Question 11.

Companies Heidee and Leaudy have the same sales, tax rate, interest rate on their debt, total assets, and basic earning power. Both companies have positive net incomes. Company Heidee has a higher debt ratio and, therefore, a higher interest expense. Which of the following statements is CORRECT? Rationalize your selection.

a. Company Heidee has more net income.

b. Company Heidee pays less in taxes.

c. Company Heidee has a lower equity multiplier.

d. Company Heidee has a higher ROA.

e. Company Heidee has a higher times interest earned (TIE) ratio.

Analyzing Foreign Currency Hedges

The Arizona Company, a U.S.-based manufacturer, ordered a piece of equipment from Sonora Inc., a Mexico-based supplier, agreeing to pay 300,000 Mexican pesos upon delivery of the equipment in three months time. At the time of the contract signing, the exchange rate between the U.S. dollar and the Mexican peso was 10P:$1.

With concerns about a weakening U.S. dollar, The Arizona Company decided to hedge its currency exposure by purchasing a forward foreign exchange contract from a local bank.

The forward contract committed The Arizona Company to pay $30,300 in three months in exchange for 300,000 pesos.

What was the forward foreign exchange rate implicit in the contract (assuming no transaction costs)?

Round to two decimal places. Hint - provide the number of Pesos to each US$.

1.) __________________

If the foreign exchange rate in three months was 9.8P:$1, how much did The Arizona Company save by purchasing the currency hedge?

Round to the nearest dollar.

2.) ________________

If the foreign exchange rate in three months was 9.0P:$1?, how much did the company save by purchasing the currency hedge?

Round answer to the nearest dollar.

3.) __________________

David Miller (age 34) and his wife, Emily Miller (age 33), reside at 293 E. Main Street in Sterling, MA, 01564 with their two children whom they fully support: Catherine (age 13) and Michael (age 11).
During the year, Emily worked full-time as a customer service representative at a
local bank and earned $37,600. Her employer withheld the following from her
wages:
Federal income tax $2,250.00
State income tax 1,124.60
Social security tax 2,331.20
Medicare tax 545.20
ROTH IRA contribution 5,500.00
David attended college full-time for 5 months and part-time (at least half time) for
7 months in pursuit of a bachelor’s degree in accounting. He attended the
University of Massachusetts, which is located at 600 University Drive in Amherst,
MA 01003. David received a tax-free scholarship that paid for most of his college
expenses, however, he did pay $900 for tuition and fees. The college did not send
David a Form 1098-T for these payments, however, he does have documentation
to substantiate his expenditures. This will be the first year that David has claimed
any education credits; he does not have any other degrees.
The Millers had other income consisting of the following:
Interest on CDs at Platinum Savings Bank $600
Municipal bond interest (state of MA) $2,000
Qualified

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Consider a new virus that causes a life-threatening disease. Two individuals are exposed to high amounts of virus and only one develops disease. Personalized medicine approaches determine that the individual that was “resistant” to the virus carried a mutation in the gene encoding surface protein X. From this information and your knowledge gained in MIBO3500, what is (are) the reasonable hypothesis(es).

Question 16 options:

Company C is a US C Corporation. It builds and operates energy plants that produce electricity. Country P has significant needs for energy, but it does not have the expertise or financial capability to borrow in the public markets to fund projects of this magnitude. Country P has determined that the best way to entice foreign power investors to invest, operate, and accept the risks inherent with this market is by offering a 10-year income tax holiday on profits derived from constructing and operating the power plant. This would also include any potential withholding taxes on distributing profits. By offering a tax holiday Country P will offer to pay a reduced rate to purchase the power produced by the power plant. In this way the local citizens will benefit by having electricity at a reduced rate. Company C is interested in pursuing this project and is now asking you to determine the US tax consequences of the operating results. You learn that the expected investment is $1B and that 95% of the investment would be funded by offering debt in the public market. Company C would set up a CFC in the Netherlands and subscribe the debt offering. The coupon rate on the debt will be 7%. Company C expects that the Operating Cash Flows in Country P to be 15% of the total investment. The total investment would be the sum of public borrowings plus Company C’s contribution to equity of $50M. Company C does not desire to leave excess cash flow in Country P due to the risks associated with that market and would like the flexibility to invest elsewhere in the world for other projects (i.e. the money is not needed in the US). Consequently, the Company wishes to assert permanent reinvestment under GAAP (ASC 740). The excess cash flow would go to an intermediate holding company in the Netherlands to service the interest expense on the public borrowing. Assume that the Netherlands does not have a tax and that the loan balance is not amortizing (i.e. interest only). Thus, the structure of entities is a U.S. Parent (USP), owning as a first tier CFC (CFC1), a Netherlands Company. CFC1 would be funded with a $50M investment in equity from USP. CFC1 would borrow $950M in the public market. CFC1 would then invest $1B into CFC2 as equity. CFC2 would operate in Country P.

