Veritime Assurance Company provides both automobile and life insurance to
its customers. Income statements for the two products for the most recent
year appear below:

                                Automobile Insurance      Life Insurance
Sales revenue  ................     $4,000,000              $12,000,000
Variable costs ................      3,510,000               10,200,000
Contribution margin ...........        490,000                1,800,000
Fixed costs ...................        600,000                  700,000
Net income/loss ...............       <110,000>               1,100,000

The president of the company is considering dropping the automobile
insurance product line. However, some policyholders prefer having
their auto and life insurance with the same company, so if automobile
insurance is dropped, sales of life insurance will drop by 15%.

Assume that $150,000 of the fixed costs assigned to automobile
insurance are unavoidable and thus will continue whether or not
automobile insurance is dropped.

Calculate the amount of the decrease in company profits if the 
automobile insurance product line is dropped. Do not put a minus
sign in front of your answer.

Problem 1: Dodson Company

The Dodson Company manufactures and distributes three types of electronic products, Zymol, Zybat and Zycot. The following details the unit sales, selling prices and manufacturing costs of the three electronic devices:

Selling, general and administrative (SG&A) expenses are $1,170,000. SG&A expenses are currently being allocated based upon sales revenue for the three products.

The Dodson Company is considering allocating SG&A expenses under an activity based costing methodology as follows:

• Upon further investigation of the SG&A expenses, (50 percent) are shown to be for marketing and advertising. Each product has its own advertising and marketing budget , administered by one of the three marketing managers. Zycot, the premier product, is advertised heavily. Sixty percent of the marketing and advertising budget goes toward Zycot, twenty percent to Zymol and twenty percent to Zybat.

• The remaining SG&A expenses consist of distribution and administrative costs (25 percent) and selling costs (25 percent). The distribution and administration department is responsible for arranging shipping and for billing the customers. Customers pay transportation charges directly to the common carrier. Upon analysis, each electronic product places equal demands on the distribution and administration department and each consumes about the same resources as the others. Selling costs consist primarily of commissions paid to independent salespeople. The commissions are based upon gross margin on the product (ie: sales revenue less manufacturing costs).

Required:

1. Prepare an income statement for each of the three electronic products with SG&A expenses allocated based upon sales revenue for the three products. Identify the most and least profitable products.

2. Prepare an income statement for each of the three electronic products with SG&A expenses allocated based upon activity based costing for the three products. Identify the most and least profitable product

A company has three manufacturing plants, and you want to determine whether there is a difference in the average age of workers at the three locations. The following data are the ages of five randomly selected workers at each plant. Perform a test to determine whether there is a significant difference in the mean ages of the workers at the three plants. Use α = 0.01 . Interpret on your findings.
Plant A Plant B Plant C
29 31 27
27 32 26
30 30 27
27 33 27
28 29 28

Based on the "Times" data, is the proposed method of production lower variance than the current?

Select one: a. Yes, the F statistic is greater than the F critical for a one tail test at the 95% confidence level. b. Yes, because the current variance is 2.5 times the variance of the proposed method. c. No, because the p value is very small. d. No, because the f critical is below 2.

Additional Info:

In New York, which has the largest ride-for-hire fleet in the United States, licenses have been issued for 13,437 taxicabs. There are an estimated 42,000 drivers in the city, with a licensed vehicle being used by two or three drivers a day. In 2014, only 6% of cab drivers in New York were born in the United States, and 36% came from Bangladesh and Pakistan. The New York taxi fleet picks up 600,000 passengers per day. An estimated 25,000 livery cars provide for-hire service by prearrangement and carry 500,000 passengers per day. 10,000 “black cars” provide services mostly for corporate clients.

Regulators have long required that taxicabs available to be hailed on the street be licensed. The license is to ensure that the taxi service is safe and reliable, and that fares are fair. For-hire vehicles must be insured to cover drivers and passengers, meet safety standards, and (if taxicabs) have a sealed meter. Regulations also require that licensed cabs be quickly and easily identifiable. This is normally achieved by a distinctive color (e.g., yellow). Cabs must also display whether or not they are in service.

