You are the Chief Financial Officer of Hilton Ltd, a large manufacturing company operating within the Asian-pacific region. The CEO, Mr Ray Ellis, has just returned from a shareholders engagement event to promote the company’s upcoming right issue of shares. He was confronted with some questions relating to issue of shares and whether there were any pros and cons to issuing shares via rights, bonus or by private placement. Issues related to the company’s earnings per share (EPS) also came up during the event. Mr Ellis was unimpressed with both the questions and his inability to respond in a comprehensive manner. He promised the shareholders that he would email them with clear responses to the issues raised, after he consulted with his Chief Financial Officer.
In consulting you, Mr Ellis would like to know your thoughts on the following:
 What is the difference between rights issue and bonus issue of shares?
 What are the advantages and disadvantages of both methods of issuing shares?
 Should Hilton Ltd consider a private placement and is there any benefit to having a private placement instead of a rights issue?
 What effects does a bonus issue of shares made in the middle of a financial year have on the EPS calculations of a company?

Required
Write a short memorandum format report to the CEO of Hilton Ltd to answer his questions. Your report should cover all four questions raised by Mr Ellis. Each question should be answered under a sub-heading within the report with appropriately cited references.

A power player is any U.S. retailer with sales equal to or greater than 10 percent of those of the category leader.

Department Stores: Department stores have survived the rise of sectors specializing in narrower product ranges, as well as the challenges of discount stores and other off-price retailers, and finally E-commerce. Gerald Storch, CEO of Hudson’s Bay, parent of Saks Fifth Avenue and Lord & Taylor, says, “Increasingly, consumers don’t think of stores as physical locations, they think of stores as brands. The opportunity is to customize on a mass scale so you simulate the selling experience on a mobile device.”

Drugstores: National healthcare questions have been driving a lot of what has been going on in the drugstore industry. CVS is moving on several fronts: It broadened its pharmacy reach by acquiring Omnicare, which distributes prescription drugs to nursing homes, assisted living facilities, and so on. CVS has unveiled the makeover of the Navarro Discount Pharmacy sites it acquired. Carrying the banner “CVS pharmacy y mas,” the South Florida stores feature bilingual associates and 1,500+ “trusted Hispanic products.” It also acquired Target’s pharmacy businesses for about $1.9 billion.

General Apparel: Fast fashion has been rising among the ranks of apparel retailers. “There is an underlying sense of rebellion that comes through in today’s fashion,” notes Marshal Cohen, a chief industry analyst with NPD Group. “The fashion industry has undergone one of the most dramatic makeovers in recent history, no doubt influenced by the Millennial consumer.”

Home Improvement and Hardware: These have had to deal with some flooring issues. First, it was hardwood laminate flooring that was said to emit formaldehyde in excess of California state standards. Soon after, came a study of vinyl floor tiles, which found that 58 percent of samples bought from large home improvement dealers contained phthalates, several forms of which have been banned from children’s products since 2009. The Home Depot clicked on several fronts, including online.

Jewelry and Accessories: Signet, which bills itself as the world’s largest retailer of diamond jewelry, acquired Zale Corp. The company now operates stores and kiosks under a variety of banners, including Kay, Jared, and a number of regional brands in its Sterling division, along with Zale, Peoples, and Piercing Pagoda in its Zale division. Zale operations have been growing same-store sales faster than the company as a whole, and Signet expects that to continue.

Mass Merchants: Amazon has joined the ranks of mass merchant power players, selling everything from digital downloads to consumer electronics, toilet paper, books, and groceries. Its limited face-to-face interaction with consumers belies Amazon’s vast physical presence around the country, where a network of fulfillment centers puts it near to customers. Amazon’s mass-market tactics include spreading same-day delivery to more segments of the population.

Supermarkets: Although mergers and acquisitions have been a way of life, grocery remains the most fragmented segment of retailing. Albertsons took over the remnants of Safeway’s network, covering much of North America, and Kroger completed its first full year with Harris Teeter stores under its wing. Then, after A&P and its affiliate brands were forced into bankruptcy in 2015, it was ultimately decided to sell off all the store locations to several major chains.

Women’s Apparel: The biggest news was a deal that closed in August 2015—Ascena Retail Group’s acquisition of Ann Taylor and Loft parent company Ann Inc. Ascena paid $2 billion to bring Ann Inc. into a diverse stable of brands that included Lane Bryant, Dress Barn, Maurices, and Justice.

Questions:
How can an independent retailer compete with power retailers?

What is the greatest opportunity for each of the retail categories described in this case?

