Kristine Drew, a senior auditor, is the in-charge accountant on the proposal and planning of the SKI audit. In addition to her supervisory and administrative responsibilities, Ms. Drew is responsible for auditing revenue and determining the risk assessment for the audit.

Ms. Drew has read the Company’s disclosed accounting policies and is interviewing the revenue controller, Bill Cook, and various sales personnel to develop in-depth process flow documentation that will serve as the basis for the team’s risk assessment.

Required:

1. What would you set Audit risk, Control Risk, Inherent Risk, and Detection risk? (Very low, low, medium, or high)
2. Are there are significant or fraud risks that you have identified? (If any why are they fraud or significant risks?)
3. What other information do you need to plan your audit approach? Where would you get this information from? For each piece of information indicate where you might receive it from and how? (ex: who else is on the board of directors- obtained through inquiry.)
4. What benchmark would you use to calculate materiality? Why? (ex: revenue, EBITDA, Equity, Assets, etc)
5. Using the benchmark and guidance in the book calculate “overall materiality” for your audit? (ex: 8% of Equity ($60m)= $2.4m).
6. For Revenue what assertions are the most important for you to test?
7. For Revenue what are your concerns with each of those assertions based on the information above?
8. What are the things about testing revenue that you are concerned about (specifically what parts of the company’s process if any concern you)? (Example: An employee could steal money from the bank account, or revenue could be modified in the accounting software by an employee.) (Focus on the actual real process for the company described above to make this determination.)
9. For your audit approach would you choose to test controls or primarily perform substantive procedures? If so what would be your mix of control testing to substantive testing? (ex: 50% controls, and 50% substantive)
10. Would you accept this audit? If not why not?

Risk Assessment- Exercise #1

Social Konnections Inc. (SKI or the “Company”) is a global Internet company that runs Social Konnections, a large social media networking Web site. SKI has experienced steep growth since its launch in 2005, and the Company went public in 2007. SKI currently has over 500 million active users who visit the site to connect with others, express themselves, and play games.

Last year, substantially all of SKI’s revenue came from advertisers who market their products and services to SKI’s active users through advertisements placed on the Web site or its various mobile platforms.

The founder of the company serves as the CEO and is also on the chairman of the board of directors. The CFO is also one of the co-founders of the company. Both have been serving in these roles since 2005.

In Q1 of the current fiscal year, SKI acquired Corporate Collaborations (CC), an entity that manages private and public social media networks for corporations. CC’s customers are primarily national and global companies whose employees connect over its platform. In addition to hosting private social media networks for corporations, CC provides services to develop the networks it manages. CC’s revenues are earned through the performance of multiyear revenue contracts with its customers. In the current year, CC is expected to produce approximately 20 percent of SKI’s consolidated revenue.

SKI’s investors are focused on the growth prospects of the Company’s legacy open social media platform operations and its new corporate revenue unit. The Company’s MD&A disclosures include (1) various user and revenue metrics to help financial statement users assess its traditional operations and (2) backlog information to help users assess CC’s operations.

Advertising Revenue

SKI creates advertising space on its Web site and mobile applications and sells the space to advertisers either directly, or through advertising agencies. According to Mr. Cook, the

amount an advertiser pays is dependent on the number of views the ad receives or the number of user clicks (depending on the type of advertisement defined in the underlying contract) and the revenue is recorded in the period in which the views or clicks are made.

Ms. Drew has learned that simple advertising can be purchased directly from SKI through SKI’s advertising Web site at standard rates, with the advertisements and terms input directly into the Company’s ad delivery platform. However, most advertising revenue is generated directly through the advertising sales team, which has the ability to help advertisers develop more sophisticated advertising campaigns. Management has established minimum pricing and volume thresholds for these advertisements; however, the sales staff is given significant latitude in securing contracts with customers. Extra commissions are paid to sales individuals who sign longer-term contracts that meet minimum revenue targets.

Once a contract is signed, the ad development department creates the ad content and obtains the customer’s approval. The approved ad and the contract are electronically sent to the ad scheduling department, and the advertisement is uploaded into the Company’s ad delivery platform. The ad delivery platform is a robust system and is designed to capture all the nuances associated with the contract. For example, an advertiser may wish to have its ads displayed only to users whose IP addresses are from a specific geographic location, or the contract may be structured to provide the advertiser with variable pricing or incentives (such as a set of free advertisements) once a certain level has been paid for. In summary, the delivery platform captures all the relevant pricing information associated with the contract to allow for real-time revenue recognition according to the terms of the contract. After the contract is entered into the system, a summary of the contract setup is provided to the sales manager that worked with the customer. The sales manager then reviews the contract setup for accuracy.

