Swaps

A. What is the cash flow position for Company A Year 1-4?

B. What is cash flow position for Company B Year 1-4?

Company A borrows $600,000 from Lender 1. The loan demands interest-only be paid and it is a variable term based on the U.S. 10-year bond plus 1%. Company B borrows $600,000 from Lender 2. The loan is fixed at 3% and requires payment of interest-only.

After Year 2, Company A enters into an agreement with Company B, wherein each of them agree to exchange interest cash flows that arise from a notional amount of $350,000, as follows: Company A agrees to pay Company B a fixed rate of 2.5% of the notional amount. These cash flows will happen in Years 3 and 4. Also, Company B agrees to pay Company A a variable rate of the 10-year US Bond rate plus 0.50%, of the notional amount. These cash flows will happen in Years 3 and 4.

Mary, the plant manager of Southern Oregon Injection Molding, Inc. (SOIM), is pondering an interesting offer made by the president and majority shareholder, Kenny. Kenny recently turned sixty and is planning a gradual retirement. None of his children are interested in taking over the business and are currently pursuing careers unrelated to the plastics industry, so Kenny has decided to offer his controlling share to Mary.

SOIM began by manufacturing plastic lawn ornaments, including a colorful tropical bird that became a major fad in the 1980s. Pleased and amused by the success of his fanciful product, Kenny added rabbits, skunks, trolls, angels, and garden fairies to the product line. Under Mary’s leadership, SOIM has also become an important secondary supplier of plastic housings for speakers, cell phones, calculators, and similar products.

Marry started working at SOIM as a color technician shortly after graduating from Southern Oregon University with a degree in chemical engineering. Within five years, she became the plant manager, a position she has held for the last eight years. Along the way, she has earned an MBA through the evening program at Southern Oregon University.

Because SOIM stock is publicly traded, we can confidently assign a value of $10,000,000 to Kenny’s shares. Kenny has stated that he is open to any reasonable plan to finance the purchase.

Questions

1. Mary could probably borrow the money to purchase the shares outright because the shares would serve as collateral and dividends would cover a good part of the loan payments. The interest rate is 7%, and the lender will amortize the loan with a series of equal payments. What are the annual payments if the bank amortizes the loan over five, ten, or twenty years?

2. Repeat Question 1, but assume that Mary makes payments at the beginning of each year.

3. Complete the following amortization schedule for a $10,000,000 loan at 7% with five equal end-ofyear payments.

4. Kenny has offered to finance the purchase with a ten-year, interest-only loan. How much is Mary’s annual payment? Describe the pattern of payments over the ten years.

5. Assume that Kenny accepts Mary’s offer to finance the purchase with a ten-year, interest-only loan. If Kenny can reinvest the interest payments at a rate of 7% per year, how much money will he have at the end of the tenth year?

Come up with a 5 elements of each category of the SWOT of 1-800-GOT-JUNK?

Eighteen thousand expired cans of sardines.84 Fifty garden gnomes. A mechanical bull. Trophies from a nudist colony. These objects are just some of the weird items that Vancouver-based 1-800-GOT-JUNK? customers have asked the uniformed people in the freshly scrubbed blue trucks to haul away. Company founder and CEO Brian Scudamore discovered a lucrative niche between “trash cans and those big green bins dropped off by” the giant waste haulers. But even in such an uncomplicated business as hauling people’s junk, Scudamore must be concerned with managing change and innovation.

1-800-GOT-JUNK? is an award-winning company with a corporate staff of about 300 individuals. “With a vision of creating the ‘FedEx’ of junk removal,” says Scudamore, “I dropped out of university with just one year left to become a full-time JUNKMAN! Yes, my father, a liver transplant surgeon, was not impressed, to say the least.” However, in 2011, the company had more than 200 franchises, and system-wide revenues were over $100 million.85 Not surprisingly, Scudamore’s father is a little more understanding these days about his son’s business. Since 1997, the company has grown exponentially. The company made the list of Entrepreneur magazine’s 100 fastest-growing franchises in 2005 and 2006. It was named one of the Best Employers in Canada by Canadian Business, and Scudamore won the International Franchise Association’s Entrepreneur of the Year award. Scudamore also started two newer franchises: Wow 1 Day Painting and You Move Me.

Hauling junk would be, to most people’s minds at least, a pretty simple business. However, the company Scudamore founded is a “curious hybrid.” It has been described as a blend of “old economy and new economy.” The company’s service—hauling away trash—has been done for hundreds, if not thousands, of years. But 1-800-GOT-JUNK? also relies heavily on up-to-date information technology and has the kind of organizational culture that most people associate with high-tech startups. The company uses its 1-800-GOT-JUNK? call centre to do the booking and dispatching for all its franchise partners. The franchise partners also use the company’s proprietary intranet and customer relationship management site—dubbed JunkNet—to access schedules, customer information, real-time reports, and so forth. According to Scudamore’s philosophy, this approach allowed franchise partners to “work on the business” instead of “work in the business.” On any given day, all a franchisee has to do is open up JunkNet to see the day’s schedule. If a new job comes in during a workday, the program automatically sends an alert to the franchisee. Needless to say, the company’s franchisees tend to be quite tech-savvy. In fact, some of them have installed GPS devices in their trucks to help find the most efficient routes on a job. Others use online navigation sites. With the price of gas continuing to increase, this type of capability is important.