5.When discussing the empirical tests of the EMH, there are three topical areas that suggest that the debate probably will never be settled: the magnitude issue, the selection bias issue, and the lucky event issue. Specifically with the lucky event issue, the laws of probability are oftentimes ignored or forgotten.

True

False

6.Bonds rate BBB or Baa or above are considered investment grade bonds whereas those lower rated bonds are classified as speculative grade, high yield, or junk bonds. Defaults on high-grade bonds - the reason for the rating - are not common as evidenced by our in-class discussion.

True

False

7.While oftentimes referred to as risk-free, default-free bonds such as US Treasury issues are nonetheless subject to interest rate and inflation rate risk.

True

False

8.Owing to the recent actions by the Federal Reserve in 2020, the current US government yield curve is inverted. Yield curves can be used to extract market expectations

True

False

For any Hypothesis Test make sure to state Ho, Ha, Test statistic, p-value, whether you reject Ho, and your conclusion in the words of the claim.

For any confidence interval make sure that you interpret the interval in context, in addition to using it for inference.

Round to the thousandths place

The USDA is concerned that most farmers are older Americans. In 2000, it was reported that 25% of all US farmers were over the age of 65. In 2020, a random sample of 350 US farmers was taken and it was found that 98 were over the age of 65. The USDA claims that the proportion of all farmers who are over the age of 65 is now greater than 25%. Does this provide evidence to support the USDA’s claim at the 5% significance level? Run a hypothesis test. Be sure state Ho and Ha, the test statistic and p-value, whether you reject Ho or not and your conclusion in terms of the claim.

Beniluz Company was formed on July 1, 2016. It was authorized to issue 1,000,000 shares of $5 par value common stock and 200,000 shares of 4% $100 par value, cumulative and nonparticipating preferred stock. Beniluz Company has a July 1-June 30 fiscal year. The following information relates to the stockholders’ equity accounts of Penn Company: Common Stock Prior to the 2020-21 fiscal year, Beniluz Company had 304,000 shares of outstanding common stock issued as follows: 1. 220,000 shares were issued for cash on July 1, 2016, at $24 per share. 2. On August 4, 2018, 24,000 shares were exchanged for an office building and warehouse which had a book value in the seller’s book of $431,000 and had an estimated fair value of $627,000 on August 4, 2018. 3. 60,000 shares were issued on November 1, 2019, for $29 per share. During the 2020-21 fiscal year, the following transactions regarding common stock took place: 1. August 31, 2020 - Beniluz purchased 5,000 shares of its own stock on the open market at $30 per share. Beniluz uses the cost method for treasury stock. 2. December 1, 2020 - Beniluz declared a 6% stock dividend for stockholders of record on December 20, 2020, to be issued on January 15, 2021. Beniluz was having a liquidity problem and could not afford a cash dividend at the time. Beniluz ‘s common stock was selling at $28 per share on December 1, 2020. 3. June 20, 2021 - Beniluz sold 1,500 shares of its own common stock that it had purchased on August 31, 2020 for $36,000. Preferred Stock Beniluz issued 20,000 shares of preferred stock at $105 per share on October 1, 2019. 2 Cash Dividends Beniluz has followed a schedule of declaring cash dividends in December and June, with payment being made to stockholders of record in the following month. The cash dividends which have been declared since inception of the company through June 30, 2021, are shown below. Date Common Preferred 6/1/2018 $ 0.50 $ 2.00 12/1/2019 $ 0.50 $ 2.00 6/1/2020 $ 0.40 $ 2.00 12/1/2020 - $ 2.00 Dividend per Share No cash dividends were declared during June 2021 due to the company’s liquidity problems. Retained Earnings As of June 30, 2020, Beniluz Retained Earnings account had a balance of $824,000 and the Accumulated Other Comprehensive Income account had a credit balance of $136,000. For the fiscal year ending June 30, 2021, Beniluz reported net income of $32,000 and an unrealized loss correctly recorded as Other Comprehensive Income for the amount of $12,000. Instructions Prepare, in good form, the Stockholders’ Equity section of the Balance Sheet, including appropriate notes, for Beniluz Company as of June 30, 2021, as it should appear in its annual report to the shareholders.

MiniCase 6—How JCPenney Sailed into a Red Ocean

How JCPenney Sailed into a Red Ocean

This activity is important because, as a strategic leader, you must be able to guide your company toward effective strategic positions of cost leadership, differentiation or a blue ocean strategy.

The goal of this exercise is to illustrate the risks of attempting a blue ocean strategy.

Read the following case on JCPenney and then answer the questions that follow.