The Company’s ad delivery platform automatically tracks the advertising activity each day and reports the activity to its customers, who are then billed weekly for the aggregate ad activity.

Ms. Drew’s Concern

Ms. Drew is concerned about several things she has learned regarding the appropriateness of management’s revenue recognition policies.

Financial Statements

Balance Sheet:

*Assets consist primarily of cash, land/building, patents, goodwill, and other assets.

** As you plan your audit this is the latest financial information available.

Controls

The Company’s has various controls in place. The CFO performs a checklist on a monthly basis to review the performance of the company. The CFO reports to the CEO every quarter. The CEO reports to the chairman of the board of directors once a year before the financial statements are prepared and released to the public.

The company has over 10 thousand employees around the world, of which 4 thousand work at the headquarters. All employees receive the company’s code of ethics that was prepared in 2005 when the company was founded. The CEO was in recent trouble when he posted controversial messages on the social platform that offended people of a certain group. The company has One hundred different controls across the company and across the world related to operations of the company and revenue.

The company uses 10 different IT systems as the company is growing quickly it has had to adopt and adds new systems whenever they are needed.

The leaders of one of the main divisions recently left to go work for Facebook, and has not been replaced for the last 4 months.

Controls have changed a lot since last year because the company is so dynamic and the environment is so fast paced. Employees are always trying to keep up with the new systems and new controls.

Audit

Because of SKI’s continued growth, the audit committee has requested that the Company choose a new audit firm with experience in auditing public technology companies.

Kristine Drew, a senior auditor, is the in-charge accountant on the proposal and planning of the SKI audit. In addition to her supervisory and administrative responsibilities, Ms. Drew is responsible for auditing revenue and determining the risk assessment for the audit.

Ms. Drew has read the Company’s disclosed accounting policies and is interviewing the revenue controller, Bill Cook, and various sales personnel to develop in-depth process flow documentation that will serve as the basis for the team’s risk assessment.

Required:

1. What would you set Audit risk, Control Risk, Inherent Risk, and Detection risk? (Very low, low, medium, or high)
2. Are there are significant or fraud risks that you have identified? (If any why are they fraud or significant risks?)
3. What other information do you need to plan your audit approach? Where would you get this information from? For each piece of information indicate where you might receive it from and how? (ex: who else is on the board of directors- obtained through inquiry.)
4. What benchmark would you use to calculate materiality? Why? (ex: revenue, EBITDA, Equity, Assets, etc)
5. Using the benchmark and guidance in the book calculate “overall materiality” for your audit? (ex: 8% of Equity ($60m)= $2.4m).
6. For Revenue what assertions are the most important for you to test?
7. For Revenue what are your concerns with each of those assertions based on the information above?
8. What are the things about testing revenue that you are concerned about (specifically what parts of the company’s process if any concern you)? (Example: An employee could steal money from the bank account, or revenue could be modified in the accounting software by an employee.) (Focus on the actual real process for the company described above to make this determination.)
9. For your audit approach would you choose to test controls or primarily perform substantive procedures? If so what would be your mix of control testing to substantive testing? (ex: 50% controls, and 50% substantive)
10. Would you accept this audit? If not why not?

Risk Assessment- Exercise #1

Social Konnections Inc. (SKI or the “Company”) is a global Internet company that runs Social Konnections, a large social media networking Web site. SKI has experienced steep growth since its launch in 2005, and the Company went public in 2007. SKI currently has over 500 million active users who visit the site to connect with others, express themselves, and play games.

Last year, substantially all of SKI’s revenue came from advertisers who market their products and services to SKI’s active users through advertisements placed on the Web site or its various mobile platforms.

The founder of the company serves as the CEO and is also on the chairman of the board of directors. The CFO is also one of the co-founders of the company. Both have been serving in these roles since 2005.

In Q1 of the current fiscal year, SKI acquired Corporate Collaborations (CC), an entity that manages private and public social media networks for corporations. CC’s customers are primarily national and global companies whose employees connect over its platform. In addition to hosting private social media networks for corporations, CC provides services to develop the networks it manages. CC’s revenues are earned through the performance of multiyear revenue contracts with its customers. In the current year, CC is expected to produce approximately 20 percent of SKI’s consolidated revenue.

