MBA 6300 Case Study No. 2

There are numerous variables that are believed to be predictors of housing prices, including living area (square feet), number of bedrooms, and number of bathrooms. The data in the Case Study No. 2.xlsx file pertains to a random sample of houses located in a particular geographic area.

1. Develop the following simple linear regression models to predict the sale price of a house based upon a 90% level of confidence. Write the regression equation for each model.
   1. Sale price based upon square feet of living area.
   2. Sale price based upon number of bedrooms.
   3. Sale price based upon number of bathrooms.
2. Develop the following multiple linear regression models to predict the sale price of a house based upon a 90% level of confidence. Write the regression equation for each model.
   1. Sale price based upon square feet of living area and number of bedrooms.
   2. Sale price based upon square feet of living area and number of bathrooms.
   3. Sale price based upon number of bedrooms and number of bathrooms.
   4. Sale price based upon square feet of living area, number of bedrooms, and number of bathrooms.
3. Discuss the joint statistical significance of each of the preceding simple and multiple linear regression models at a 90% level of confidence and 95% level of confidence.
4. Discuss the individual statistical significance of the coefficient for each independent variable for each of the preceding simple and multiple linear regression models at a 90% level of confidence and 95% level of confidence.
5. Compare any of the preceding simple and multiple linear regression models that were found to be jointly and individually statistically significant at a 90% level of confidence and select the preferred regression model. Explain your selection using the appropriate regression statistics.
6. Interpret the coefficient for each independent variable (or variables) associated with your selected preferred regression model.
7. Using the preferred regression model, predict the sale price of a house with the following values for the independent variables: 3,000 square feet of living area, 3 bedrooms, and 2.5 bathrooms. (Hint: You should only use the values for those independent variables that are specifically associated with your selected preferred regression model.)

Prepare a single Microsoft Excel file using a separate worksheet for each question and upload your Excel file.

The system will not let me post all of the data needed to answer the question... it says that it is too long . could you save this information so i can add the data ?

As a recently hired MBA intern, you are working in a consulting capacity to provide an analysis for Al Dente's Italian Restaurant. A financial income Statement is presented below: Sales $2,698,000 Cost of sales (all variable) $1,557,563 Gross Margin $1,140,438 Operating expenses: Variable $277,975 Fixed $213,675 Total operating expenses: $491,650 Administative expenses (all fixed) $564,375 Net operating income $84,413 This income statement presents the sales, expenses and pre-tax operating income for a local eating facility. At Al Dente, the average meal cost for lunches and dinners are $20 and $40 respectively. Al Dente serves both lunch and dinner 300 days per year and serves twice as many lunches as dinners.

4. The owner of the restaurant is thinking of increasing sales through additional advertising, which she will incur as an administrative expense. The proposed additional advertising campaign will cost $25,000. She anticipates that the additional advertising expense will result in an additional 6 lunches and 3 dinners on average, per day. Illustrate the impact on NOI assuming the changes above (hint: show a revised CM statement). Hint: for this type of ‘whatif’, compare the additional contribution margin impact on NOI given the change in units and change in fixed costs.

As a recently hired MBA intern, you are working in a consulting capacity to provide an analysis for Al Dente's Italian Restaurant. A financial income Statement is presented below: Sales $2,698,000 Cost of sales (all variable) $1,557,563 Gross Margin $1,140,438 Operating expenses: Variable $277,975 Fixed $213,675 Total operating expenses: $491,650 Administative expenses (all fixed) $564,375 Net operating income $84,413 This income statement presents the sales, expenses and pre-tax operating income for a local eating facility. At Al Dente, the average meal cost for lunches and dinners are $20 and $40 respectively. Al Dente serves both lunch and dinner 300 days per year and serves twice as many lunches as dinners.

5. In order to increase NOI, the owner of the restaurant is considering adjustments to the quality of food ingredients currently used. Rather than using premium ingredients, use of average quality ingredients would reduce the cost of food by 15%. The owner proposes to not change the current meal pricing. As the consultant, prepare a memo to the owner that presents the pros and cons of this change in operations. What are the potential impacts on revenue, costs, and net operating income may result from this change? The owner does not want to see a decrease in net operating income. Could the owner make this change and absorb a decrease in customers, and how would you demonstrate numerically to support your analysis? What other factors or consequences of this decision should the owner consider besides the financial impact of the change?