Taxicabs charge a regulated fare, set by a government agency, based on the time and distance of the trip, as measured by a meter. Some trips to and from established destinations, such as an airport, may have a fixed price and will displayed in the cab. Taxicabs are required to carry standardized meters that must be prominently displayed, are sealed and periodically checked to ensure that the proper fare is being charged. Limousine services are generally prohibited from charging fares based on time and distance, and they do not carry a meter. Typically, fees are based on time, often with a minimum billed time. The fee normally has to be agreed on in advance.

In many jurisdictions the licensing system limits the supply of taxicabs. One common variant of licensing is the medallion system that is used in cities such as New York, Boston, Chicago and San Francisco. Medallions are small metal plates attached to the hood of a taxi certifying it for passenger pickup throughout a defined area (normally metropolitan boundaries). When the medallion system was first introduced in New York in 1937, the idea was to make sure that taxi driver was not a criminal luring passengers into his vehicle. To get a medallion, the taxi service has to adhere to the regulatory requirements in that jurisdiction and be approved by the appropriate regulatory agency. Medallions may be given to individual taxi drivers who own their own cars, but more typically taxi companies that own fleets of cars acquire them. The taxi companies then lease cars and medallions to drivers on a daily or weekly basis. In some locations the driver may own the car, but lease or purchase the medallion from an agent who has acquired it. An example would be Medallion Financial, a publicly traded company that owns hundreds of medallions in New York, sells them to aspiring young cabbies, and arranges for loans to finance their purchase.

In cities that utilize a medallion system the supply of medallions has often been limited. The rationalizations for doing this include ensuring quality, guaranteeing a fair return to taxi companies, and helping to support demand for other forms of public transportation, such as buses, trains and the subway. It has also been argued that limiting the number of cabs helps to reduce congestion and pollution.

In practice, the supply of medallions has often not kept pace with growing population. In New York, Chicago and Boston for example, the number of medallions issued has barely budged since the 1930s. In New York, there were 11,787 medallions issued after World War II, a number that remained constant until 2004. By 2014 there were 13,437 medallions issued in New York.

Medallions can be traded. Thus, over time, a secondary market in medallions has developed. In this market, the price is not set by the agency issuing them, but by the laws of supply and demand. The effect of limited supply has been to drive up the price of medallions. In New York, taxi medallions were famously selling for over $1 million in 2012. In Boston the price was $625,000. In San Francisco the price was $300,000 and the city took a $100,000 commission on the sale of medallions. The average annual price of medallions surged during the 2000s. In New York, prices increased 260% between 2004 and 2012. The inflation adjusted annualized return for medallions over this time period in New York was 19.5%, compared to a 3.9% annual return for the S&P 500.

As noted above, drivers often do not own the medallions. There are three players in many taxi markets: the medallion holders (often taxi companies) who have acquired the right to operate a taxi from the regulatory agency, the taxi driver, and taxi dispatch companies. A taxi dispatch company is a middleman or broker, who typically matches available cabs with customers and takes a fee for its scheduling services. While an individual taxi driver may own a medallion, most often taxi companies own them. Tax companies own a fleet of cabs, which they lease out to drivers (with a medallion). A minority of drivers may own their own cab. In New York, about 18% of cabs were owner operated in 2014, putting most medallions in the hands of taxi companies.

In New York, regulations allow medallion owners to lease them out to drivers for 12-hour shifts. The critical problem facing a driver is that they must get access to a medallion in order to make a living. Due to this, companies that own medallions can extract high fees from drivers. There are also reports that some taxi dispatch companies use their position as schedulers to extract payment in the form of bribes from drivers in return for good shifts.

Drivers, who legally are viewed as “independent contractors”, can begin a 12-hour shift owing as much as $130 to their medallion leasing company. They may not break even until half way through their shift. One consulting company report found that in 2006 a driver’s take home pay in New York for a 12-hour shift averaged $158. In 2011, the New York transportation authority calculated that it was $96. A study of taxi drivers in Los Angeles found that drivers worked on average 72 hours a week for a median take home wage of $8.39 an hour. The LA drivers were paying $2000 in leasing fees per month to taxi companies. None of the drivers in the LA study had health insurance provided by their companies, and 61% were completely without health insurance. Given the compensation, it is perhaps not surprising that some drivers can be rude, impatient, and prone to drive fast and take poor care of their cabs.

