On January 2, 2006, in the strategic committee meeting of the company, Christine Carmen Chairman, President and Chief Executive Officer said, we are optimistic about 2006 and the years beyond. The proposed projects presently under consideration will enable us efficiently to expand our productivity in order to meet ever-increasing customers demand with high quality engineered products and systems for defense, aerospace and industrial applications.

Carmen Corporation is a supplier of sophisticated, highly engineered products and systems for defense, aerospace and industrial applications. The Company has three business segments.

The Company's Defense segment provides integrated front-line war-fighting systems and components, including electronic warfare systems, reconnaissance and surveillance systems, aircraft weapons suspension and release systems and airborne mine countermeasures systems.

The Company's Communications and Space Products segment supplies antenna products and ultra-miniature electronics and systems for the remote sensing, communications and electronic warfare industries.

The Company's Engineered Materials segment supplies piezoelectric ceramic products for commercial and military markets and advanced fiber composite structural products for the aircraft, communication, navigation, chemical, petrochemical, paper, and oil industries.

Carmen Corporation has the following financial statements:

Its established common stock’s dividend payout ratio after the preferred stock dividends payment is 50 percent and it is expected to grow at a constant rate of 9 percent in the future. The tax rate is 40 percent and investors requiring a rate of return of 15% on the common stock.

Preferred stock is trading at a price of $40 per share, with a dividend of $4.8. The 30-year long-term debt with a par value of $1,000 was issued 10 years ago with a coupon rate of 8%. The bonds can be refinanced at the market interest rate of 10 percent today.

Carmen has the following investment opportunities:

Part II Although the average project in the Defense Segment was substantially riskier than communications and Space Products segment and Engineered Materials segment, the project evaluation process did not formally incorporate risk considerations. This lack of risk consideration was more evident in the Communications and Space Products segment and Engineered Materials segments, since their productions, earnings, and profits were highly correlated and fluctuated with the economy. As a result, these segments provided a very stable income to the company. On the other hand, the Defense segment provides military products and professional services to the United States and allied governments, and their prime defense contractors and as a result, the earnings and profits of the Defense segment tended to be tied to the world geo-political environment.

Carmen has gathered the following beta for each segment based on comparable companies:

Project             Defense           Com. Space     Eng. Materials                        

Beta                 1.50                 1.20                 0.80   

The risk-free rate is 5% and rate of the market risk premium 9.0%.

1)Calculate the required rate of return for each project?

2)Compare the required rate of return with expected rate of return, according to the risk characteristics of each project; which project is appropriate to take?

CARMEN CORPORATION

On January 2, 2006, in the strategic committee meeting of the company, Christine Carmen Chairman, President and Chief Executive Officer said, we are optimistic about 2006 and the years beyond. The proposed projects presently under consideration will enable us efficiently to expand our productivity in order to meet ever-increasing customers demand with high quality engineered products and systems for defense, aerospace and industrial applications.

Carmen Corporation is a supplier of sophisticated, highly engineered products and systems for defense, aerospace and industrial applications. The Company has three business segments.

The Company's Defense segment provides integrated front-line war-fighting systems and components, including electronic warfare systems, reconnaissance and surveillance systems, aircraft weapons suspension and release systems and airborne mine countermeasures systems.

The Company's Communications and Space Products segment supplies antenna products and ultra-miniature electronics and systems for the remote sensing, communications and electronic warfare industries.

The Company's Engineered Materials segment supplies piezoelectric ceramic products for commercial and military markets and advanced fiber composite structural products for the aircraft, communication, navigation, chemical, petrochemical, paper, and oil industries.

Carmen Corporation has the following financial statements:

Its established common stock’s dividend payout ratio after the preferred stock dividends payment is 50 percent and it is expected to grow at a constant rate of 9 percent in the future. The tax rate is 40 percent and investors requiring a rate of return of 15% on the common stock.

Preferred stock is trading at a price of $40 per share, with a dividend of $4.8. The 30-year long-term debt with a par value of $1,000 was issued 10 years ago with a coupon rate of 8%. The bonds can be refinanced at the market interest rate of 10 percent today.

