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Venice InLine, Inc., was founded by Russ Perez to produce a specialized in-line skate he had designed for doing aerial tricks. Up to this point, Russ has financed the company with his own savings and with cash generated by his business. However, Russ now faces a cash crisis. In the year just ended, an acute shortage of high-impact roller bearings developed just as the company was beginning production for the Christmas season. Russ had been assured by his suppliers that the roller bearings would be delivered in time to make Christmas shipments, but the suppliers were unable to fully deliver on this promise. As a consequence, Venice InLine had large stocks of unfinished skates at the end of the year and was unable to fill all of the orders that had come in from retailers for the Christmas season. Consequently, sales were below expectations for the year, and Russ does not have enough cash to pay his creditors. |
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Well before the accounts payable were due, Russ visited a local bank and inquired about obtaining a loan. The loan officer at the bank assured Russ that there should not be any problem getting a loan to pay off his accounts payable—providing that on his most recent financial statements the current ratio was above 2.0, the acid-test ratio was above 1.0, and net operating income was at least four times the interest on the proposed loan. Russ promised to return later with a copy of his financial statements. |
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Russ would like to apply for a $110,000 six-month loan bearing an interest rate of 6% per year. The unaudited financial reports of the company appear below. |
| Venice InLine, Inc. Comparative Balance Sheet As of December 31 (dollars in thousands) |
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| This Year | Last Year | |||
| Assets | ||||
| Current assets: | ||||
| Cash | $ | 181.6 | $ | 255.0 |
| Accounts receivable, net | 95.0 | 80.0 | ||
| Inventory | 255.0 | 165.0 | ||
| Prepaid expenses | 50.0 | 48.0 | ||
| Total current assets | 581.6 | 548.0 | ||
| Property and equipment | 380.0 | 265.0 | ||
| Total assets | $ | 961.6 | $ | 813.0 |
| Liabilities and Stockholders' Equity | ||||
| Current liabilities: | ||||
| Accounts payable | $ | 281.0 | $ | 160.0 |
| Accrued liabilities | 55.0 | 40.0 | ||
| Total current liabilities | 336.0 | 200.0 | ||
| Long-term liabilities | .0 | .0 | ||
| Total liabilities | 336.0 | 200.0 | ||
| Stockholders' equity: | ||||
| Common stock and additional paid-in-capital | 150.0 | 150.0 | ||
| Retained earnings | 475.6 | 463.0 | ||
| Total stockholders' equity | 625.6 | 613.0 | ||
| Total liabilities and stockholders' equity | $ | 961.6 | $ | 813.0 |
| Venice InLine, Inc. Income Statement For the Year Ended December 31 (dollars in thousands) |
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| This Year | ||
| Sales (all on account) | $ | 665.0 |
| Cost of goods sold | 402.0 | |
| Gross margin | 263.0 | |
| Selling and administrative expenses: | ||
| Selling expenses | 108.0 | |
| Administrative expenses | 137.0 | |
| Total selling and administrative expenses | 245.0 | |
| Net operating income | 18.0 | |
| Interest expense | – | |
| Net income before taxes | 18.0 | |
| Income taxes (30%) | 5.4 | |
| Net income | $ | 12.6 |
| Required: |
| 1a. |
Based on the above unaudited financial statement of the current year calculate the following. (Round your answers to 2 decimal places.) |
| 1b. |
Based on the statement made by the loan officer, would the company qualify for the loan? |
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| 2. |
Last year Russ purchased and installed new, more efficient equipment to replace an older heat-treating furnace. Russ had originally planned to sell the old equipment, but found that it is still needed whenever the heat-treating process is a bottleneck. When Russ discussed his cash flow problems with his brother-in-law, he suggested to Russ that the old equipment be sold or at least reclassified as inventory on the balance sheet because it could be readily sold. At present, the equipment is carried in the Property and Equipment account and could be sold for its net book value of $93,000. The bank does not require audited financial statements. |
| a. |
Calculate the following if the old machine is considered as inventory. (Round your answers to 2 decimal places.) |
| b. |
Based on the 2a above would the company qualify for the loan? |
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| c. |
Calculate the following if the old machine is sold off. (Round your answers to 2 decimal places.) |
| d. |
Based on the 2c above would the company qualify for the loan? |
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In: Accounting
Measure the accounting for foreign currency and its translation.
Scenario
CM Corporation (CMC) was founded six years ago by Phil Connor and Eric Martin. The company designs, installs, and services security systems for high-tech companies. The founders, who describe themselves as "entrepreneurial geeks," met in a computer lab when they were teenagers and found they had common interests in working on security systems for critical industries. CMC hired you as a junior accountant this year.