a) Using Pre 2017 rates and rules assume that neither Sec. 904(c) look through nor check the box is available. What, if any, is the expected annual U.S. tax and the underlaying tax rate on the investment?

b) Using Pre 2017 rates and rules assume either 904(c) look through or check the box is implemented. What, if any, is the expected annual U.S. tax and the underlying tax rate on the investment?

c) Using Post 2017 Act rates and rules what, if any, is the expected U.S. tax and tax rate on the investment (rather than guessing what year in service the asset is in assume this is year 1). Further assume that the entity holding the debt has checked open the operating entity (i.e. its one aggregate calculation)

1. The following conversation took place between two friends John and Peter. John is the general manager of XYZ Company while Peter is the CEO of LMN Company:

John: Hi Peter, it is nice to meet you. I want to share to you the new policies and procedures that we have implemented in my company.
Peter: Oh really, I want to know those new policies so maybe I can also use and apply those in my company specially at this time of Coronavirus Pandemic , such a very challenging time for us.
John : Yes indeed. Anyway, our first policy is “No Work, No Pay”. As you know, my company is involved in the tourism business, and this Pandemic has forced us to close our shops and stop our operations. So all our employees are not working, and they are just in their homes. So the top management decided to also stop giving their salaries because they are not working at all.
Peter: Really? So all your employees are not getting salary?
John: Well, actually, not all employees, only the rank and file. Our managers are still given half of their salaries. We do not want to lose them. But for the rank and file employees, we can always replace them anytime, so if they want to resign then we will not stop them. As a matter of fact, our second policy is “Give priority to Top Level Employees”. It means that if we have to provide trainings and opportunities, it will be for our top level employees only. These are the people who will stay with us. Actually, most of our rank and files are expatriates, sooner or later, they will go home to their countries.
Peter: Yes, you told me before, they are mostly Asians right?
John: Yes Asians, I hate those people. Most of them are lazy. We are both lucky, we have blue eyes and blond hair, we come from the West, we are the only expatriates who are very much welcome here in the Gulf, and we are given special privileges. We belong to the superior race. Anyway, our last policy is “Men leads, women follows”
Peter: Really? That is a written policy that you have in your company?
John: No, it is not written but we practice and follow it. All our top managers are men. Women are very sensitive and emotional. They really cannot handle pressure. Honestly, I believe they should only stay at home and work in the kitchen.
Peter: Okay John, let me think about those policies that you have shared. Thanks for this conversation.

Required : Based on the conversation above, what are your views and opinions on the policies mentioned by John? Discuss in full details all your points and cite any ethical principles and ethical issues in culture and diversity that you have learned in your Business Ethics class that has been violated or is in contradiction to the points made by John. Make a full discussion on those issues and suggest ways on how to address those issues.
    

2. The COVID 19 Pandemic has caused the loss of so many lives, increasing unemployment, economies crashing, cities in lockdown, schools and colleges, shops and malls, churches and mosques all closed. The past two months has been very challenging for everyone, regardless of your religion, race, nationality or social status, the Corona Virus Pandemic has really changed our lives and the world.

Required: Write a personal reflection on how this pandemic has affected your values, your attitude, your behavior towards yourself, your friends, your family and your communities. Write the challenges or any personal ethical dilemmas that you have faced or encountered and what courses of action you have taken. In your write-up, include a discussion of any ethical approaches that you have learned and used as you face these challenges and solve this dilemma.

Direct mail advertisers send solicitations​ ("junk mail") to thousands of potential customers in the hope that some will buy the​ company's product. The response rate is usually quite low. Suppose a company wants to test the response to a new flyer and sends it to 1010 people randomly selected from their mailing list of over​ 200,000 people. They get orders from 113 of the recipients. Use this information to complete parts a through d.

​a) Create a 95​% confidence interval for the percentage of people the company contacts who may buy something.

Direct mail advertisers send solicitations​ ("junk mail") to thousands of potential customers in the hope that some will buy the​ company's product. The response rate is usually quite low. Suppose a company wants to test the response to a new flyer and sends it to

1020

people randomly selected from their mailing list of over​ 200,000 people. They get orders from

100

of the recipients. Use this information to complete parts a through d.

​a) Create a

90%

confidence interval for the percentage of people the company contacts who may buy something.

In a recent advertisement a new car has a sale price of $32,000. The car company is giving you the option of receiving a $3500 cash rebate or a special interest rate (for those who qualify) at 0.9% for 5 years.

If the local bank will lend you the money at 4.5% for 5 years should you take the discount and borrow from the bank or select the low interest rate from the company?

What option would you select and how much would you save over the second option?

Direct mail advertisers send solicitations​ ("junk mail") to thousands of potential customers in the hope that some will buy the​ company's product. The response rate is usually quite low. Suppose a company wants to test the response to a new flyer and sends it to 1110 people randomly selected from their mailing list of over​ 200,000 people. They get orders from 108 of the recipients.

​Create a 90% confidence interval for the percentage of people the company contacts who may buy something.

( __ % __ % )

​(Round to one decimal place as​ needed.)