On January 1, 2019, Plywood Homes, Inc., issued 20-year, 4% bonds having a face value of $1 million. The interest on the bonds is payable semiannually on June 30 and December 31. The proceeds to the company were $975,000 (i.e. on the day they were issued the bonds had a market value of $975,000). On June 30, 2019, the company’s fiscal closing date, when the bonds were being traded at 98.5, each of the following amounts was suggested as a possible valuation basis for reporting the bond liability on the balance sheet.

1. $975,625 (proceeds, plus six months’ straight-line amortization)
2. $1 million (face value)
3. $1,780,000 (face value plus interest payments)

Required:

a. Distinguish between nominal and effective interest rates.
b. Explain the nature of the $25,000 difference between the face value and market value of the bonds on January 1, 2019.
c. Between January 1 and June 30, the market value of the company’s bonds increased from $975,000 to $985,000. Explain. Discuss the significance of the increase to the company.
d. Evaluate each of the three suggested alternatives for reporting the bond liability on the balance sheet, giving arguments for and against each alternative. Your answer should take the investor and the reporting company into consideration.

On January 1, 2016, Plywood Homes, Inc., issued 20‐year, 4 percent bonds having a face value of $1 million. The interest on the bonds is payable semiannually on June 30 and December 31. The proceeds to the company were $975,000 (i.e., on the day they were issued the bonds had a market value of $975,000). On June 30, 2016, the company’s fiscal closing date, when the bonds were being traded at 98 ½, each of the following amounts was suggested as a possible valuation basis for reporting the bond liability on the balance sheet.

$975,625 (proceeds, plus six months’ straight‐line amortization)

$1 million (face value)

$1,780,000 (face value plus interest payments)

Required:

1) Distinguish between nominal and effective interest rates.

2) Explain the nature of the $25,000 difference between the face value and market value of the bonds on January 1, 2016.

3) Between January 1 and June 30, the market value of the company’s bonds increased from $975,000 to $985,000. Explain. Discuss the significance of the increase to the company.

4) Evaluate each of the three suggested alternatives for reporting the bond liability on the balance sheet, giving arguments for and against each alternative. Your answer should take the investor and the reporting company into consideration.

A golf club manufacturer claims that golfers can lower their scores by using the manufacturer's newly designed golf clubs. Eight golfers are randomly selected and each is asked to give his or her most recent score. After using the new clubs for one month, the golfers are asked again to give their most recent score. The scores for each golfer are given in the table below. Is there enough evidence to support the manufacturer's claim? Let d=(golf score after using the newly designed golf clubs)−(golf score before using the newly designed golf clubs). Use a significance level of α=0.05 for the test. Assume that the scores are normally distributed for the population of golfers both before and after using the newly designed clubs. Golfer 1 2 3 4 5 6 7 8 Score (old design) 96 86 79 95 78 92 75 79 Score (new design) 94 89 74 90 82 90 71 74 Step 3 of 5 : Compute the value of the test statistic. Round your answer to three decimal places.

Explain for right option

Multiple Choice Questions

1. The primary objective of financial reporting is to provide information

a. Useful for making investment and credit decisions.

b. About the profitability of the enterprise.

c. To the federal government.

d. On the cash flows of the company.

2. Which type of business organization provides the least amount of protection for bankers and other creditors of the company?

a. Partnership

b. Proprietorship

c. Corporation

d. Both a and b

3. Assets are usually reported at their

a. Historical cost.

b. Current market value.

c. Appraised value.

d. None of the above (fill in the blank).

4. During March, assets increased by $19,000 and liabilities increased by $6,000. Stockholders equity must have

a. Increased by $13,000.

b. Decreased by $13,000.

c. Increased by $25,000.

d. Decreased by $25,000.

5. The amount a company expects to collect from customers appears on the

a. Statement of cash flows.

b. Balance sheet in the current assets section.

c. Income statement in the expenses section.

d. Balance sheet in the stockholders equity section.

6. All of the following are current assets except

a. Inventory.

b. Sales Revenue.

c. Cash.

d. Accounts Receivable.