JCPenney was once one of the top department stores in the United States, with more than 2,000 locations at its peak. Indeed, the retailer was so common in the suburbs that one could not imagine a shopping mall without a JCPenney. Generations of America's children were mesmerized by its annual holiday catalog. As recent as 2007, JCPenney had enjoyed a market valuation of $18 billion. In a bit over a decade, JCPenney's market cap had fallen to a mere $269 million. Thus, the retailer lost 98.5 percent of its valuation or $17.7 billion in a bit over decade. Many observers expect JCPenney to follow Sears—once the leading American retailer—to also file for bankruptcy, which Sears did in 2018. What went wrong?

Of course, all retailers are exposed to the same threat, Amazon, which has become synonymous with online shopping. Although Walmart, Target, and Best Buy all have become more competitive in recent years, JCPenney sped up its own demise with a bad business strategy. In particular, under former CEO Ron Johnson, JCPenney learned the hard way how difficult it is to change a strategic position. When hired as JCPenney's CEO in 2011, Johnson was hailed as a star executive. Johnson was poached from Apple, where he had created and led Apple's retail stores since 2000. Apple's stores are the most successful retail outlets globally in terms of sales per square foot. No other retail outlet, not even luxury jewelers, achieves more. This poaching didn't come cheap: JCPenney paid Ron Johnson close to $53 million in total compensation in 2011, even though he didn't start until November of that year.

Once on board with JCPenney, Johnson immediately began to change the company's strategic position from a cost-leadership to a blue ocean strategy, attempting to combine its traditional cost-leadership position with a differentiation position. In particular, he tried to reposition the department store more toward the high end by providing an improved customer experience and more exclusive merchandise through in-store boutiques. Johnson ordered all clearance racks with steeply discounted merchandise, common in JCPenney stores, to be removed. He also did away with JCPenney's long-standing practice of mailing discount coupons to its customers. Rather than following industry best practice by testing the more drastic strategic moves in a small number of selected stores, Johnson implemented them in all of the then 1,800 stores at once. When one executive raised the issue of pretesting, Johnson bristled and responded: "We didn't test at Apple."1  Under his leadership, JCPenney also got embroiled in a legal battle with Macy's because of Johnson's attempt to lure away homemaking maven Martha Stewart and her exclusive merchandise collection.

The envisioned blue ocean strategy failed badly, and JCPenney ended up being stuck in the middle. Within 12 months with Johnson at the helm, JCPenney's sales dropped by 25 percent. In a hypercompetitive industry such as retailing where every single percent of market share counts, this was a landslide. Things went from bad to worse. In 2013, JCPenney's stock performed so poorly it was dropped from the S&P 500 index. Less than 18 months into his new job, Johnson was fired. JCPenney had lost over two-thirds of its market valuation (or $6 billion) under Johnson's leadership. The attempted overhaul of JCPenney under Johnson also left the company burdened with more than $4 billion in debt. Myron Ullman, his predecessor, was brought out of retirement as a temporary replacement.

Under Johnson's leadership, JCPenney failed at its attempted blue ocean strategy and instead sailed deeper into the red ocean of bloody competition. This highlights the perils of attempting a blue ocean strategy because of the inherent trade-offs in the underlying generic business strategies of cost leadership and differentiation. As a result, JCPenney continues to experience a sustained competitive disadvantage and may go out of business.

To turn around the 120-year-old icon, the board appointed Marvin Ellison as CEO in 2015. With a strong background in operations management and leadership skills honed at The Home Depot, he focused on lowering JCPenney's cost structure while increasing perceived value offered to its customers. In an attempt to stem losses, in 2017 JCPenney closed some 140 retail stores across the United States out of a total of 1,000 remaining outlets. Marvin Ellison was lured back into the home improvement industry when he was appointed CEO of Lowe's in 2018.

In October 2018, Jill Soltau was appointed CEO of JCPenney. She was previously the CEO of Jo-Ann Stores, a fabric-and-craft retailer. Her new business strategy is not yet clear, and several top executive positions were still vacant as of spring 2019. Soltau retained McKinsey, a strategy consulting firm, to help with the turnaround. One question she faces is whether to continue selling appliances, which her predecessor brought back in 2016 to take away sales from failing Sears. JCPenney had discontinued sales of appliances in 1983 to focus on apparel, and the majority of JCPenney's sales still come from apparel, an area the retailer has neglected in recent years, even though JCPenney was once the go-to apparel retailer for American middle-class families. Whether Soltau will successfully sharpen JCPenney's strategic position and thus make the American icon competitive again remains to be seen.