Carmen has the following investment opportunities:

Part I

Determine the book value and market value of the capital structure.

Determine the weighted average cost of capital (WACC) for each of the capital structure.

Calculate the internal rate of return (IRR) and Net Present Value of each project and compare them against the book value and market value weighted average cost of capital.

Are there any conflict between NPV and IRR? How do you resolve the conflict in ranking?

e.

How much of the internal fund is available for investments?

Are there any issues about the projects you should consider before your recommendation?

Part II

Although the average project in the Defense Segment was substantially riskier than communications and Space Products segment and Engineered Materials segment, the project evaluation process did not formally incorporate risk considerations. This lack of risk consideration was more evident in the Communications and Space Products segment and Engineered Materials segments, since their productions, earnings, and profits were highly correlated and fluctuated with the economy. As a result, these segments provided a very stable income to the company. On the other hand, the Defense segment provides military products and professional services to the United States and allied governments, and their prime defense contractors and as a result, the earnings and profits of the Defense segment tended to be tied to the world geo-political environment.

Carmen has gathered the following beta for each segment based on comparable companies:

Project             Defense           Com. Space     Eng. Materials                        

Beta                 1.50                 1.20                 0.80                

The risk-free rate is 5% and rate of the market risk premium 9.0%.

h.Calculate the required rate of return for each project?

i.Compare the required rate of return with expected rate of return, according to the risk characteristics of each project; which project is appropriate to take?

In a landmark paper published in 2006, Shinya Yamanaka discovered a minimal number of transcription factors that could transform somatic cells into pluripotent stem cells (iPSC). The discovery of the “Yamanaka factors” was a major break-through in stem cell biology and has revolutionized regenerative medicine. What was the major observation from previous studies that lead Yamanaka (and others) to believe that it would be possible for a somatic cell to be re-programmed back into a pluripotent stem cell?

Read the July 9, 2006 the Freakonomics column in the New York Times Magazine uploaded in the docs and stuff section of this site. The authors examine a simple supply-and-demand gap with tragic implications: the shortage of human organs for transplantation. In the space of just a few decades, transplant surgery has become remarkably safe and reliable. But this success has bred huge demand: as more patients get new organs, more patients want them. So, while the number of kidney transplants has risen by 45% in the past 10 years, the number of people on a kidney waiting list has risen by 119%. Consequently, some 3,500 people die each year while waiting for a kidney transplant. A big problem is that would-be suppliers of kidneys, whether living or dead, are not given very strong incentives to step forward.

1. Summarize the main arguments about providing incentives for the supply side of this volunteer market.

2. Evaluate the argument carefully. What do you think? Why?

July 9, 2006
Freakonomics
Flesh Trade
By STEPHEN J. DUBNER and STEVEN D. LEVITT
Weighing the Repugnance Factor

How's this for a repugnant situation? Take someone you love, perhaps your spouse or your sibling, and find a stranger who will accept a really big bet that your loved one will die prematurely — and if indeed that happens, you pocket a few million dollars.

This, of course, is how life insurance works. And most Americans don't find this idea repugnant at all. They used to, however. Until the mid-19th century, life insurance was considered "a profanation," as the sociologist Viviana Zelizer has written, "which transformed the sacred event of death into a vulgar commodity."

Alvin Roth, a Harvard economist who studies the design of markets, has done a lot of thinking about repugnance. On some issues, he notes, repugnance will recede, as with life insurance — or, even more momentously, the practice of charging interest on loans. In other cases, the reverse happens: a once-accepted behavior like slaveholding comes to be seen as repugnant.

One case of repugnance is far from settled: the dispute over how human organs for transplantation should be allocated — and, perhaps, even sold. If you happen to have a failing heart or liver or kidneys, you will almost certainly die without a transplant, but if you aren't lucky enough to get an organ through an official registry, you can't legally purchase one at any price. So instead of a free market in organs, we have a volunteer market. Some people agree to give up their usable organs once they die. In the case of a living donor, someone sacrifices a kidney or a portion of a liver to a recipient, most likely a family member.
In the space of just a few decades, transplant surgery has become safe and reliable (to say nothing of miraculous). But success breeds demand: as more patients get new organs, more patients want them. In 2005, more than 16,000 kidney transplants were performed in the U.S., an increase of 45 percent over 10 years. But during that time, the number of people on a kidney waiting list rose by 119 percent. More than 3,500 people now die each year waiting for a kidney transplant.