SKI’s investors are focused on the growth prospects of the Company’s legacy open social media platform operations and its new corporate revenue unit. The Company’s MD&A disclosures include (1) various user and revenue metrics to help financial statement users assess its traditional operations and (2) backlog information to help users assess CC’s operations.

Advertising Revenue

SKI creates advertising space on its Web site and mobile applications and sells the space to advertisers either directly, or through advertising agencies. According to Mr. Cook, the

amount an advertiser pays is dependent on the number of views the ad receives or the number of user clicks (depending on the type of advertisement defined in the underlying contract) and the revenue is recorded in the period in which the views or clicks are made.

Ms. Drew has learned that simple advertising can be purchased directly from SKI through SKI’s advertising Web site at standard rates, with the advertisements and terms input directly into the Company’s ad delivery platform. However, most advertising revenue is generated directly through the advertising sales team, which has the ability to help advertisers develop more sophisticated advertising campaigns. Management has established minimum pricing and volume thresholds for these advertisements; however, the sales staff is given significant latitude in securing contracts with customers. Extra commissions are paid to sales individuals who sign longer-term contracts that meet minimum revenue targets.

Once a contract is signed, the ad development department creates the ad content and obtains the customer’s approval. The approved ad and the contract are electronically sent to the ad scheduling department, and the advertisement is uploaded into the Company’s ad delivery platform. The ad delivery platform is a robust system and is designed to capture all the nuances associated with the contract. For example, an advertiser may wish to have its ads displayed only to users whose IP addresses are from a specific geographic location, or the contract may be structured to provide the advertiser with variable pricing or incentives (such as a set of free advertisements) once a certain level has been paid for. In summary, the delivery platform captures all the relevant pricing information associated with the contract to allow for real-time revenue recognition according to the terms of the contract. After the contract is entered into the system, a summary of the contract setup is provided to the sales manager that worked with the customer. The sales manager then reviews the contract setup for accuracy.

The Company’s ad delivery platform automatically tracks the advertising activity each day and reports the activity to its customers, who are then billed weekly for the aggregate ad activity.

Ms. Drew’s Concern

Ms. Drew is concerned about several things she has learned regarding the appropriateness of management’s revenue recognition policies.

Financial Statements

Balance Sheet:

*Assets consist primarily of cash, land/building, patents, goodwill, and other assets.

** As you plan your audit this is the latest financial information available.

Controls

The Company’s has various controls in place. The CFO performs a checklist on a monthly basis to review the performance of the company. The CFO reports to the CEO every quarter. The CEO reports to the chairman of the board of directors once a year before the financial statements are prepared and released to the public.

The company has over 10 thousand employees around the world, of which 4 thousand work at the headquarters. All employees receive the company’s code of ethics that was prepared in 2005 when the company was founded. The CEO was in recent trouble when he posted controversial messages on the social platform that offended people of a certain group. The company has One hundred different controls across the company and across the world related to operations of the company and revenue.

The company uses 10 different IT systems as the company is growing quickly it has had to adopt and adds new systems whenever they are needed.

The leaders of one of the main divisions recently left to go work for Facebook, and has not been replaced for the last 4 months.

Controls have changed a lot since last year because the company is so dynamic and the environment is so fast paced. Employees are always trying to keep up with the new systems and new controls.

Audit

Because of SKI’s continued growth, the audit committee has requested that the Company choose a new audit firm with experience in auditing public technology companies.

Kristine Drew, a senior auditor, is the in-charge accountant on the proposal and planning of the SKI audit. In addition to her supervisory and administrative responsibilities, Ms. Drew is responsible for auditing revenue and determining the risk assessment for the audit.

Ms. Drew has read the Company’s disclosed accounting policies and is interviewing the revenue controller, Bill Cook, and various sales personnel to develop in-depth process flow documentation that will serve as the basis for the team’s risk assessment.

Required:

1. What would you set Audit risk, Control Risk, Inherent Risk, and Detection risk? (Very low, low, medium, or high)
2. Are there are significant or fraud risks that you have identified? (If any why are they fraud or significant risks?)
3. What other information do you need to plan your audit approach? Where would you get this information from? For each piece of information indicate where you might receive it from and how? (ex: who else is on the board of directors- obtained through inquiry.)
4. What benchmark would you use to calculate materiality? Why? (ex: revenue, EBITDA, Equity, Assets, etc)
5. Using the benchmark and guidance in the book calculate “overall materiality” for your audit? (ex: 8% of Equity ($60m)= $2.4m).
6. For Revenue what assertions are the most important for you to test?
7. For Revenue what are your concerns with each of those assertions based on the information above?
8. What are the things about testing revenue that you are concerned about (specifically what parts of the company’s process if any concern you)? (Example: An employee could steal money from the bank account, or revenue could be modified in the accounting software by an employee.) (Focus on the actual real process for the company described above to make this determination.)
9. For your audit approach would you choose to test controls or primarily perform substantive procedures? If so what would be your mix of control testing to substantive testing? (ex: 50% controls, and 50% substantive)
10. Would you accept this audit? If not why not?

