Q3.

Consider the CEO of “Zeus Engineering” who knows very well how to use the Bloomberg Terminals and download the most contemporary data in the global financial markets. He calculates the historical returns by employing the CAPM MODEL.

Consider the following table and assist him in order to estimate the following relationships for Kronos (K) and Titan (T) Multinationals (hereafter, MNEs).

YEAR             MNE (K)                    MNE (T)                    MARKET

2016                14%                            13%                             12%

2017                19%                            7%                             10%

2018                -16%                           - 5%                            -12%

2019                   3%                            1%                                1%

2020                20%                            11%                             15%

Assume that the Risk-Free Rate is 2%

1. What are the betas of the MNE’s K and T respectively?
2. What are the required rates of return for MNE’s K and T?
3. Are stocks for the MNE K and T aggressive or defensive stocks?
4. What is the slope of the SML LINE for MNE stocks K and T respectively? Draw them carefully and provide comments and explanations for the Sharpe’s and Treynor’s Ratios.
5. How different is the CAPM model from the Mean Variance Model?
6. What is the Efficient Frontier? Carefully explain your answer.               

Sailing Voyages Inc. is a company operated by an individual as a summer tourist attraction on the Great Lakes. It operates a sailing schooner offering day cruises for individuals and groups. Over the last few years, the average number of tourists per cruise was 30. The average charge per person for the cruise including group discounts was $100. The company operates from mid-May until mid-September. On average, the ship sails 100 days during this period. ‘The Canadian’ (the name of the schooner) requires a crew of 6, and is captained by the owner of the company. University students with extensive sailing experience have been willing to work on a per diem basis of $100. They are paid only if the ship is cruising. The ship provides non-alcoholic refreshments and a light lunch. These are acquired daily from a local delicatessen and cost, on average, $25 per person. The daily operating expenses fuel and miscellaneous supplies average $50 per cruise. The company has a variety of annual expenses including: maintenance, depreciation, marketing, licenses, etc., totaling approximately $85,000. Required: Prepare an Excel Workbook to answer the following questions in a professional manner. Ensure that you are utilizing Excel features (including links between spreadsheets, formulas, formatting, graphing).

1. Compute the revenue and variable costs for each cruise. Use this to compute the contribution margin per cruise.

2. Compute the number of cruises that ‘Canadian’ must have each year to break-even. Use your knowledge gained in this course to show the different formulas, graphs etc for break-even analysis.

3. The owner expects a total return on capital and remuneration of $125,000. Using the concept of ‘contribution margin’, cost-volume-profit, and target profit calculations, estimate how many cruises the Canadian needs to make to reach this objective. Is this a realistic expectation? Add your thoughts, proposals, and recommendations.

4. Prepare a contribution margin income statement for Sailing Voyages Inc. If the owner wishes to adjust or achieve his income goal, what changes can he make? How can these changes be easily estimated and projected to show how these changes affect net income. Use your imagination, and your knowledge of cost-volume-profit analysis. Highlight your ideas by utilizing the various graphing tools in Excel.

On January 1, 2017, Palka, Inc., acquired 70 percent of the outstanding shares of Sellinger Company for $1,274,000 in cash. The price paid was proportionate to Sellinger’s total fair value, although at the acquisition date, Sellinger had a total book value of $1,540,000. All assets acquired and liabilities assumed had fair values equal to book values except for a patent (six-year remaining life) that was undervalued on Sellinger’s accounting records by $270,000. On January 1, 2018, Palka acquired an additional 25 percent common stock equity interest in Sellinger Company for $512,500 in cash. On its internal records, Palka uses the equity method to account for its shares of Sellinger.

During the two years following the acquisition, Sellinger reported the following net income and dividends:

1. Show Palka’s journal entry to record its January 1, 2018, acquisition of an additional 25 percent ownership of Sellinger Company shares.

2. Prepare a schedule showing Palka’s December 31, 2018, equity method balance for its Investment in Sellinger account.

On January 1, 2017, Palka, Inc., acquired 70 percent of the outstanding shares of Sellinger Company for $1,789,900 in cash. The price paid was proportionate to Sellinger’s total fair value, although at the acquisition date, Sellinger had a total book value of $2,250,000. All assets acquired and liabilities assumed had fair values equal to book values except for a patent (six-year remaining life) that was undervalued on Sellinger’s accounting records by $297,000. On January 1, 2018, Palka acquired an additional 25 percent common stock equity interest in Sellinger Company for $665,625 in cash. On its internal records, Palka uses the equity method to account for its shares of Sellinger.

During the two years following the acquisition, Sellinger reported the following net income and dividends:

Show Palka’s journal entry to record its January 1, 2018, acquisition of an additional 25 percent ownership of Sellinger Company shares.

Prepare a schedule showing Palka’s December 31, 2018, equity method balance for its Investment in Sellinger account.