1-800-GOT-JUNK? has a culture that would rival any high-tech startup. The head office is known as the Junktion. Grizzly, Scudamore’s dog, comes to the office every day and helps employees relieve stress by playing catch anytime, anywhere. Each morning at exactly 10:55, all employees at the Junktion meet for a seven-minute huddle, where they share good news, announcements, metrics, and problems they are encountering. Visitors to the Junktion have to join the group huddle, too. One of the most conspicuous features of the Junktion is the “Vision Wall,” which contains the varied outputs of Scudamore’s brainstorms. Other members of the executive team have visions for the company’s future as well. Periodically they will wander through the offices of Genome Sciences Centre, the tenant occupying the space above them, to visualize a future when GOT-JUNK? has expanded so sufficiently that it will take over that office space. Scudamore does not use a permanent desk, instead preferring to sit in different spaces to talk with people and get a sense of what is going on in the business.

Company franchisees are also encouraged to take initiative and be innovative. For example, the Toronto franchise, which has 12 trucks, sometimes gets a blue truck motorcade going down Yonge Street through the heart of the city as a way to be noticed and to publicize its services. Despite the company’s success to date, Scudamore is wondering whether he is prepared to face whatever changes may happen in the environment in the years to come.

Progressive Studios​ Corporation’s sales in Year 2019 is 800 million dollars.​ Let’s make the following assumptions on the​ firm’s performance to forecast its free cash flow in Year​ 2020:

​• Sales grow​ 25% from Year 2019 to Year 2020.

​• Corporate tax rate is​ 25%.

​• COGS is​ 40% of the sales in Year 2020.

​• SG&A is​ 20% of the sales in Year 2020.

​• Depreciation is​ 10% of the sales in Year 2020.

​• Net working capital amounts to​ 30% of the sales for each year​ (i.e., NWC for 2019 is​ 30% sales in​ 2019, NWC for 2020 is prediced to be​ 30% sales in​ 2020).

​• Capital expenditure is​ 5% of the sales in Year 2020.

a. What is the forcasted EBIT of Progressive Studios Corporation in Year​ 2020? Progressive Studios ​Corporation’s forecasted EBIT in Year 2020 is $___.(Round to the nearest​ dollar.)

b. What is Progressive Studios ​Corporation’s forecasted free cash flow in Year​ 2020? Progressive Studios ​Corporation’s forecasted free cash flow in Year 2020 is ​$___.​(Round to the nearest​ dollar.)

c. Assume that starting from Year 2021 and​ beyond, Progressive​ Studios' free cash flow will grow​ 2% per year. The weighted average cost of capital is ​ 12%. The corporation has debt outstanding of​ $100 million and cash of​ $50 million in Year 2019. The number of shares outstanding is 100 million shares. What is the price of Progressive Studios stock will be consistent with the​ forecast? The price per share of $___ will be consistent with the forecast

E5.16  

(Preparation of Partial Statement of Cash Flows—Operating Activities)

(LO 8, 9) The statement of income of Kneale Transport Inc. for the year ended December 31, 2020, reported the following condensed information:

Kneale's statement of financial position included the following comparative data at December 31:

Additional information:

Operating expenses include $70,000 in depreciation expense. The company follows IFRS. Assume that interest is treated as an operating activity for purposes of the statement of cash flows.

Instructions

a.  

Prepare the operating activities section of the statement of cash flows for the year ended December 31, 2020, using the

• 1.indirect method and

• 2.direct method.

b.  

From the perspective of an external user of Kneale Transport's financial statements, discuss the usefulness of the statement of cash flows prepared using either the indirect or the direct method.