The following information has been extracted from the financial statements of a company. Use it to answer the 4 questions that follow it. When answering the questions (filling in the blanks), DO NOT use dollar signs, USE commas to separate thousands, DO NOT use parenthesis to denote negative numbers, USE the negative sign in front of first digit for negative numbers. Round to the nearest dollar.

1. What is the Net Cash Flow (NFC) for 2020?

2. What is the Investment in Gross Fixed Assets for 2020?

3. What is the investment in net operating working capital (Investment NOWC) for 2020?

4. What is the Free Cash Flow (FCF) for 2020?

The following information has been extracted from the financial statements of a company. Use it to answer the 4 questions that follow it. When answering the questions (filling in the blanks), DO NOT use dollar signs, USE commas to separate thousands, DO NOT use parenthesis to denote negative numbers, USE the negative sign in front of first digit for negative numbers. Round to the nearest dollar.

1. What is the Net Cash Flow (NFC) for 2020?

2. What is the Investment in Gross Fixed Assets for 2020?

3. What is the investment in net operating working capital (Investment NOWC) for 2020?

4. What is the Free Cash Flow (FCF) for 2020?

What does it mean biologically to be human? How can evolution explain both the unity and diversity of human phenotypes? Use specific examples of evidence and some version of the following terms in your answer: neutral genetic variation, evolution, natural selection, drift/bottleneck/founder effect, migration, mutation, and species/population/lineage.

How Bad Performance Management Killed Microsoft’s Edge

By DARCY JACOBSEN

What went wrong? Microsoft has been crippled by a management system known as “stack ranking.” Like the hated bell curve of your high school memory, this program forced each business area to rank a certain percentage of employees as top, good, average, or poor performers. That means that even if your department was full of stars, a certain quota would be getting bad reviews—no matter how hard they worked. Pretty demoralizing.

Here is a quote from the preview of the article that’s now available online:

“Every current and former Microsoft employee I interviewed—every one—cited stack ranking as the most destructive process inside of Microsoft, something that drove out untold numbers of employees,” Eichenwald writes. “If you were on a team of 10 people, you walked in the first day knowing that, no matter how good everyone was, 2 people were going to get a great review, 7 were going to get mediocre reviews, and 1 was going to get a terrible review,” says a former software developer. “It leads to employees focusing on competing with each other rather than competing with other companies.”

This sort of cannibalistic performance management practice—with its rigid, stratified winner’s circle—completely disengaged many workers at the company, and led to a culture that did not encourage cooperation or teamwork. Innovation and excellence fell victim to the need to compete with co-workers for not only recognition but survival. Said one former employee: “It was always much less about how I could become a better engineer and much more about my need to improve my visibility among other managers.”

Microsoft, once the uncontested king of the tech industry, has faltered while companies like Facebook, Apple and Google have excelled. Where Microsoft had a head start on technologies like smart phones, social networking and e-reader tablets, in every case the company’s culture, which penalized risk-taking, caused them to fail.

Good talent management is not divisive; it is inclusive. It takes into account the viewpoints of peers; it doesn’t pit you against peers. It is flexible and immediate and responsive to the needs of management and the needs of workers. It works in tandem with the culture you want to encourage; it does not set up a new, toxic culture. The surest way to kill your company is to ignore these principles.

Read the case and answer the following questions. All questions carry equal marks.

Q1. Identify the performance measurement approach adopted in the Microsoft company and analyze its negative impact on employee morale, creativity and work-outcomes.

Q2. Identify and explain the key stages of performance management cycle in which Microsoft company made errors in designing an effective performance management system. Give examples.

Q3. In your opinion, is the performance management system at Microsoft ethical? Can it create legal issues for the company?

Q4. Plan and propose a new performance management system for Microsoft company capable of motivating the employees, taking into consideration all the stages of PMS development.

How Bad Performance Management Killed Microsoft’s Edge

By DARCY JACOBSEN

What went wrong? Microsoft has been crippled by a management system known as “stack ranking.” Like the hated bell curve of your high school memory, this program forced each business area to rank a certain percentage of employees as top, good, average, or poor performers. That means that even if your department was full of stars, a certain quota would be getting bad reviews—no matter how hard they worked. Pretty demoralizing.

