What generally happens to the cost of debt, cost of equity, and cost of capital when a firm increases Debt and holds Equity constant?

QUESTION 1)

Revenue: 10,635,119

COGS: 7,872,775

Gross margin: 2,762,344

Expenses:

Employee admin sal.: 673,475

Employee benefits: 30,162

Info technology, computer repairs: 33,860

telecommunications: 23,874

unsaleable product damage, expired, shortage: 53,170

facilities, rent, amortization: 31,609

automobile including amortization: 62,500

foreign exchange (gains) losses, realised and unrealized: 88,445

customer discounts/rebates and commissions: 160,658

transportation of inventory: 801,523

insurance for inventory: 15,184

stroage costs for inventory: 45,700

interest and bank charges: 15,910

consulting fees: 22,511

advertising, entertainment: 62,520

Total = 2,121,101

Net Income = 641,243

INSTRUCTIONS:

PART A) Please help do a cost/benefit analysis based off the information given above. The operating system suggests that the cost of goods sold is most likely UNDERSTATED, as only the purchase costs paid to the suppliers are captured.

Please re-calculate COGS to make sure that it is an accurate number.

QUESTION 2)

(built off from question 1) - The consultant has quoated the cost of the new software at 100,000. there would also be a hardware upgrade required for 12,000, an annual licensing/operating cost of 13,000, which is 11,000 more than the existing system. You estimate that training in terms of outside help, replacement staff, and staff time to cost is 17,000, of which is 10,000 is for intiial training and 7,000 for additional post-implimentation training. Its estimated that a one year time frame is required for staff to become familiar with the system. Training is to start one month after the software set-up. There are 100 hours allocated for training over the first year. Its estimated that inventory - which is at a steady level during the year - will be reduced by 10% due to the better information of the new system. (they have inventory turn of 20 times.) Also, they would represent an annual saving of 10%. There is also an estimated 10% saving in employee administation salaries from a reduction in manual entries, duplication, and quicker transaction processing. Cash flow should also improve, becaues of the reduction of inventory as noted, which would decrease the interest and bannk charge cost by 15%.

INSTRUCTIONS:

PART B) Do a cost/benefit analysis of this new accoutning software. calculate the benefits from the info given. How long will it take to get a return on the investment (just a simple payback is fine) under different assumptions (like will the firm get all the benefits in year 1 or might it take a year or 2 – also do scenarios around growth rates as that could have an impact).

Suppose we wish to build a multiple regression model to predict the cost of rent (dollars) in a city based on population (thousands of people), and income (thousands of dollars). Use the alpha level of 0.05.

A. Is the whole regression model effective in predicting the cost of rent? Use alpha of 0.1. Make sure to show which values you use to make the decision.

B. Write down the multiple regression equation using actual names of IVs and DVs.

C. What is the value of the estimated intercept? Interpret the value in terms of rent (dollars) based on population (thousands of people), and income (thousands of dollars).

D. What is the values of the estimated slope for the variable “Income”? Interpret the value in terms of actual names of IVs and the DV.

E. What is the values of the estimated slope for the variable “Population”? Interpret the value in terms of actual names of IVs and the DV.

F. Does Income significantly influence the Rent at the alpha level of 0.01? Make sure to show which values you use to make the decision.

G. Does Population significantly influence the Rent at the alpha level of 0.01? Make sure to show which values you use to make the decision.

Data:

Jenny Jinglebell has always wished to own her own French macaroons shop. Ever since she tried

her first macaroon, she thought it would be a brilliant idea to have her own shop where she can

sell a multitude of flavors and colors of French macaroons. She purchased a premium site for

the macaroons shop, right across the street from Campus Martius Park in Downtown Detroit.

After extensive research, Jenny decided that it is best for her to open a franchise at first. The

franchise that best fit Jenny’s criteria is François Patisserie. A François Patisserie franchise costs

$30,000, an amount that is amortized over 15 years. As a franchisee, Jenny needs to adhere to

the company’s building specifications. The building would cost an estimated $450,000 and

would result in a $50,000 salvage value at the end of its 15-year life. The equipment needed is

sold as a package by the corporate office at a cost of $200,000, will have a salvage value of

$10,000 at the end of its 5-year life, equipment and must be replaced every 5 years.