7. Revenues are

a. Decreases in liabilities resulting from paying off loans.

b. Increases in paid-in capital resulting from the owners investing in the business.

c. Increases in retained earnings resulting from selling products or performing services.

d. All of the above.

8. The financial statement that reports revenues and expenses is called the

a. Statement of cash flows.

b. Income statement.

c. Statement of retained earnings.

d. Balance sheet.

Determining Effects of Stock Splits
Oracle Corp has had the following stock splits since its inception.

a. If the par value of Oracle shares was originally $2, what would Oracle Corp. report as par value per share on its 2015 balance sheet?

Compute the revised par value after each stock split.
Round answers to three decimal places.

b. On May 10, 2016, Oracle stock traded for about $60. All things equal, if Oracle had never had a stock split, what would a share of Oracle have traded for that same day?
Round answer to the nearest dollar.
$Answer

A 30-year-old male who knowingly suffers from heart disease states on his life insurance application that he is a 27-year-old female in perfect health. How do you think the insurance company will treat a death claim made three years later? Do you feel that this is fair to the insurance company? Explain.

1.When a net loss has occurred, Income Summary is

2. On September 23, Reese Company received a $350 check from Mike Moluf for services to be performed in the future. The bookkeeper for Reese Company incorrectly debited Cash for $350 and credited Accounts Receivable for $350. The amounts have been posted to the ledger. To correct this entry, the bookkeeper should

3. Cash of $100 received at the time the service was provided was journalized and posted as a debit to Cash $100 and a credit to Accounts Receivable $100. Assuming the incorrect entry is notreversed, the correcting entry is

4. Whitman Company paid $630 cash on account to a creditor. The journal entry for this transaction was incorrectly recorded as a debit to Cash of $360 and a credit to Accounts Receivable of $360. The correcting entry is

5. In a classified balance sheet, assets are usually classified using the following categories:

6. Maxim Company had the following partial listing of accounts and balances at year-end: Cash, $7,000; Accounts Receivable, $6,000; Accounts Payable, $15,000; Equipment, $23,000; Inventories, $5,000; Supplies, $1,000; Investment in Real Estate, $75,000; Unearned Service Revenue, $13,000; and Prepaid Rent, $4,000. The total current assets for Maxim Company is

Following the outbreak of the Novel Coronavirus (COVID 19), CPCa pharmaceutical company is considering introducing a new vaccine unto the market to help fight the virus. This will require the injection of huge capital to the tune of GH¢40,000,000 for the purchase of the equipment for production. It will cost CPC an additional GH¢5,500,000 to set up the production facility and install that equipment for production. Mr. Smart, the CEO of CPC believes that the vaccine could be manufactured in a building owned by the firm and located in East Legon. This vacant building and the land can be sold for GH¢ 1,500,000 after taxes. CPC will finance the production of the vaccine (including initial working capital investment) by issuing 2000,000 new common stocks at GH¢ 20 per share from its existing shareholders. A total of GH¢ 15,000,000 is expected to be raised from the rights issue. It expects to finance the remaining from the issue of a 5-year bond with a before-tax yield to maturity (YTM) of 12%. Mr. Qwesi, the Finance Director has estimated the beta of the project to be 2.5 and the average return for stocks traded on the Ghana Stock Exchange to be 10% while the rate on Government of Ghana traded Treasury bills is 5%. The successful production of the vaccine will generate additional cash flows for CPC. The Production and Marketing department has presented the information in the table below:

Again the following information should be taken note of:

·Feasibility studies cost the company GH¢2,000,000

·Test marketing expenses amounts to GH¢1,000,000

·The research into the discovery of the vaccine costs GH¢5,000,000

·Variable cost will increase by 5% per annum

·Selling price will increase by 10% per annum

·Marketing expense will be 5% of sales revenue per year

·Overhead cost will be fixed at GH¢6000,000 per year

·The project will last for five (5) years (2021-2025)

Charge depreciation using the straight-line method

·Salvage value for equipment is GH¢2,000,000

·CPC falls within the 25% tax bracket

·An initial working capital investment of GH¢10,000,000will be made. Subsequently, net working capital at the end of each year will be equal to 10 percent of sales for that year. In the final year of the project, net working capital will decline to zero as the project is wound down. In other words, the investment in working capital is to be completely recovered by the end of the project’s life

·The introduction of this new vaccine is expected to lead to 10,000units per annum drop in sales of vaccines for other types of corona virus by. The selling price per unit of existing products is GH¢100while the variable cost is GH¢70.This has no tax implications for the new vaccine.