Here is a quote from the preview of the article that’s now available online:

“Every current and former Microsoft employee I interviewed—every one—cited stack ranking as the most destructive process inside of Microsoft, something that drove out untold numbers of employees,” Eichenwald writes. “If you were on a team of 10 people, you walked in the first day knowing that, no matter how good everyone was, 2 people were going to get a great review, 7 were going to get mediocre reviews, and 1 was going to get a terrible review,” says a former software developer. “It leads to employees focusing on competing with each other rather than competing with other companies.”

This sort of cannibalistic performance management practice—with its rigid, stratified winner’s circle—completely disengaged many workers at the company, and led to a culture that did not encourage cooperation or teamwork. Innovation and excellence fell victim to the need to compete with co-workers for not only recognition but survival. Said one former employee: “It was always much less about how I could become a better engineer and much more about my need to improve my visibility among other managers.”

Microsoft, once the uncontested king of the tech industry, has faltered while companies like Facebook, Apple and Google have excelled. Where Microsoft had a head start on technologies like smart phones, social networking and e-reader tablets, in every case the company’s culture, which penalized risk-taking, caused them to fail.

Good talent management is not divisive; it is inclusive. It takes into account the viewpoints of peers; it doesn’t pit you against peers. It is flexible and immediate and responsive to the needs of management and the needs of workers. It works in tandem with the culture you want to encourage; it does not set up a new, toxic culture. The surest way to kill your company is to ignore these principles.

Read the case and answer the following questions. All questions carry equal marks.

Q1. Identify the performance measurement approach adopted in the Microsoft company and analyze its negative impact on employee morale, creativity and work-outcomes.

Q2. Identify and explain the key stages of performance management cycle in which Microsoft company made errors in designing an effective performance management system. Give examples.

Q3. In your opinion, is the performance management system at Microsoft ethical? Can it create legal issues for the company?

Q4. Plan and propose a new performance management system for Microsoft company capable of motivating the employees, taking into consideration all the stages of PMS development.

Week 6 Assignment: Case Study: 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 11 million shares of common stock outstanding. The stock currently trades at $48.50 per share. Stephenson is evaluating a plan to purchase a huge tract of land in the southeastern United States for $45 million. The land will subsequently be leased to tenant farmers. This purchase is expected to increase Stephenson’s annual pretax earnings by $10 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 40 percent corporate tax rate (state and federal). If Stephenson wishes to maximize its total market value, would you recommend that it issue debt or equity to finance the land purchase? Explain. Review Stephenson's market value balance sheet before it announces the purchase. Suppose Stephenson decides to issue equity to finance the purchase. What is the net present value of the project? Review 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? Review 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? Review Stephenson's market value balance sheet after the purchase has been made. Suppose Stephenson decides to issue debt to finance the purchase. What will the market value of the Stephenson company be if the purchase is financed with debt? Review 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? Which method of financing maximizes the per-share stock price of Stephenson's equity? In a 2-3 page analysis, answer the questions provided at the end of the case study. Be sure to support your analysis with appropriate calculations and critical thought.

Market balance sheet info: Before the land purchase: Assets=$533,500,000 Total Assets: $533,500,000 Equity=$533,500,000 Debt & Equity=$533,500,000

Market balance sheet after purchase of land: Old Assets=$533,500,000

Will need calculations for new balance sheet including NPV and Equity. Will also need calculations for the change in stock value and how much stock would need to be issued to purchase land. The remaining questions will follow a similar format in which you create Market Value Balance Sheets and calculations.

1. In August 2019, Judge Marshall purchased a 2020 Bentley Mulsanne for $320,000. In order to purchase the Bentley, the Judge made a 25% down payment and signed a note to finance the balance of the purchase price over 4 years at a 5% rate of interest. According to his mileage log, the business usage for the Bentley in 2019 was 80%. All of his business usage related to his bar review course sole proprietorship. What is the amount of depreciation, if any, the Judge can claim on his Bentley in 2019? (explain the proper tax treatment and cite tax law authorities). (Assume U.S tax code)

4.

The United Nations' Human Settlements Program forecast that by the year 2020 what percent of the world's population would live in poverty?

7.

The Federal Trade Commission advocates which of the following for business security?

8.

In 2009 the U.S. government announced plans to spend how much to spur the use of digital or electronic patient records, as part of a national effort to reduce medical costs?