**JCPenney filed for bankruptcy in May 2020, after the publication of this case.

AFTER READING THE CASE ANSWER THE FOLLOWING QUESTIONS:

• While all brick-and-mortar retailers face the threat of Amazon and online shopping in general, why did JCPenney perform so poorly while other retailers such as Walmart, Best Buy, or Target fare better?
• Ron Johnson was hailed as a star executive at Apple, where he led the company's highly successful retail arm. As CEO of JCPenney, he applied the "Apple playbook," for example, moving JCPenney toward the higher end of the market or going with hunches ("we didn't test at Apple"), rather than applying more traditional decision making. Why did his attempt to change JCPenney's strategic position from cost-leadership to a blue ocean strategy fail so spectacularly? What are some of the lessons?
• You are part of the McKinsey strategy consulting team that the new CEO, Jill Soltau, retained to help turn around JCPenney. What recommendations would you give her? In particular, what type of business strategy would you want JCPenney to pursue, and how would you make the changes necessary? Be specific.

Canberra acquired all of the equity shares in Yass on 1 October 2019, for consideration of $2,150 million. The carrying amount of identifiable net assets at acquisition was $2,130 million, which was the same as the fair value. Canberra is actively selling its entire shareholding in Yass as a single transaction and has classified the investment as a disposal group held for sale, in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, for the year ended 30 September 2020. The carrying amounts of the net assets of Yass in the individual financial statements of Canberra at 30 September 2020, before classification as held for sale, were ($ million):

Canberra measures properties at fair value, in accordance with IAS 16 Property, Plant and Equipment. No revaluations had been recognised on acquisition, when the estimated fair values were substantially the same as the carrying amounts. Properties with a carrying amount of $630 million were revalued to fair value of $680 million, at 30 September 2020. This fair value change has not been recognised in the financial statements. The total fair value less costs to sell of the disposal group was estimated as $2,140 million, at 30 September 2020. No impairments had been recognised previously, to the goodwill of Yass.

Yass owns and operates private hospitals and the medical sector is highly regulated. Canberra is confident that the sale of Yass will be agreed shortly after 30 September 2020. Any purchaser will require regulatory approval, which could delay completion of the sale until after 30 September 2021. Regulatory approval cannot be sought by a purchaser until a contract of sale had been agreed. Yass will continue to operate the hospitals until the sale is completed. Canberra will sell all of the shares in Yass to the purchaser, who would obtain all of Yass’s rights and obligations. Yass does not intend to sell or acquire any significant assets or liabilities prior to completion of the sale, as that would affect the value of the shares being sold.

Required:

Discuss the correct recognition and measurement of the investment in Yass in the consolidated financial statements, for the year ended 30 September 2020. Provide calculations.     

Canberra acquired all of the equity shares in Yass on 1 October 2019, for consideration of $2,150 million. The carrying amount of identifiable net assets at acquisition was $2,130 million, which was the same as the fair value. Canberra is actively selling its entire shareholding in Yass as a single transaction and has classified the investment as a disposal group held for sale, in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, for the year ended 30 September 2020. The carrying amounts of the net assets of Yass in the individual financial statements of Canberra at 30 September 2020, before classification as held for sale, were ($ million):

Canberra measures properties at fair value, in accordance with IAS 16 Property, Plant and Equipment. No revaluations had been recognised on acquisition, when the estimated fair values were substantially the same as the carrying amounts. Properties with a carrying amount of $630 million were revalued to fair value of $680 million, at 30 September 2020. This fair value change has not been recognised in the financial statements. The total fair value less costs to sell of the disposal group was estimated as $2,140 million, at 30 September 2020. No impairments had been recognised previously, to the goodwill of Yass.

Yass owns and operates private hospitals and the medical sector is highly regulated. Canberra is confident that the sale of Yass will be agreed shortly after 30 September 2020. Any purchaser will require regulatory approval, which could delay completion of the sale until after 30 September 2021. Regulatory approval cannot be sought by a purchaser until a contract of sale had been agreed. Yass will continue to operate the hospitals until the sale is completed. Canberra will sell all of the shares in Yass to the purchaser, who would obtain all of Yass’s rights and obligations. Yass does not intend to sell or acquire any significant assets or liabilities prior to completion of the sale, as that would affect the value of the shares being sold.

Required:

Discuss the correct recognition and measurement of the investment in Yass in the consolidated financial statements, for the year ended 30 September 2020. Provide calculations.                 