To an economist, this is a basic supply-and-demand gap with tragic consequences. So what can be done to increase the supply of organs?

A big problem is that would-be suppliers are not given very strong incentives to step forward. In much of Europe, the choice is made for them: instead of "opting in" to donate, the default assumption is that your usable organs will be harvested upon your death unless your family "opts out." But Europe, too, still has a sizable organ shortage, in part because traffic fatalities — which tend to produce desirable organs for harvest — are on a downward trend in Western countries.
If it's hard to get people to give up their organs upon death, consider how much harder it is to persuade a living person to donate a kidney. (From a medical perspective, a kidney from a living donor is far more valuable than a cadaver kidney.) Even though most people can live safely on one kidney, there is still a price to be paid in discomfort, risk, fear and lost wages. But the United States, like pretty much every other country in the world, forbids a donor to collect on that price, or any other.

It is hard to find an economist who agrees with this policy. Gary Becker and Julio Jorge Elias argued in a recent paper that "monetary incentives would increase the supply of organs for transplant sufficiently to eliminate the very large queues in organ markets, and the suffering and deaths of many of those waiting, without increasing the total cost of transplant surgery by more than 12 percent."

Some noneconomists may well find this reasoning repugnant. There are many reasons, after all, for banning the sale of organs. Some people consider it immoral to commodify body parts (although it is now commonplace to not only sell sperm and eggs but also to rent a womb). Others fear that most organ sellers would be poor while most buyers would be rich; or that someone might be pressured into selling a kidney without fully understanding the risks.

But why, Becker and Elias ask, should poor people "be deprived of revenue that could be highly useful to them"? Even more compelling is the fact that a poor person is just as likely as a wealthy person (if not more so) to need a new kidney — and, with no legal market for organs, is just as likely to die while waiting on a list.

Alvin Roth, even though he is an economist, is smart enough to realize that repugnance will keep Americans from embracing a true market for organs anytime soon. So, along with several other scholars and medical personnel, he has helped design a clever alternative, the New England Program for Kidney Exchange. Imagine that you have a wife who is dying of renal failure, and that you would give her one of your kidneys, but you are not a biological match. Now imagine that another couple is in the same bind. The kidney exchange locates and matches the couples: you donate your kidney to the stranger's wife, while the stranger gives his kidney to your wife; the operations are performed simultaneously to make sure no one backs out. Although this system has yielded only a couple dozen transplants so far, it illustrates an economist's understanding of incentives: if you can't get someone to give an organ out of altruism, and you can't pay him either, what do you do? Find two parties who are desperate to align their incentives.

Otherwise, who in his right mind would step forward to donate a kidney to a stranger? In fact, we recently spoke to one such potential donor who asked to remain anonymous. Donor is married, with four children and a precarious financial situation. Because Donor had a sibling who nearly needed an organ transplant, the idea got into Donor's head to perhaps sell a kidney to a stranger. Through a donor Web site, Donor met a potential recipient, whom we'll call Recipient. It wasn't until the process was well under way that Donor learned it was illegal to be paid. In the end, however, Donor's moral mission overrode the financial need, and Donor decided to go ahead with the transplant.
Donor has undergone extensive testing at the hospital where Recipient will have the transplant. Both Donor and Recipient have had to lie repeatedly to the doctors, pretending they are old friends. "If they find out you met on the Internet," Donor explains, "they assume it's for money, and they'll call off the operation."

If all goes well, the transplant may happen soon. Consider the parties who stand to profit from this transaction: Recipient, certainly, as well as the transplant surgeons, the nurses, the hospital, the drug companies. Everyone will be paid in some form — except for Donor, who not only isn't being paid but, in return for carrying out a deeply altruistic act, also has to pay the additional price of lying about it.

Surely there are some people, and not just economists, who would find this situation — well, repugnant.