Is the SAT Really the Problem? Family breakdown causes serious disadvantages when it comes to college. By William McGurn May 25, 2020 12:32 pm ET When the University of California announced it will stop using the SAT and ACT for admissions, it sent tremors through the world of higher education. If only because of its sheer size—the UC system covers 285,000 students over several campuses—others are bound to follow. Thursday’s decision by the Board of Regents was taken, as are so many decisions in academia these days, in the name of equity and diversity. Requiring SAT scores, the argument goes, discriminates against low-income, black and Latino children who perform poorly on the tests because they lack advantages such as prep courses. To amp up the pressure, a coalition of students and activist groups filed suit in November against the Board of Regents, challenging the SAT requirement on these grounds. Undeniably wealth is a big advantage. But if the idea is to address what’s keeping children from a college degree, instead of papering over the achievement gap, it might be better to address the elephant in the room: family. It’s taboo to raise it, but for all the invocations of “science” and “data-driven decisions,” seldom is any recognition given to what the data tell us about the most privileged kids of all: those living with their biological parents under the same roof. “Family structure is about as important as family income in predicting who graduates from college today,” says W. Bradford Wilcox, a visiting scholar at the American Enterprise Institute, professor of sociology at the University of Virginia and a senior fellow at the Institute for Family Studies. “In the absence of SAT scores, which can pinpoint kids from difficult family backgrounds with great academic potential, family stability is likely to loom even larger in determining who makes it past the college finish line in California.” The data are pretty conclusive. The more intact the family, the better the education outcomes. In a new IFS study (Links to an external site.) released Monday, research psychologist Nicholas Zill reports that when it comes to graduation from top colleges, “students from intact families are twice as likely to do so as those from all other family types combined.” By dropping SATs, UC hopes to produce a student body that includes higher percentages of blacks and Latinos. This requires discrediting the SATs as an indicator of college performance (a point contested by the UC Academic Senate). It also requires finding a way to make room for the students it wants by reducing the number of Asian-Americans (13.6% of California’s population but 29.5% of UC undergraduates). This is why the Asian American Coalition for Education warned the regents that, without the SAT, Asian-American applicants will “become easy victims of various radical acts of racial balancing.” Wenyuan Wu, who addressed the regents on the coalition’s behalf, tells me she cringes whenever the anti-SAT crowd invokes the “racial/socioeconomic biases argument.” She asks: “What about those Chinatown kids whose parents toil in ethnic enclaves with low incomes and tremendous language barriers?” Which raises a further indelicate question: Is it a coincidence that Asian-Americans, who disproportionately earn entry into UC, disproportionately come from intact families? If it’s unjust that rich kids get test prep from their parents, why doesn’t the university simply come up with a good prep course and provide it free to anyone who wants it? If the rejoinder is that the wealthy kids enjoy the further advantage of better schools, why do so many SAT opponents also reject measures that might help level the playing field—vouchers and charter schools come to mind—by giving underserved kids the opportunity of going to a good school too? The modern American university isn’t afraid to weigh in when it comes to issues outside its direct purview. Two days before UC announced its decision on the SAT, it boasted of having completely divested from fossil fuels. But when it comes to addressing a major factor keeping students out of its system and thus widening the achievement gap—crickets. As Charles Murray noted in “Coming Apart” (2012), the data showing the advantage to children of living with their biological parents across a range of outcomes are broadly accepted by social scientists. But those data are “resolutely” ignored by “network news programs, editorial writers for the major newspapers, and politicians of both major political parties.” Not to mention the UC regents. “Given the science,” Mr. Wilcox says, “why can’t universities bring themselves to tell the truth that if you’d like your kids to get a college degree—especially from a selective college—you’d do well to get and stay married?” COMMENT

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)

Xi ~ Uniform [USD 0, USD 40,000] Population is equally distributed between robust (good health people) and frail people (low health people). Robust population do not demand this insurance contract as they expect to have their health care costs lower than the premium amount P= USD 20,000. On the other hand, Frail population decide to purchase this insurance deal as they expect their health care costs greater than the premium amount P= USD 20,000.

• Please define and explain the market situation that insurance company ABC is exposed to in 2019. Please draw a figure with a uniform distribution and clearly show the regions defining market demand for insurance. Summarize insurance company ABC’s financial statement and find expected profit or loss per customer on average. [Hint: Find receivables from customers and payables to customers for health care].

• You are a consultant and you suggest insurance company ABC to raise its insurance premiums to P= USD 30,000 for 2020. Does this new premium save the insurance company’s cash flow when each custumer’s health care costs is USD 30,000 to an insurance company? Please draw a figure with a uniform distribution and clearly show the regions defining market demand for insurance with the new premium. Summarize insurance company ABC’s financial statement and find expected profit or loss per customer on average. [Hint: Find receivables from customers and payables to customers for health care]. Please define and explain the market situation that insurance company ABC is exposed to in 2020 with the new premium.

QUESTION 1:

Researchers claim that women speak significantly more words per day than men. One estimate is that a woman uses about 20,000 words per day while a man uses about 7,000. To investigate such claims, one study used a special device to record the conversations of male and female university students over a four- day period. From these recordings, the daily word count of the 20 men in the study was determined. Here are their daily word counts:

What value we should remove from observation for applying t procedures?

A 90% confidence interval (±±10) for the mean number of words per day of men at this university is from  to  words.

Is there evidence at the 10% level that the mean number of words per day of men at this university differs from 7000?

QUESTION 2:

You are testing H₀: µ = 100 against H_a: µ < 100 based on an SRS of 16 observations from a Normal population. The data give x¯¯¯x¯ = 9.5 and s = 5.9.

The value of the t statistic (±0.01) is  

QUESTION 14

1. The class COVIDTest has five private attributes, name, test date, age, gender, and a Boolean value telling us whether test was positive or negative. Implement the function nextTest() based on the logic, if the number of days from the test date to the current date is more than or equal to 15 days, then print the message “Note: Time to do a COVID 19 Test”, otherwise print “Test not required”.

   The following test case reveals the use of the class. Define a Python class to match the test case given below.

   #Test: Do NOT change this code
   test1 = COIVDTest()
   test1.setname('Jamal K')
   test1.setdate('09/10/2020')
   test1.setage(45)
   test1.setgender('Male')
   test1.setresult(False)
   print(test1.nextTest()) # Print if next test is needed
   print(test1.displaytest()) # Print all details of a test