Jenny estimates the annual revenue from a François Patisserie franchise at $950,000. Food

costs typically run 36% of revenue. Annual operating expenses, not including depreciation, total

$425,000. For financial reporting purposes, Jenny will use straight-line depreciation and

amortization. Based on past experience, she uses a 16% discount rate.

*Please no handwriting*

Required:

a.

Calculate the shop’s net present value over the franchise’s 15-year life.

b.

Calculate the restaurant’s payback period.

c.

Calculate the restaurant’s simple rate of return.

d.

Should Jenny open a

François Patisserie? Why or why not? Note: for comparison

purposes, you should know that

using Excel or a similar spreadsheet application Jenny

calculates her IRR to be 22.64%.

e.

What potential shortcomings do you see in Jenny’s estimates? How do you recommend she

adjusts her analysis to address those shortcomings?

NewTech Medical Devices is a medical devices wholesaler that commenced business on June 1, 2019. NewTech Medical Devices purchases merchandise for cash and on open account. In June 2019, NewTech Medical Devices engaged in the following purchasing and cash payment activities:

Required:
Journalize the transactions in a general journal.


Analyze:
What was the amount of trade discounts received on the June 15 purchase from Park Research?

Issued Check 101 to purchase merchandise, $3,800.

Note: Enter debits before credits.

Purchased merchandise for $1,350 from BioCenter Inc., Invoice 606; terms 2/10, n/30.

Note: Enter debits before credits.

Purchased merchandise for $5,150, plus a freight charge of $100, from New Concepts Corporation, Invoice 1011, terms 2/10, n/30.

Note: Enter debits before credits.

Paid amount due to BioCenter Inc. for purchase of June 3, less discount, Check 102.

Note: Enter debits before credits.

Received Credit Memorandum 227 from New Concepts Corporation for damaged merchandise totaling $350 that was returned; the goods were purchased on Invoice 1011, dated June 5.

Note: Enter debits before credits.

Purchased merchandise for $1,610 from BioCenter Inc., Invoice 612; terms 2/10, n/30.

Note: Enter debits before credits.

Paid amount due to New Concepts Corporation for Invoice 1011 of June 5, less the return of June 10 and less the cash discount, Check 103.

Note: Enter debits before credits.

Purchased merchandise with a list price of $8,500 and trade discounts of 20 percent and 15 percent from Park Research, Invoice 1029, terms n/30.

Note: Enter debits before credits.

Issued Check 104 to purchase merchandise, $2,300.

Note: Enter debits before credits.

Returned merchandise purchased on June 20 as defective, receiving a cash refund of $210.

Note: Enter debits before credits.

Handout Question 1:

Stokes Bay Fishing Corporation manufactures and sells fishing boats. The CEO of the company, Keith Jones, has been fishing since he was a young boy and is very excited to be the majority owner of a successful fishing-related business. All of the company’s sales come from two products: the Fish Hauler and the Trolling Deluxe. Both are 16-foot aluminum boats. The Fish Hauler is a basic boat built with the minimum required components necessary for a successful outing and sells for $12,000. The Trolling Deluxe sells for $14,500 and is built for the luxury-minded outdoors person; it includes adjustable padded seats, moveable storage boxes, and rod holders, among other conveniences, to make the trip more comfortable. The boats are sold to retailers who then usually add an outboard motor and a trailer before selling to the consumer.

Stokes Bay Fishing Corporation management is meeting to discuss recent financial results and to plan for the future. John Singh, the sales manager, has been successful in convincing Keith to keep the boats close in price, basing his argument on the fact that the boats are the same size and about the same weight. In fact, he argues, each boat has the same seating capacity and is used for essentially the same purpose. Keith, however, is concerned. He has reviewed the financial results for the boating business and is confused by the results. Keith has noticed that while sales volume is increasing, profits are decreasing (as a percent of sales). Keith has consulted with his production manager, Jeff Knowles, who told him that he is doing his best to manage production costs but is challenged by the fact that the proportion of Trolling Deluxe boats manufactured and sold is growing at a far greater rate than the Fish Hauler.

Keith has asked his CFO, Janet Costa, for financial data regarding the sales and manufacturing activities for the past year. The following is what Janet provided.