As a recently hired MBA intern, you are working in a consulting capacity to provide an analysis for Al Dente's Italian Restaurant. A financial income Statement is presented below: Sales $2,698,000 Cost of sales (all variable) $1,557,563 Gross Margin $1,140,438 Operating expenses: Variable $277,975 Fixed $213,675 Total operating expenses: $491,650 Administative expenses (all fixed) $564,375 Net operating income $84,413 This income statement presents the sales, expenses and pre-tax operating income for a local eating facility. At Al Dente, the average meal cost for lunches and dinners are $20 and $40 respectively. Al Dente serves both lunch and dinner 300 days per year and serves twice as many lunches as dinners. As the MBA intern you are to prepare a managerial accounting focused report to the owners of Al Dente's Italian Restaurant, to include the following:

2. Compute the break-even volume of the number of lunches and dinners. Assume that the CM% for each meal category is the same as the average CM% as calculated in #1. Hint: To solve a break even sales mix, use the horizontal formula:

Net operating income = ($Sales – $Variable costs) – $fixed costs

Net operating income = $CM – $fixed costs

At Breakeven, NOI = $0

Therefore, $CM = $ Fixed costs

Now solve for the unit $CM for each item. Let X be the number of dinners, 2X the number of lunches. $CM is the combined total of the $CM for dinners, and the $CM for lunches.

Part A) Both signaling and screening:

Multiple Choice

• reduce efficiency in the market.

• are effective ways to increase information available to both parties.

• benefit the sellers but harm the buyers.

• benefit the buyers but harm the sellers.

Part B) Rational people having preferences for immediate benefits and delayed costs is another way of saying that:

Multiple Choice

• money is worth less to us now than in the future.

• money is worth more to us now than in the future.

• the value of money does not change over time.

• rational people have insatiable wants.

Part C) The present value of $300,000 in 12 years at 4 percent interest is approximately:

Multiple Choice

• $312,451.

• $187,379.

• $427,126.

• None of these statements is true.

Part D) John is trying to decide whether to expand his business or not. If he continues his business as it is, with no expansion, there is a 50 percent chance he will earn $100,000 and a 50 percent chance he will earn $300,000. If he does expand, there is a 30 percent chance he will earn $100,000, a 30 percent chance he will earn $300,000 and a 40 percent chance he will earn $500,000. It will cost him $150,000 to expand. The expected value of John's earnings if he chooses to expand is:

Multiple Choice

• $320,000

• $230,000

• $900,000

• $140,000

Part E) When risks are shared across many different assets or people, reducing the impact of any particular risk on any one individual, it is called:

Multiple Choice

• diversification.

• indemnification.

• risk aversion.

• risk analysis.

Part F)

Because of the problem of adverse selection,

Multiple Choice

• low-risk individuals may have a hard time finding insurance worth buying.

• high-risk individuals may have a hard time finding insurance worth buying.

• everyone is typically charged a lower premium.

• individuals who buy insurance act more recklessly.

It is common practice in America for companies to take out corporate-owned life insurance policies on their leaders and senior management, so that the company can offset the cost of replacing them if they die. However, some companies have begun to extend this practice to their low-level employees, which have become known as “dead peasant” policies. Although profitable for the business, it is often the case that the families of these low-level employees are not aware that this step has been taken and the practice has been outlawed in some states. Is this practice ethical for all employees? Or just top corporate leaders?

Case

Insuring the lives of top executives is common practice in corporate America. The death of a CEO or CFO can put the future of the company at risk; replacing these individuals can be costly. Large companies often take out life insurance policies, called corporate-owned life insurance (COLI) polices, on their leaders to help offset these expenses. Some firms extend their COLI policies to cover low-level employees. These policies, sometimes referred to as “dead peasant” or “dead janitor” insurance, are taken out on rank-and-file workers like convenience store clerks, electrical linemen, and cake decorators. The company pays the premiums and receives the death benefits when the employee dies. Often, workers and their surviving family members do not know that these policies exist, prompting one attorney to call these policies corporate America's “dirty little secret” (Mason, 2002). In a case featured in the film Capitalism: A Love Story, the widow of an Amegy bank project manager discovered that the bank had received a US$3.8 million payout after her husband's death. Her husband's salary, before the bank fired him, was US$70,000. (She later sued Amegy and settled for an undisclosed sum.) In another instance, Wal-Mart collected US$381,000 after the death of an employee but didn't reveal that fact to his spouse. Dead peasant policies can be profitable. The lump sum paid to the company is tax free, and in the past, the cost of the premiums could also be written off. Press reports name Proctor & Gamble, AT&T, Walt Disney, Portland General Electric, and Nestlé as corporations carrying COLI policies on low-level workers. At one time, as many as one quarter of the Fortune 500 purchased such policies, covering as many as 5–6 million workers. However, fewer companies took out such insurance after the tax laws were tightened. Wal-Mart says it discontinued its program when the tax law changed and after it lost several lawsuits. Nonetheless, policies purchased earlier may still be in place at a number of firms. Rules on dead peasant policies vary between states. Some jurisdictions outlaw this type of insurance, requiring that companies demonstrate that they have an “insurable interest” (would suffer significant loss of income) in the individual covered by the policy. Others require that employees give their consent before such insurance can be put in force. Corporations defend their use of dead peasant policies by claiming that the insurance helps defray the expenses of providing benefits for executives and of providing health insurance for employees and retirees. Critics scoff at this explanation, noting that insurance payout monies are generally mingled with general revenue. They point out that taking out such policies without the knowledge or consent of employees is disrespectful and treats workers as resources, not as human beings. Such insurance also sets up a potentially deadly conflict of interest. Employers, who are in charge of safety, now have a financial stake in the early death of employees. As one surviving spouse asked, “What incentive is there for a safe work environment if companies can do this?” (Roesler, 2003).