Runiowa is a fashion shoe company that tries to manufacture much more durable heels in 2020. The management team of Runiowa suggests two rubber materials A and B and the research team of Runiowa is asked to design an experiment to gauge whether the rubber A is more durable than the rubber B. 300 people in the US aged between 18 and 65 were randomly chosen. The rubber A is allocated at random to the right shoe or the left shoe of each individual. Then, the rubber B has been assigned to the other. For example, if Mr. Nathaniel is one of 300 people randomly chosen, then the right heel of Mr. Nathaniel is randomly assigned to be made with the rubber A and then his left heel is to be made with the rubber B. The research team measures the amounts of heel wear both the rubber A (wA) and the rubber B (wB) in each individual and records the difference wA − wB of 300 individuals. Even though the individuals are heterogeneous with different heights and weights, those individual heterogeneities will not obscure the comparison of treatment groups by focusing on the paired differences of each individual. Also as long as the heel materials are randomly assigned for each individual, there has been no restrictions on shoe styles. Note that the age of subjects is ranging from 18 to 65. In this way, researchers compare treatments within blocks controlling heterogeneity of individuals. The research team also repeats this experiment design with 300 people in the US aged between 18 and 65 chosen at random.

Question:

Is there a conjecture?

What is the response variable?

What is the explanatory variable?

What levels of the factor(s) were used in the expereiment?

What are the treatments for this experiment?

What are the experimental units?

What is the control?

Hoe much replication was used?

How was randomization used?

6) Tuition and fees at Eastern Washington University Suppose state law allows the university to increase tuition and fees by 3.5% per year. You would like you child to have enough money for four years at Eastern Washington University 16 years from now (suppose your child is 2 years old). According to EWU the current tuition and fees for THIS year is $7109.61 (this is based on three quarters of attendance). Create an Excel Table with first column “Years from now” and second column “Tuition and Fees”. Under Years from the first cell should be 0 and under tuition and fees the first cell should be $7109.61. Use the fact that the tuition and fee rate will increase by 3.5% per year to fill out this table and answer these questions:

a) How much will your child need in tuition and fees 16 years from now to attend EWU the first year?

b) How much total will your child need in tuition and fees for their four years at EWU (this would be years 16,17,18 and 19 from now)

3. Prepare the journal entry to record receipt of payment by Hamada LLC if the spot rate on dirhams was 4.75 dirhams/GBP on April 2, 2020.

Suppose that on February 1, 2020, Victoria, Plc., a British company, makes a sale and ships goods to Hamada, LLC, an Emirati customer, for 100,000 (GBP).

However, it is agreed that Hamada will pay in dirhams on April 2, 2020. The exchange (spot) rate as of February 1, 2020 is 5 dirhams per Great British Pound.

2. A Multi-Item (Summated Scale) Consist of a number of closely related items (questions or statements) whose responses are combined into a composite score to measure a construct. Explain the benefits of measuring a construct with a multi-item scale as opposed to a single item scale in the context of an interview or questionnaire

3. Explain what is wrong with the following interview question and propose a solution to the problem you identify (i.e., re-write the question). (4 points)

a. Considering the high rate of childhood obesity and the fact that many Canadians eat fast food, don’t you think that fast food advertising in Canada should be banned?

b. Given the increased incidence of morbidity and mortality associated with gun ownership would you support increasing regulation of gun ownership and increased security in gun storage?

4. We are developing an online test to give to job applicants to measure their suitability for a sales position and one of key attributes for a good salesperson is ‘proactiveness’. To measure this, we have decided to use 24 different questions. Explain how you would use split-half reliability to ensure the questions were a reliable measure?

5. We are developing an online to give to job applications to measure their suitability for a sales position and one of the key attributes for a good salesperson is emotional intelligence. We plan to use Trait Emotional Intelligence Questionnaire (TEIQue) to measure emotional intelligence. Explain how and why you would use convergent validity to validity the TEIQue before using it?

6. An IT company operating in Atlantic Canada with 4 locations (Charlottetown, Halifax, Moncton, St. Johns) has seen its profits drop in recent years due to decreasing sales numbers. The company’s CEO believes that this is due to employees’ poor sales skills and has hired you to help address this problem. You perform design an experiment where half the sales staff at each location receive three weeks of sales training in the straight-line selling system. After training is completed, you track sales in both stores over a period of six months to assess the impact of sales skills training on store performance. Answer the following:

a. State an appropriate null hypothesis. (1 mark)

b. State an appropriate alternative hypothesis. (1 mark)

c. Describe a Type I error in the context of this study. (1 mark)

d. Describe a Type II error in the context of this study. (1 mark)

e. What is an important step that should have been completed before the experiment was designed? (1 mark)

f. Identify the dependent, independent and mediator variables

7. Comment on the descriptive statistics (i.e., means, standard deviations) and internal consistency reliabilities in the table below adapted from Erdogan and Bauer (2009) and summarize the correlation results, taking into account the strength, direction, and statistical significance of the bivariate relationships. (6 points)

A US manufacturing company has reached an EBIT of USD 500 mil. and paid USD 170 mil. in taxes last year. The Debt/Total Capital ration has been 25% (debt in the form of corporate bonds). The company is targeting a constant D/Capital ratio in the future. US 30-year T-Bond's current rate of return is 3%, the average excess return of the US stock market over the last 50 years is 5%. The beta of assets for the firm is 1.1 while the beta of debt equals 1.3. Estimate the weighted average cost of capital for this company. Describe in words what would happen to the company's cash flow and cost of capital if the company decided to raise the level of debt to 50% by taking a bank loan.