Lately, Connor and Martin have been working with "radio frequency identification" (RFID) technology. They have developed a detailed system designed to track inventory items using RFID tags embedded invisibly in products. This technology has numerous inventory applications in multiple industries.
One of the most basic applications is tracking manufacturing components; if tagged components "go walking" (if employees attempt to take them), companies can easily track and find them. Connor and Martin have sold their system to several high-tech companies in the area. These companies have a number of government contracts that require extensive security systems to protect sensitive data from infiltration by terrorists and others. To date, CMC's cash flow from sales and services has adequately funded its operations.
CMC expects much growth potential for its products. As a result, they are considering going public and expanding internationally in the near future.
Instructions
Connor and Martin are contemplating international business in their industry and feel that global expansion is a great transition for the company. They feel they understand IFRS much better in addition to having a greater technical grasp of GAAP. They have decided to go public and also expand internationally within the next two to three years. With making such bold moves, they are also seriously considering a switch to IFRS as their accounting standards for financial statements. Connor and Martin have requested your assistance in creating a PowerPoint presentation that summarizes information on the impact of foreign currency should the firm expand internationally.
Presentation Mechanics should be as follows:
Prepare a 5-8 slide PowerPoint presentation, including slide notes.
Summarize the impact foreign currency will have on a firm expanding internationally.
Explain the advantages and disadvantages to foreign currency translation of financial statements.
Explain different reasons for the firm to continue with accounting under US GAAP or switching to IFRS standards.
In: Accounting
| On January 1st 2018, the Antman Company was founded when Ms. Wasp purchased 100 units of inventory at $25 each | ||||||||||||||
| On February 1st Antman sold 80 units of inventory at $40 each | ||||||||||||||
| On March 1st Antman purchased 200 units of inventory at $27 each | ||||||||||||||
| On July 1st Antman purchased 300 units of inventory at $30 each | ||||||||||||||
| On August 1st Antman sold 400 units of inventory at $44 each | ||||||||||||||
| On October 1st Antman purchased 300 units of inventory at $31 each | ||||||||||||||
| On December 1st Antman sold 200 units of inventory at $50 each | ||||||||||||||
| On December 28th Antman purchased 100 units of inventory at $29 each | ||||||||||||||
| ALL PURCHASES AND SALES WERE MADE ON CREDIT | ||||||||||||||
| REQUIRED: MAKE ALL THE JOURNAL ENTRIES ANTMAN MAKES CONNECTED WITH INVENTORY | ||||||||||||||
| UNDER PERPETUAL LIFO METHOD…DON'T FORGET THE ORIGINAL PURCHASE OF INVENTORY ON JANUARY 1 | ||||||||||||||
| WHAT IS ENDING INVENTORY AND COST OF GOODS SOLD FOR 2018? | ||||||||||||||
| BONUS 2 POINTS (NO PARTIAL CREDIT) IF TAXES ARE 30% HOW MUCH MONEY DID ANTMAN SAVE BY | ||||||||||||||
| USING LIFO PERPETUAL INSTEAD OF FIFO PERPETUAL? | ||||||||||||||
In: Accounting
Q1.
Agarwal Technologies was founded 10 years ago. It has been profitable for the last 5 years, but it has needed all of its earnings to support growth and thus has never paid a dividend. Management has indicated that it plans to pay a $0.25 dividend 3 years from today, then to increase it at a relatively rapid rate for 2 years, and then to increase it at a constant rate of 8.00% thereafter. Management's forecast of the future dividend stream, along with the forecasted growth rates, is shown below. Assuming a required return of 11.00%, what is your estimate of the stock's current value? (12 points)
| Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 |
| Growth rate | NA | NA | NA | NA | 50.00% | 25.00% | 8.00% |
| Dividends | $0.00 | $0.00 | $0.00 | $0.25 | $0.38 | $0.47 | $0.51 |
Q2.
ABC corporation suffers a declining of performance recently and shareholders are concerned that the executives might not do their best to run the company. Therefore, the company consults its board directors and people put up the following suggestions for consideration:
Please go through each suggestion and briefly state your thoughts on how the suggestion could possibly solve the conflicts between shareholders and the executives, and conclude your recommendations to the shareholders of ABC corporation.