·The project will be financed with debt and equity

Required

a.Evaluate the project using the NPV and Profitability index and recommend whether CPC should go ahead with the production of the vaccine.

b.Discuss three(3) qualitative factors that the Management of CPC might have to consider and how these factors are expected to influence the decision of Management with regards to the production of the vaccine. (6 marks )

c.Under what circumstances will you prefer profitability index to NPV as project evaluation techniques. (2marks )

d.Explain why sunk costs should not be included in a capital budgeting analysis, but opportunity costs and externalities should be included. (2 marks )

Following the outbreak of the Novel Coronavirus (COVID 19), CPCa pharmaceutical company is considering introducing a new vaccine unto the market to help fight the virus. This will require the injection of huge capital to the tune of GH¢40,000,000 for the purchase of the equipment for production. It will cost CPC an additional GH¢5,500,000 to set up the production facility and install that equipment for production. Mr. Smart, the CEO of CPC believes that the vaccine could be manufactured in a building owned by the firm and located in East Legon. This vacant building and the land can be sold for GH¢ 1,500,000 after taxes. CPC will finance the production of the vaccine (including initial working capital investment) by issuing 2000,000 new common stocks at GH¢ 20 per share from its existing shareholders. A total of GH¢ 15,000,000 is expected to be raised from the rights issue. It expects to finance the remaining from the issue of a 5-year bond with a before-tax yield to maturity (YTM) of 12%. Mr. Qwesi, the Finance Director has estimated the beta of the project to be 2.5 and the average return for stocks traded on the Ghana Stock Exchange to be 10% while the rate on Government of Ghana traded Treasury bills is 5%. The successful production of the vaccine will generate additional cash flows for CPC. The Production and Marketing department has presented the information in the table below:

Again the following information should be taken note of:

·Feasibility studies cost the company GH¢2,000,000

·Test marketing expenses amounts to GH¢1,000,000

·The research into the discovery of the vaccine costs GH¢5,000,000

·Variable cost will increase by 5% per annum

·Selling price will increase by 10% per annum

·Marketing expense will be 5% of sales revenue per year

·Overhead cost will be fixed at GH¢6000,000 per year

·The project will last for five (5) years (2021-2025)

Charge depreciation using the straight-line method

·Salvage value for equipment is GH¢2,000,000

·CPC falls within the 25% tax bracket

·An initial working capital investment of GH¢10,000,000will be made. Subsequently, net working capital at the end of each year will be equal to 10 percent of sales for that year. In the final year of the project, net working capital will decline to zero as the project is wound down. In other words, the investment in working capital is to be completely recovered by the end of the project’s life

·The introduction of this new vaccine is expected to lead to 10,000units per annum drop in sales of vaccines for other types of corona virus by. The selling price per unit of existing products is GH¢100while the variable cost is GH¢70.This has no tax implications for the new vaccine.

·The project will be financed with debt and equity

Required

a.Evaluate the project using the NPV and Profitability index and recommend whether CPC should go ahead with the production of the vaccine.

b.Discuss three(3) qualitative factors that the Management of CPC might have to consider and how these factors are expected to influence the decision of Management with regards to the production of the vaccine. (6 marks )

c.Under what circumstances will you prefer profitability index to NPV as project evaluation techniques. (2marks )

d.Explain why sunk costs should not be included in a capital budgeting analysis, but opportunity costs and externalities should be included. (2 marks )