The LA study noted that because city officials heavily regulate the taxi business, taxi companies are active politically, paying lobbyist to advocate their interests and contributing to the campaign funds of local politicians. The same is true in New York, where the medallion owners trade association, the Metropolitan Taxi Board of Trade, lobbies hard to influence public policy. In 2011, for example, medallion owners were initially able to block plans to create a fleet of green “Boro” cabs to serve New York’s outer boroughs. They argued that doing so would drive down the price of their medallions. In June 2013, however, the New York Supreme Court overruled lower court rulings and allowed the licensing of Boro cabs to go ahead. The intention now is to issue 18,000 new licenses to green cabs. These cabs, however, will not be able to pick up passengers in lower Manhattan, which remains the territory of yellow cabs.

Analyze the competitive structure of the taxi market such as New York prior to the introduction of Uber?

The 2019 financial statements for Company A and Company B are provided below:The companies are in the same line of business and are direct competitors in India. Both have been in business approximately 10 years, and each has had steady growth. The management of each has a different viewpoint in many respects. Company B is more conservative, and as its president said, “We avoid what we consider to be undue risk.” Neither company is publicly held. Company A has an annual audit by a Chartered Accountant firm but Company B does not.

1. Compute the ratio analysis of each company and try to include all the ratios you can.

2.A client of yours has the opportunity to buy 10% of the shares in one or the other company at the per share prices given and has decided to invest in one of the companies. Based on the data given, prepare a comparative written evaluation of the ratio analysis and give your recommended choice with the supporting explanation.

3) A company manufactures and sells x cellphones per week. The weekly cost and price-demand equations are

Cx=5,000+84x

p(x)=300-0.2x

a) What price should the company charge for the phones, and how many phones should be produced to maximize weekly revenue? What is the maximum revenue?

b) What is the maximum weekly profit? How much should the company charge for the phones, and how many phones should be produced to realize the maximum weekly profit?

101)

Suppose that you are valuing a South African diamond producer that sells most of its products in China, records its sales in Chinese RMB, and has most of its employees in China. The company is publicly traded on the South African stock market. Which of the following should be components of your Cost of Equity calculation for this company?

a) Use Chinese government bond yields for the Risk-Free Rate.

b) Use South African government bond yields for the Risk-Free Rate.

c) The Equity Risk Premium should be based on US stock market historical returns, plus a spread to account for the additional risk and potential returns in South Africa (as the company is listed on the South African stock market).

d) The Equity Risk Premium should be based on US stock market historical returns, plus a spread to account for the additional risk and potential returns in China (as the company operates largely in China).

e) Ideally, Levered Beta should be based on comparable diamond producers that operate in China.

f) Ideally, Levered Beta should be based on comparable diamond producers that are headquartered in South Africa but operate largely in China.

102)

Which of the following represent DIFFERENCES in a Levered DCF analysis compared to an Unlevered DCF analysis?

a) You will calculate Terminal Value using an Equity Value-based multiple rather than an Enterprise Value-based one.

b) You will use Levered Beta rather than Unlevered Beta in the Cost of Equity calculations.

c) You will use Cost of Equity instead of WACC for the discount rate.

d) You don’t have to add back non-cash charges in the same way because Levered Free Cash Flow starts with Net Income rather than NOPAT.

e) You will calculate the company’s Implied Equity Value directly from the analysis, rather than calculating the implied Enterprise Value and then backing into the implied Equity Value.

f) When calculating Free Cash Flow, you have to subtract the net interest expense and mandatory debt repayments.

106)

Which of the following events might serve as catalysts if you are drafting a stock pitch for a healthcare company?

a) The launch of new products in any year of the projection period shown in your DCF analysis.

b) The launch of new pipeline drugs in the next 6-12 months.

c) A debt, equity, or convertible issuance within the next year.

d) A key patent expiration in 2-3 years.

e) An annual price increase that the company announces in January each year.

f) US or EU regulators approving a key drug for sale within the next year.

g) An acquisition that is set to close in 18 months.