CARMEN CORPORATION

On January 2, 2006, in the strategic committee meeting of the company, Christine Carmen Chairman, President and Chief Executive Officer said, we are optimistic about 2006 and the years beyond. The proposed projects presently under consideration will enable us efficiently to expand our productivity in order to meet ever-increasing customers demand with high quality engineered products and systems for defense, aerospace and industrial applications.

Carmen Corporation is a supplier of sophisticated, highly engineered products and systems for defense, aerospace and industrial applications. The Company has three business segments.

The Company's Defense segment provides integrated front-line war-fighting systems and components, including electronic warfare systems, reconnaissance and surveillance systems, aircraft weapons suspension and release systems and airborne mine countermeasures systems.

The Company's Communications and Space Products segment supplies antenna products and ultra-miniature electronics and systems for the remote sensing, communications and electronic warfare industries.

The Company's Engineered Materials segment supplies piezoelectric ceramic products for commercial and military markets and advanced fiber composite structural products for the aircraft, communication, navigation, chemical, petrochemical, paper, and oil industries.

Carmen Corporation has the following financial statements:

Its established common stock’s dividend payout ratio after the preferred stock dividends payment is 50 percent and it is expected to grow at a constant rate of 9 percent in the future. The tax rate is 40 percent and investors requiring a rate of return of 15% on the common stock.

Preferred stock is trading at a price of $40 per share, with a dividend of $4.8. The 30-year long-term debt with a par value of $1,000 was issued 10 years ago with a coupon rate of 8%. The bonds can be refinanced at the market interest rate of 10 percent today.

Carmen has the following investment opportunities:

Part I

A) Determine the book value and market value of the capital structure.

B) Determine the weighted average cost of capital (WACC) for each of the capital structure.

C) Calculate the internal rate of return (IRR) and Net Present Value of each project and compare them against the book value and market value weighted average cost of capital.

D) Are there any conflict between NPV and IRR? How do you resolve the conflict in ranking?

E) Which projects should Carmen accept?

F) How much of the internal fund is available for investments?

G) Are there any issues about the projects you should consider before your recommendation?

Part II

Although the average project in the Defense Segment was substantially riskier than communications and Space Products segment and Engineered Materials segment, the project evaluation process did not formally incorporate risk considerations. This lack of risk consideration was more evident in the Communications and Space Products segment and Engineered Materials segments, since their productions, earnings, and profits were highly correlated and fluctuated with the economy. As a result, these segments provided a very stable income to the company. On the other hand, the Defense segment provides military products and professional services to the United States and allied governments, and their prime defense contractors and as a result, the earnings and profits of the Defense segment tended to be tied to the world geo-political environment.

Carmen has gathered the following beta for each segment based on comparable companies:

Project             Defense           Com. Space     Eng. Materials                        

Beta                 1.50                 1.20                 0.80                

The risk-free rate is 5% and rate of the market risk premium 9.0%.

H) Calculate the required rate of return for each project?

J) Compare the required rate of return with expected rate of return, according to the risk characteristics of each project; which project is appropriate to take?

Williams-Santana, Inc., is a manufacturer of high-tech industrial parts that was started in 2006 by two talented engineers with little business training. In 2018, the company was acquired by one of its major customers. As part of an internal audit, the following facts were discovered. The audit occurred during 2018 before any adjusting entries or closing entries were prepared. The income tax rate is 40% for all years.

1. A five-year casualty insurance policy was purchased at the beginning of 2016 for $39,500. The full amount was debited to insurance expense at the time.
2. Effective January 1, 2018, the company changed the salvage values used in calculating depreciation for its office building. The building cost $636,000 on December 29, 2007, and has been depreciated on a straight-line basis assuming a useful life of 40 years and a salvage value of $100,000. Declining real estate values in the area indicate that the salvage value will be no more than $25,000.
3. On December 31, 2017, merchandise inventory was overstated by $29,500 due to a mistake in the physical inventory count using the periodic inventory system.
4. The company changed inventory cost methods to FIFO from LIFO at the end of 2018 for both financial statement and income tax purposes. The change will cause a $1,005,000 increase in the beginning inventory at January 1, 2019.
5. At the end of 2017, the company failed to accrue $16,400 of sales commissions earned by employees during 2017. The expense was recorded when the commissions were paid in early 2018.
6. At the beginning of 2016, the company purchased a machine at a cost of $810,000. Its useful life was estimated to be ten years with no salvage value. The machine has been depreciated by the double-declining balance method. Its book value on December 31, 2017, was $518,400. On January 1, 2018, the company changed to the straight-line method.
7. Warranty expense is determined each year as 1% of sales. Actual payment experience of recent years indicates that 0.75% is a better indication of the actual cost. Management effects the change in 2018. Credit sales for 2018 are $4,900,000; in 2017 they were $4,600,000.