During 2020, the following transactions were recorded by the Port Hudson Community Hospital, a private sector not-for-profit institution:

1. Gross charges for patient services, all charged to Patient Accounts Receivable, amounted to $1,950,000. Estimated contractual adjustments with third-party payors amounted to $550,000 and the Hospital estimated implicit price concessions would total $25,000.
2. Charity services, not included in transaction 1, would amount to $96,000, had billings been made at gross amounts.
3. Other revenues, received in cash, were parking lot, $35,000; cafeteria, $57,500; gift shop, $12,500.
4. Cash gifts restricted by the donor for programs amounted to $38,750 for the year. During the year, $77,000 was expended for technician salaries supporting the program identified by the donor (debit Operating Expense—Salaries and Benefits).
5. Mortgage bond payments amounted to $74,000 for principal and $46,000 for interest. Assume unrestricted resources are used.
6. During the year, the hospital received, in cash, unrestricted contributions of $63,000 and unrestricted income of $53,750 from endowment investments. (It is the hospital’s practice to treat unrestricted gifts as nonoperating income.)
7. New equipment, costing $182,000, was acquired, using donor-restricted cash that was on hand at the beginning of the year.
8. An old piece of lab equipment that originally cost $200,000 and that had an undepreciated cost of $40,000 was sold for $22,000 cash.
9. At the end of 2020, pledges (restricted as to purpose) were received in the amount of $195,000. These are intended to be received and expended in 2021.
10. Cash contributions were received from donors restricted for plant acquisition, $218,750.
11. Bills were received for the following items: Utilities $158,500 and Insurance $92,000. These will be paid in January of 2021.
12. Depreciation of plant and equipment amounted to $225,000.
13. Cash payments on accounts payable amounted to $208,500. Another $834,500 was expended on wages and benefits.
14. Cash collections of patient accounts receivable amounted to $1,210,000. These were in settlement of patient accounts totaling $1,662,000. Contractual adjustments associated with these totaled $430,000 and price concessions totaled $22,000.
15. Closing entries were prepared.

Required:
a. Record the transactions in the general journal of the Port Hudson Community Hospital.
b. Prepare a Statement of Operations for the Port Hudson Community Hospital for the year ended December 31, 2020.
c. Prepare a Statement of Changes in Net Assets for the Port Hudson Community Hospital for the year ended December 31, 2020. Assume beginning net assets are $7,225,000

During 2020, the following transactions were recorded by the Port Hudson Community Hospital, a private sector not-for-profit institution:

1. Gross charges for patient services, all charged to Patient Accounts Receivable, amounted to $1,970,000. Estimated contractual adjustments with third-party payors amounted to $560,000 and the Hospital estimated implicit price concessions would total $27,000.
2. Charity services, not included in transaction 1, would amount to $100,000, had billings been made at gross amounts.
3. Other revenues, received in cash, were parking lot, $37,000; cafeteria, $60,500; gift shop, $13,500.
4. Cash gifts restricted by the donor for programs amounted to $40,450 for the year. During the year, $80,600 was expended for technician salaries supporting the program identified by the donor (debit Operating Expense—Salaries and Benefits).
5. Mortgage bond payments amounted to $77,200 for principal and $48,400 for interest. Assume unrestricted resources are used.
6. During the year, the hospital received, in cash, unrestricted contributions of $65,800 and unrestricted income of $56,250 from endowment investments. (It is the hospital’s practice to treat unrestricted gifts as nonoperating income.)
7. New equipment, costing $186,000, was acquired, using donor-restricted cash that was on hand at the beginning of the year.
8. An old piece of lab equipment that originally cost $220,000 and that had an undepreciated cost of $44,000 was sold for $24,000 cash.
9. At the end of 2020, pledges (restricted as to purpose) were received in the amount of $205,000. These are intended to be received and expended in 2021.
10. Cash contributions were received from donors restricted for plant acquisition, $225,250.
11. Bills were received for the following items: Utilities $161,100 and Insurance $93,600. These will be paid in January of 2021.
12. Depreciation of plant and equipment amounted to $231,000.
13. Cash payments on accounts payable amounted to $213,900. Another $839,100 was expended on wages and benefits.
14. Cash collections of patient accounts receivable amounted to $1,214,000. These were in settlement of patient accounts totaling $1,672,000. Contractual adjustments associated with these totaled $434,000 and price concessions totaled $24,000.
15. Closing entries were prepared.

Required:
a. Record the transactions in the general journal of the Port Hudson Community Hospital.
b. Prepare a Statement of Operations for the Port Hudson Community Hospital for the year ended December 31, 2020.
c. Prepare a Statement of Changes in Net Assets for the Port Hudson Community Hospital for the year ended December 31, 2020. Assume beginning net assets are $7,255,000.