In: Finance
In: Finance
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, thecompany is entirely equity financed, with 8 million shares of common stock outstanding. The stock currently trades at $37.80 per share. Stephenson is evaluating a plan to purchase a huge tract of land in the southeastern United States for $85 million. The land will subsequently be leased to tenant farmers. This purchase is expected to increase Stephenson’s annual pretax earnings by $14.125 million in perpetuity. Jennifer Weyand, the company’s new CFO, has been put in charge of the project. Jennifer has determined that the company’s current cost of capital is 10.2 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 6 percent coupon rate. 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 23 percent corporate tax rate (state and federal).
QUESTIONS
1. If Stephenson wishes to maximize its total market value, would you recommend that it issue debt or equity to finance the land purchase? Explain.
2. Construct Stephenson’s market value balance sheet before it announces the purchase.
3. Suppose Stephenson decides to issue equity to finance the purchase.
a. What is the net present value of the project?
b. Construct 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?
c. Construct 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?
d. Construct Stephenson’s market value balance sheet after the purchase has been made.
4. Suppose Stephenson decides to issue debt to finance the purchase.
a. What will the market value of the Stephenson company be if the purchase is financed with debt?
In: Finance
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).
In: Finance
Quick Air S.L. was founded 10 years ago by friends Peter Smith and Javier Benet. The company has manufactured and sold light airplanes over this period, and the company’s products have received high reviews for safety and reliability. The company has a niche market in that it sells primarily to individuals who own and fly their own airplanes. Peter and Javier have decided to expand their operations. They instructed their newly hired financial analyst, Laura Sanchez, to enlist an underwriter to help sell $35 million in new 10-year bonds to finance construction. Laura has entered into discussions with Sandra Harper, an underwriter from the firm of Castle & Partners, about which bond features Quick Air should consider and what coupon rate the issue will likely have.
Although Laura is aware of the bond features, she is uncertain about the costs and benefits of some features, so she isn’t sure how each feature would affect the coupon rate of the bond issue. You are Sandra’s assistant, and she has asked you to prepare a memo to Laura describing the effect of each of the following bond features on the coupon rate of the bond. She would also like you to list any advantages or disadvantages of each feature.
QUESTIONS:
In: Finance
How does Zynga recognize revenue from virtual goods?
Zynga was founded in July 2007 and is headquartered in San
Francisco, California. Around 80% of Zynga’s revenue comes from
Facebook users. Facebook provides a social networking platform used
by over 1 billion people, and Zynga is a video game developer with
many products (e.g. FarmVille, MafiaWars) that interface with
social technology sites like Facebook. Zynga has been publicly
traded since December 16, 2011.
Zynga’s FarmVille players can use Facebook to purchase in-game
currency they can use to acquire resources, such as hay and
animals, in pursuit of a more productive virtual farm. Revenue from
conversion of real dollars into in-game currency is big business:
Zynga estimates that such sales, from FarmVille hay to Mafia Wars
guns, accounted for nearly all of Zynga’s $1.1 billion in 2011
revenues and 12% of revenue for Facebook.
Revenue recognition in firms that earn money through socially-based
use of virtual items is challenging. Zynga’s customers convert real
dollars into FarmVille currency in order to purchase virtual goods.
Customers’ real dollars become Farm Cash which the customers can
use in the future to purchase virtual items in the Farmville
application. When the customer uses Farm Cash to buy a tractor, for
example, Facebook reduces the player’s Farm Cash, keeps 30% of the
real dollar equivalent as a processing fee, and sends 70% to
Zynga.
Starting in 2009, Zynga classified the game items it sells to
players as either “consumable” or “durable” goods. The former
category is for goods that players can immediately use, like energy
in the game CityVille; the latter is for goods that players buy and
keep for the duration of the game, such as tractors in FarmVille.
Until 2010 Zynga estimated the average player life (the number of
months a player on average continues to play the game) to be 19
months. In early 2011 it changed that estimate to 15 months. The
shorter player life increased revenue for the six months by $27.3
million, turning a loss for the six months ended June 30, 2011 into
a net profit of $18.1 million.
Required:
Discuss the revenue recognition at Zynga.
In: Accounting
Starware Software was founded last year to develop software for gaming applications. The founder initially invested
$ 800 comma 000$800,000
and received
88
million shares of stock. Starware now needs to raise a second round of capital, and it has identified a venture capitalist who is interested in investing. This venture capitalist will invest
$ 1.60$1.60
million and wants to own
31 %31%
of the company after the investment is completed.
a. How many shares must the venture capitalist receive to end up with
31 %31%
of the company? What is the implied price per share of this funding round?
b. What will the value of the whole firm be after this investment (the post-money valuation)?
In: Finance