Required:
For each situation:
1. Identify whether it represents an accounting change or an error. If an accounting change, identify the type of change. For accounting errors, choose "Not applicable".
2. Prepare any journal entry necessary as a direct result of the change or error correction as well as any adjusting entry for 2018 related to the situation described. Any tax effects should be adjusted for through Income tax payable or Refund income tax.

Starting in 2006, Chuck and Luane have been purchasing Series EE bonds in their name to use for the higher education of their daughter Susie, who currently is age 18. During the year, they cash in $12,000 of the bonds to use for freshman year tuition, fees, and room and board. Of this amount, $5,000 represents interest. Of the $12,000, $8,000 is used for tuition and fees, and $4,000 is used for room and board. Chuck and Luane's AGI, before the educational savings bond exclusion, is $120,000. Review § 135, and answer the following questions.

a)Determine the tax consequences for Chuck and Luane, who will file a joint return, and for Susie.

b) Assume that Chuck and Luane purchased the bonds in Susie's name. Determine the tax consequences for Chuck and Luane and for Susie.

c) How would your answer to part(a) change if Chuck and Luane filed separate returns?

The merger of steel makers Arcelor and Mittal in 2006 produced the world's largest steel company, with 330,000 employees and forecast earnings of $15.6 billion. Arcelor had fought a long defensive battle against the hostile takeover, valued at around $35 billion. Arcelor was incorporated in Luxembourg and had adopted European governance architecture, with a supervisory board, including employee representatives, and a management board.   
Mittal was a family company with a tradition of growth through acquisition, in which the founding family still played the dominant role. Arcelor had criticised Mittal for its inadequate controls, because it had many Mittal family members and few independent directors on its board.
In the merged Arcelor Mittal company, the Mittal family retained 43.5% of the voting equity. The new board was 18 strong, with chairman Joseph Kinsch, who was previously chairman of Arcelor, president Lakshmi Mittal, nine independent directors, plus employee representative directors and nominee directors to reflect the interests of significant shareholders.
The General Management Board was chaired by the CEO Roland Junck, with the son of Lakshmi Mittal, Aditya Mittal as CFO.

Questions
1. Assess the post-merger board structure and discuss the pros and cons before reading the Financial Times article. 2

An article in the Journal of Family Psychology (March 2006) by research psychologist Scott Stanley, titled "Premarital Education, Marital Quality, and Marital Stability " presents evidence that pre-marital counseling helps to make marriages healthy and strong. Assuming the current divorce rate is 42%, this study suggests that for couples who participated in pre-marital counseling, the divorce rate is less. The study is based on n=3,000 couples and it found that 828 ended in divorce. Answer the following questions.

a. Calculate a two-sided 99% confidence interval for the true divorce rate (proportion) of couples who receive pre-marital counseling. Interpret your interval.

b. Perform a test to determine if the true proportion of couples divorcing who receive pre-marital counseling is less than the current divorce rate of 42%. Use alpha = 0.05 State the hypotheses (Ho, Ha), z*, p-value and conclusion.

c. Check the assumptions of the proportion test, do they pass?

1. Could you conclude that pre-martial counseling ‘statistically’ lowers the divorce rate? Please answer Yes or No and support your answer.
2. Someone suggested that pre-marital counseling reduces the risk of divorce by 50% (cuts the rate in half from 42% to 21%. Based on your interval in (1.), could that claim be reasonably made?
3. What are your views of pre-marital counseling? Does this study support or change your views on pre-marital counseling? Why or why not? (There is no wrong answer here)