Discussion Questions

1.Do you think it is ethical to insure top corporate leaders? What criteria should be used in determining who should be covered?

2.Would you agree to a company-owned insurance policy on your life if it was required for employment?

3.What would Immanuel Kant say about dead peasant policies?

4.Are dead peasant policies unjust?

5.Do you think that employers have a conflict of interest if they hold life insurance policies on their employees? Why or why not?

6.Are dead peasant policies ethical if (a) workers are notified of their existence; (b) if the proceeds go towards supporting employee benefits?

7.Would you support a total ban on dead peasant policies? Why or why not?

Bad News Message Assignment

Bad news messages can follow a different pattern than good news letters: the indirect approach. In all of our writing, we are trying to create goodwill between our readers, ourselves, and our organization. This means that one of the primary goals of a bad news message is to ensure that the reader continues to think well of us. We can write a bad news message in a way that maximizes the chances that this will happen.

Sometimes people like to hear the bad news first. However, in many situations this approach will not help us achieve our purpose. In these cases we need to use a less direct approach.

Using the techniques you’ve learned in class, write a bad news email addressing the bad news scenario below. Use email format at the header:

From:

To:

Cc:

Subject:

Attached:

Bad News Scenario

You are the Participant Services Manager for Encore Events, an event planning and management company that is producing your city’s largest marathon, half-marathon, and 5K races on April 1 this year. A portion of the proceeds will go to your local chapter of Ronald McDonald House Charities. To participate, runners pay $99, $80, and $45, respectively. In addition to the charity donation, these fees cover costs such as advertising, insurance, permits, security, water, promotional materials, goodie bags, etc. While participants can register for the races at any time, including the day of the event, refunds are not granted after February 15 for any reason—a rule that runners must acknowledge before submitting their entries. This helps you to budget and avoid the problematic nature of adjusting credit card charges or handling cash for anyone who wants a refund. Today (February 25), you received a letter from Lucila Muñoz, who paid her registration fee on November 6. However, she broke her ankle on November 27. She thought she would be healed in time to participate, but she hasn’t had time to do the rehabilitation and training needed to participate in the event. She is asking that her card be credited for $45. You are a runner, and you empathize with her. However, Ms. Muñoz should have requested the refund before the deadline. Besides, you think it’s a little tacky that she would want a refund on a partial charitable donation (for which she received a receipt that can be used to claim a tax deduction).

Your client, Jacob, turned 66 years old this year. Jacob has decided that he would like to sell a life insurance policy to fund a trip to Africa that he has wanted to take. He has no heirs.

Jacob knows that he could surrender the policy (a whole-life policy) back to the insurance company, but a friend told him he could get more for the policy if he sold it to a life settlement company. A life settlement company buys life insurance policies from policyholders who are not ill and who generally have a life expectancy of between 2 and 15 years. In return, the seller of the policy receives a lump-sum payment. The life settlement company either holds the policy to maturity or resells the policy to an investor.

The lump sum received depends on factors such as age, health, and the terms and conditions of the policy, but in general, the amount is more than the policy’s cash surrender value, which is the amount received from the life insurance company upon surrender of the policy.

In November 2019, Jacob (who was not terminally or chronically ill) sold his policy to a life settlement company for $160,000. During the time that he owned the policy, Jacob did not borrow against the policy or receive any distributions. Premiums paid on the policy by Jacob totaled $122,000 (of which $32,000 pertained to the provision of insurance before the sale of the policy).

What are the tax consequences to Jacob on the sale of his life insurance policy?

What are the Internal Revenue Codes and possible current cases that pertain to the problem?

John is looking at several options to fund his son’s 4-year university degree.

The university fees of $45,000 a year will have be paid starting 11 years from today. He is analysing an insurance plan that pays out $45,000 a year for 4 years with the first payout 11 years from today. The insurance plan has several payment options:

Option 1 Pay $60,000 today.

Option 2 Beginning 1 year from today, pay $12,000 a year for the next 8 years.

Option 3 Beginning 1 year from today, make payments each year for the next 8 years. The first payment is $11,000 and the amount increases by 5% each year.

Answer the following questions regarding the options above:

(a) Calculate the present value of each option. Use a 10% discount rate.

(b) Analyse which option John should choose.

(c) If the discount rate is not given to you, what would be an appropriate discount rate to use?