Question 1 (EPS)

The following summarised information is available in relation to ‘La Scan’, a publicly listed company in Australia:

Statement of comprehensive income extracts for years ended 30^th June:

* Acquired on the 1^st November 2017

Analyst expect profits from the market sector in which La Scan’s existing operations are based to increase by 6% in the year to 30^th June 2019 and by 8% in the sector of its newly acquired operations.

On 1^st July 2016 La Scan had:

$12 million of $1 ordinary shares in issue.

$5 million 8% convertible debentures 2023; the terms of conversion are 40 equity shares in exchange for each $100 of debenture.

On 1 January 2018 the directors of La Scan were granted options to buy 2 million shares in the company for $1 each. The average market price of La Scan’s shares for the year ending 30^th June 2018 was $2.50 each.

Assume an income tax rate of 30% for year 2016,2017 and 2018

Required:

(i) Calculate La Scan’s estimated profit after tax for the year ending 30 June 2019 assuming the analysts’ expectations prove correct;

(ii) Calculate the diluted earnings per share (EPS) on the continuing operations of La Scan for the year ended 30 June 2018 and the comparatives for 2017.

Question 1:

You have been hired by UrTaxi - a taxi service company in Brisbane which drives customers home in drivers’ personal cars. Customers currently phone in to book a driver and pay cash on arrival. The current system is a simple spreadsheet with a basic AIS. UrTaxi have decided it was time to go online and they would like customers to register online and book and pay for their trips online. The CEO of the business would like to upgrade their accounting system and have hired you as a consultant, to develop/acquire the necessary systems. Current staff are wary of change and are do not seem too pleased about a new way of doing things. The CEO has warned you about this and has asked you to help with minimising user resistance.

As a consultant, which Systems Development Life Cycle stage/s would you refer to prior to acquiring a suitable accounting system for this new business?

Would the online nature of their business impact on your decision?

What would you do to help minimise user resistance?

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Firm X wants to raise $10 million to grow and attract new investors. Firm X operates in an inflationary environment and has been using the LIFO inventory valuation method to minimize their net earnings and thereby reduce their taxes. The CEO asks you to estimate the change in net earnings that would happen if they switched to FIFO.

After reviewing Firm X’s finances, you estimate that pre-tax income would increase by $1.2 million if the company adopted the FIFO method. However, the switch would result in approximately $400k of additional taxes. The overall effect would result in an increase of $800k in net earnings. The CEO tells you to prepare the tax return on a LIFO basis for inventory, but to prepare statements on a FIFO basis to be sent to potential investors.

1. How will the switch to FIFO affect the Balance Sheet?
2. What are the legal and ethical implications of the CEO’s recommendation?
3. If you switch to FIFO for taxes as well as financial reporting purposes, net income will increase by $800k. Comment on the possibility of paying $400k in income taxes to obtain an additional $800k of net income.

“Bankrupt” Corporation is in a deep financial crisis. You are one of the financial avengers “Bankrupt” is desperately seeking help from. CEO of the company informed you that he is considering the two risky projects “Thanos” and “Loki” to protect the firm from financial collapse. Both projects have similar risk characteristics. Bankrupt’s WACC is 11%. The initial investments for both the projects are $200 million. Cashflow from the projects are as follows;

Year           1                2                3                4

Thanos       10M           60M           80M           160M

Loki           70M           50M           20M           160M

Now, your job is to explain the following questions in great detail so that the CEO understands your plans to protect the firm.

1. Explain your decision when Thanos and Loki are mutually exclusive, and when they are independent.
2. WACC has increased to 15%. What change you will see in NPV?
3. What is IRR and how it is different from NPV? What is the IRR for Thanos and Loki? Based on IRR which project you should accept?
4. How is IRR identical to Bond’s YTM?

ABC Meat Processing, Inc. is considering an upgrade to their facilities. The CEO and largest shareholder of the company was recently inspired by the movie about Dr. Temple Grandin, and believes that implementing some of Dr. Grandin's designs could increase the efficiency and profitability of the company.

A task force of engineers and marketers was formed to analyse different designs. They have settled on their top recommendation, and have come to you for a financial analysis.

The upgrades are expected to last for 7 years. It is expected that the implementation of this design will increase the number of cattle that can be processed by 11,250 per year. The revenue generated by one head of cattle is expected to be $2,500 in the first year of the project; and the cost of one head of cattle is expected to be $1,350 in the first year of the project. The revenue and cost per unit are expected to increase at a constant rate of 2% annually for the life of the project.