Corporation (Form 1120) Fall 2018 Rick Smith, Bill Thomas, Diane Asche, and Jill Renteria are equal owners in “STAR, Inc.” – a corporation engaged in HR consulting. Pertinent information regarding STAR is summarized below. • Social security numbers are as follows; Rick – 648-98-4321; Bill – 486-63-4297; Diane – 855-21-1750; and Jill – 896-49-2341. Rick is the President of the company. • The address of the company is 2835 Bay View Drive, Wilmington, NC 26812. • The company was incorporated and began operations on January 1, 2012. • The business code is 561900. • The federal identification number is 67-1234576 • The company uses the cash method of accounting and the calendar year for reporting. • The company claimed $8,119 depreciation for book purposes, but $11,919 for tax purposes (under a MACRS methodology). Assume none of the depreciation creates a tax preference or adjustment for AMT purposes. The company is NOT a personal holding company. • All loan borrowings were used exclusively for acquisition of equipment, consequently, all interest is considered business interest. • No compensation was paid to Thomas, Asche, or Renteria, but each of the four owners withdrew $35,000 as a dividend of operating profits. There was no distribution of any non-cash property. • The equipment loan is nonrecourse debt to the owners. All initial equity contributions were paid equally and each individual owns 25% of the common stock. • None of the owners sold any portion of their ownership interests during the year. • The company has no available tax credits and is not subject to AMT. • The company’s operations are entirely restricted to the local geographic area in North Carolina. All owners are U.S. citizens. The company had no foreign operations, no foreign bank accounts, and no interest in any foreign trusts or other corporations. The company is not publicly traded. • The company is not subject to the consolidated audit procedures. The company files its return in Cincinnati, OH. • Rick Smith lives at 572 Knowles Ct., Wilmington, NC 26811, Bill Thomas lives at 942 Richland Dr., Wilmington, NC 26812; Diane Asche lives at 1342 Coastal Rd., Wilmington, NC 26812; and Jill Renteria lives at 550 Rocker Ave., Wilmington, NC 26812. • The company’s marketable securities represent small investments (<1% ownership) in a number of publicly traded companies and mutual funds. • The company sold its holdings of XYZ Corporation (carried as Marketable Securities on the balance sheet) on July 10 for $5,000. The corporation purchased this investment several years ago for $9,000. (The proceeds from this sale are listed as a cash receipt below. The company has no prior-year capital gains or losses.) The current income statement for the company reflected book net income of $ 159,900 AFTER book depreciation has been taken on the equipment, and the loss on the sale of XYZ Mutual Fund, and $44,000 of recorded federal income tax expense. The following information was taken from the corporation’s financial statements for the current year. Cash Receipts: Fees collected $755,000 Taxable qualified dividend income 3,600 Taxable business interest income 2,400 Tax Exempt interest 2,600 Proceeds from sale of XYZ Corp. common stock $ 5,000 Total Receipts $768,600 Cash Disbursements: Compensation to Rick Smith $120,000 Dividend payments to shareholders ($35K each) 140,000 Customer Refunds 3.000 Office Rent 26,000 Utilities 6,700 Administrative employee salaries 310,000 Federal income tax payments ($11,000/Qtr.) 44,000 Business & Professional Licenses 2,000 Cash Contribution to United Way 1,000 Business Meals (100%) 3,600 Business Travel 7,000 Office supplies & expense 12,000 Accounting (Professional) fees 8,000 Advertising 7,000 Taxes (Payroll, State, Local) 28,600 Business interest (on equipment loan) 4,481 Principal payments on equipment loan 15,000 General Liability Insurance Expense 3,200 Equipment rental 5,000 Total Disbursements 746,581 Journal entries have been made to record regular (book) depreciation in the amount of $8,119. MACRS tax depreciation was not recorded in the book records. Principal payments against the equipment loan amounted to $15,000 for the year. The balance sheets (book basis) for the company were as follows for the current year: Account January 1, 2018 December 31, 2018 Cash $ 86,576 $ ? Tax-exempt securities (at cost) 52,000 52,000 Marketable Securities (at cost) 120,000 ? Office furniture & equipment 65,000 65,000 Accumulated depreciation ( 36,576) ________? Total assets $ 287,000 $ ? Nonrecourse equipment loan $ 47,000 $ ? Common Stock $ 48,000 $ ? Retained Earnings $ 192,000 $_______? Total liabilities and capital $ 287,000 $ ? REQUIRED: 1. Prepare a Form 1120 for the corporation for 2018 including Form 4562. (Do NOT prepare a state return). Prepare supporting schedules as necessary if adequate information is provided. You will need to log into the IRS website and print the blank DRAFT forms for 2018. (Final forms are not yet available). Go to: www.irs.gov/draftforms and type “Form 1120” in the search box.