Stokes has been applying variable overhead on the basis of direct labour hours. For the past year, factory overhead was $640,000 and total direct labour hours for the year were18,600. The hourly rate for direct labour hours is $22. Also, sales and administrative expenses for the year totalled $984,000.

Keith has hired a financial consultant, Sue Wong, to analyze the activity of the past year, and to help management to understand the deteriorating profit results. Sue specializes in the application of activity-based costing (ABC) in small manufacturing businesses. The focus of her work was to determine key activities, cost drivers, and related costs in the business. Sue has found several overhead activities and related costs, and the associated cost drivers. She has also determined the amount of each activity consumed by the two products. This information is presented below.

Activities and Cost Drivers:

            Factory Overhead

Activities and Cost Drivers:

            Factory Overhead

Financial data for the two products, based on ABC analysis:

Required:

1. Calculate unit cost using the current process costing system. Calculate gross and net operating income generated for the company by the two products.
2. Calculate activity rates, rounding to the nearest dollar.
3. Calculate unit cost using activity-based costing, and recalculate gross and net operating income generated by the two products.
4. Based on the results above, what advice would you give to Keith regarding his observation of increasing volume but decreasing profit?

1 (a). Define the followings:

Cost pool

Cost driver

Direct cost allocation

Step-down cost allocation

Direct Cost

Indirect Cost

Fixed cost

Variable cost

(b) Effective cost drivers, and hence the resulting cost allocation system, must have what two important attributes?

(c) What is the better cost driver for the costs of a hospital’s financial services department: patient services department revenues or number of bills generated? Explain your rationale.

​​​​​​

Sylvia comes to you for advice in organizing her financial affairs. She is 29 years old and makes $50,000 per year, 30% of which goes to payroll deductions and taxes. Sylvia also receives $400 per year in interest from miscellaneous investments and savings accounts.

Sylvia has tracked her expenses for the last six months and provides you with the following estimates for the year:

Sylvia has the following assets:

Sylvia has the following debt:

Required:

1. Based on the information provided, prepare a net worth statement and an annual cash flow statement for Sylvia.     

b. Sylvia also has plans for saving and investing, and wants to find a way to “pay herself first.” She is willing to make adjustments to her spending habits and would like to see the effect of putting away 10% of her net pay for investing. Draw up a proposed future cash flow budget that will incorporate her ideas

Suzanne is a 28-year-old BYU graduate. She pays her bills on time, has managed to save a little in a mutual fund, and (with the help of her parents) managed a down payment on a condo. Assume that all her short-term and long-term liabilities are paid except for credit cards; she pays all expenses on her credit cards, and the balances given represent her average monthly balances. Note that her paycheck is net of taxes only and her average tax rate is 15% on gross earnings. Her gross salary = net salary / (1 – average tax rate).

1.

Prepare a monthly income statement for Suzanne (using the better method).

Prepare a balance sheet for Suzanne.

Pricing

Hamburg AG produces a number of pocket computer products. It is an established company with a good reputation that has built on well-engineered, reliable and good-quality products. It is currently developing a product called Techstar and has spend € 1.5 million on development so far. It now has to decide whether it should proceed further and launch the product in one year ́s time.

If Hamburg AG decides to continue with the project, it will incur further development costs of € 750.000 straight away. Hamburg AG expects that it could see Techstar for three years before the product becomes out of date (i.e. it is expected to be 3 years on the market).

It is estimated that the Techstars produced and sold in the first year would cost an average of € 675 each unit, for production, marketing and distribution costs. Further fixed costs associated with the project are expected to amount € 0.9 million (cash out flow) for each year the product is in production.

Because of the cost estimates, the Chief Executive expected the selling price to be in the region of € 950. However, the Marketing Director is against the pricing strategy; he says that this price is far too high for this type of product and that he could sell only 6,000 units each year at this price. He suggests a different strategy: setting a price of € 625, at which price he expects sales to be 15,000 units each year.

a) The Chief Executive has asked you to help sort out the pricing dilemma. Prepare calculations that demonstrate which of the two suggestions is the better pricing strategy. Should the product be produced? Neglect the company ́s cost of capital.

b) Hamburg AG found from past experience that in the second year the totals variable costs are 20% less of the first year ́s costs because of experience curve effects. In the third year the total variable costs are 20% less than the variable costs of the second year. How would the calculations (and the recommendation?) change? (6 points)