The updgrades will cost $55 million and will be depreciated on a straightline basis over the 7-year economic life of the project. The project will also require an immediate investment in net working capital of $400,000 which will be recovered at the end of the project.

The company's marginal tax rate is 35%. Additionally, the company is financed entirely with equity, and the cost of equity r_e = 9%.

A.) What is the NPV of this project? Round your answer to the nearest dollar, and do not include symbols or commas in your answer. For example, write "$1,234,567.89" as "1234568".

B.) However: the CEO wants to finance the updgrades entirely with debt so as not to dilute his control of the company. Assuming this is possible and that the company could raise the $55 million with an issue of bonds priced to yield 5% and maturing in 7 years, the annual interest expense for each of the next 7 years would be $2.750 million.

What is the value of the project with leverage? Round your answer to the nearest dollar, and do not include symbols or commas in your answer. For example, write "$1,234,567.89" as "1234568".

CASE STUDY CH.6

DROPBOX ASSIGNMENT

A spice manufacturer has a machine that fills bottles. The bottles are labeled 16 grams net weight so the company wants to have that much spice in each bottle. The company knows that just like any packaging process this packaging process is not perfect and that there will some variation in the amount filled. If the machine is set at exactly 16 grams and the normal distribution applies, then about half of the bottles will be underweight making the company vulnerable to bad publicity and potential lawsuits. To prevent underweight bottles, the manufacturer has set the mean a little higher than 16 grams. Based on their experience with the packaging machine, the company believes that the amount of spice in the bottle fits a normal distribution with a standard deviation of 0.2 grams. The company decides to set the machine to put an average 16.3 grams of spice in each bottle. Based on the above information answer the following questions:

1) What percentage of the bottles will be underweight? (5 Points)

2) The company's lawyers says that the answer obtained in question 1 is too high. They insist that no more then 4% of the bottles can be underweight and the company needs to put a little more spice in each bottle. What mean setting do they need? (5 Points)

3) The company CEO says that they do not want to give away too much free spice. She insists that the machine be set no higher than 16.2 grams (for the average) and still have only 4% underweight bottles as specified by the lawyers. This can be only accomplished by reducing the standard deviation. What standard deviation must the company achieve to meet the mandate from the CEO? (4 Points)

4) A disgruntled employee decides to set the machine to put an average 17.4 grams of spice in each bottle. What % of the bottles will be over weight (use standard deviation of 0.2 grams for this question)? (5 Points Hint: this question is similar to Question 1 but make sure you draw a diagram so as to answer this question correctly)

5) Can you think of a practical way as to how the company can reduce the standard deviation for this bottle filling process? (1 Point)

Shopwell is a U.K. grocery chain that is a subsidiary of Premium Products, a U.S. company. Premium’s fiscal year ends January 31. On February 1, 2018, Shopwell’s inventory balance consisted of £100,000 purchased when the exchange rate was $1.20/£, and £300,000 purchased when the exchange rate was $1.23/£. Shopwell made purchases of £5,000,000 evenly throughout fiscal 2019, and its inventory on January 31, 2019, consisted of £350,000 purchased when the exchange rate was $1.29/£. Shopwell’s sales of inventory occurred relatively evenly throughout fiscal 2019. The average exchange rate for fiscal 2019 was $1.26/£, and the January 31, 2019, exchange rate was $1.30/£.

Required

a. Assume that Shopwell’s functional currency is the pound. Calculate Shopwell’s translated ending inventory at January 31, 2019, and its translated cost of sales for fiscal 2019.

b. Now assume that Shopwell’s functional currency is the U.S. dollar. Calculate Shopwell’s remeasured ending inventory at January 31, 2019, and its remeasured cost of sales for fiscal 2019.

John’s company signs a contract with the city of Monrovia, a town located in the U.S., to remove all of the gravel in a specific area. The city has performed their due diligence and has determined that the gravel should be removed and foresees no issues in doing so. After surveying the area himself and after accepting the contract, Hurricane Matthew comes into town and quickly leaves a large portion of the gravel underwater and removing it will cost the company 20 times more than was originally agreed to. The contract between John and the City has a provision stating that come Hell or Highwater, the contract is to be performed. Will there be any issues for John? For the City? Who should prevail if there is an issue of Non-performance? Refer to the theories in the chapter regarding Performance, Breach and Discharge.