Following the outbreak of the Novel Coronavirus (COVID 19), CPCa pharmaceutical company is considering introducing a new vaccine unto the market to help fight the virus. This will require the injection of huge capital to the tune of GH¢40,000,000 for the purchase of the equipment for production. It will cost CPC an additional GH¢5,500,000 to set up the production facility and install that equipment for production. Mr. Smart, the CEO of CPC believes that the vaccine could be manufactured in a building owned by the firm and located in East Legon. This vacant building and the land can be sold for GH¢ 1,500,000 after taxes. CPC will finance the production of the vaccine (including initial working capital investment) by issuing 2000,000 new common stocks at GH¢ 20 per share from its existing shareholders. A total of GH¢ 15,000,000 is expected to be raised from the rights issue. It expects to finance the remaining from the issue of a 5-year bond with a before-tax yield to maturity (YTM) of 12%. Mr. Qwesi, the Finance Director has estimated the beta of the project to be 2.5 and the average return for stocks traded on the Ghana Stock Exchange to be 10% while the rate on Government of Ghana traded Treasury bills is 5%. The successful production of the vaccine will generate additional cash flows for CPC. The Production and Marketing department has presented the information in the table below:

Again the following information should be taken note of:

·Feasibility studies cost the company GH¢2,000,000

·Test marketing expenses amounts to GH¢1,000,000

·The research into the discovery of the vaccine costs GH¢5,000,000

·Variable cost will increase by 5% per annum

·Selling price will increase by 10% per annum

·Marketing expense will be 5% of sales revenue per year

·Overhead cost will be fixed at GH¢6000,000 per year

·The project will last for five (5) years (2021-2025)

Charge depreciation using the straight-line method

·Salvage value for equipment is GH¢2,000,000

·CPC falls within the 25% tax bracket

·An initial working capital investment of GH¢10,000,000will be made. Subsequently, net working capital at the end of each year will be equal to 10 percent of sales for that year. In the final year of the project, net working capital will decline to zero as the project is wound down. In other words, the investment in working capital is to be completely recovered by the end of the project’s life

·The introduction of this new vaccine is expected to lead to 10,000units per annum drop in sales of vaccines for other types of corona virus by. The selling price per unit of existing products is GH¢100while the variable cost is GH¢70.This has no tax implications for the new vaccine.

·The project will be financed with debt and equity

Required

a.Evaluate the project using the NPV and Profitability index and recommend whether CPC should go ahead with the production of the vaccine.

b.Discuss three(3) qualitative factors that the Management of CPC might have to consider and how these factors are expected to influence the decision of Management with regards to the production of the vaccine. (6 marks )

c.Under what circumstances will you prefer profitability index to NPV as project evaluation techniques. (2marks )

d.Explain why sunk costs should not be included in a capital budgeting analysis, but opportunity costs and externalities should be included. (2 marks )

Once a pinnacle of luxury clothing found only in high-end fashion stores, by 2006 cashmere sweaters, which typically sold for hundreds of dollars, could be found in big box stores for as little as $20. The reason for this substantial price drop: increased production and competition from China. The cashmere industry has been around for centuries. Historically, however, Chinese and Mongolian herders exported the raw fiber to Europe, where it was spun and converted into clothing. Beginning in the 1980’s, China made a charge toward industrialization and the market economy. One area of rapid growth was the textile industry.

To increase production of cashmere wool, the number of wool-producing goats in Inner Mongolia, home to a vast grassland that the animals can graze on, increased tenfold, from 2.4 million in 1949 to 25.8 million in 2004. This dramatically increased the production of cashmere in China, but not without its consequences. One of the biggest problems, however, is that goats are devastating to the topsoil. The combination of pointy hooves and a voracious appetite leads to a rise in desertification. That is, turning grassland to desert. Over a 5-year period, “the Gobi Desert expanded in size by an area larger than the Netherlands.”

A consequence of this desertification is an increase in dust storms. Over the last several decades, the number and size of dust storms originating in China has grown dramatically. These storms impose a tremendous external cost on the regions through which they travel. One storm, “forced 1.8 million South Koreans to seek medical help and cost the country $7.8 billion in damage to industries such as airlines and semiconductors.” Another storm was so large it traveled around the entire world, causing damage in the US, Europe, and Africa.

1. There are several methods for reducing the costs of negative externalities. Why might some of these be difficult to implement at the global level? and what policies could the Chinese government implement to prevent the Tragedy of the Commons outcome of desertification?