True or False questions

Michael Baker and Michael Gluk were the CEO and CFO of ArthroCare Corporation, a public company. Due to fraud committed by two senior vice presidents of ArthroCare, John Raffle and David Applegate, ArthroCare misstated its earnings in various SEC filings from 2006 to 2008. Pursuant to the clawback provisions of §§ 302 and 304 of Sarbanes-Oxley Act and acting on behalf of ArthroCare, the SEC sought recovery from Baker and Gluk in the amount of cash bonuses, incentives, and equity-based compensation that Baker and Gluk earned during the affected periods. The SEC argued that Baker and Gluk were liable because they were the CEO and CFO at the time and thus signed the filings that required restatements. Baker and Gluk argued that they did not commit any conscious wrongdoing, did not themselves commit any violation of securities law, and should not be required to disgorge their compensation.

Project Evaluation. This is a comprehensive project evaluation problem bringing together much of what you have learned in this and previous chapters. Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large, publicly traded firm that is the market share leader in radar detection systems (RDSs). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a five-year project. The company bought some land three years ago for $4.5 million in anticipation of using it as a toxic dump site for waste chemicals, but it built a piping system to safely discard the chemicals instead. If the land were sold today, the net proceeds would be $5 million after taxes. In five years, the land will be worth $5.3 million after taxes. The company wants to build its new manufacturing plant on this land; the plant will cost $19.5 million to build. The following market data on DEI’s securities are current:

Debt:

Common stock: Preferred stock: Market:

60,000 6.2 percent coupon bonds outstanding,
25 years to maturity, selling for 95 percent of par; the bonds have a $1,000 par value each and make semiannual payments.
1,250,000 shares outstanding, selling for $97 per share; the beta is 1.15.
90,000 shares of 5.8 percent preferred stock outstanding, selling for $95 per share.
7 percent expected market risk premium; 3.8 percent risk-free rate.

DEI’s tax rate is 34 percent. The project requires $825,000 in initial net working capital investment to get operational.

1. Calculate the project’s Time 0 cash flow, taking into account all side effects.

2. The new RDS project is somewhat riskier than a typical project for DEI, primarily because the plant is being located overseas. Management has told you to use an adjustment factor of +2 percent to account for this increased riskiness. Calculate the appropriate discount rate to use when evaluating DEI’s project.

3. The manufacturing plant has an eight-year tax life, and DEI uses straight-line depreciation. At the end of the project (i.e., the end of Year 5), the plant can be scrapped for $2.1 million. What is the aftertax salvage value of this manufacturing plant?

4. The company will incur $3,500,000 in annual fixed costs. The plan is to manufacture 13,000 RDSs per year and sell them at $10,800 per machine; the variable production costs are $9,900 per RDS. What is the annual operating cash flow, OCF, from this project?

5. Finally, DEI’s president wants you to throw all your calculations, all your assumptions, and everything else into a report for the chief financial officer; all he wants to know is what the RDS project’s internal rate of return, IRR, and net present value, NPV, are. What will you report?  

Can you explain the solution step by step?

28. Project Evaluation. This is a comprehensive project evaluation problem bringing together much of what you have learned in this and previous chapters. Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large, publicly traded firm that is the market share leader in radar detection systems (RDSs). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a five-year project. The company bought some land three years ago for $4.5 million in anticipation of using it as a toxic dump site for waste chemicals, but it built a piping system to safely discard the chemicals instead. If the land were sold today, the net proceeds would be $5 million after taxes. In five years, the land will be worth $5.3 million after taxes. The company wants to build its new manufacturing plant on this land; the plant will cost $19.5 million to build. The following market data on DEI’s securities are current:

Debt:

Common stock: Preferred stock: Market:

60,000 6.2 percent coupon bonds outstanding,
25 years to maturity, selling for 95 percent of par; the bonds have a $1,000 par value each and make semiannual payments.
1,250,000 shares outstanding, selling for $97 per share; the beta is 1.15.
90,000 shares of 5.8 percent preferred stock outstanding, selling for $95 per share.
7 percent expected market risk premium; 3.8 percent risk-free rate.

DEI’s tax rate is 34 percent. The project requires $825,000 in initial net working capital investment to get operational.

1. Calculate the project’s Time 0 cash flow, taking into account all side effects.

2. The new RDS project is somewhat riskier than a typical project for DEI, primarily because the plant is being located overseas. Management has told you to use an adjustment factor of +2 percent to account for this increased riskiness. Calculate the appropriate discount rate to use when evaluating DEI’s project.

3. The manufacturing plant has an eight-year tax life, and DEI uses straight-line depreciation. At the end of the project (i.e., the end of Year 5), the plant can be scrapped for $2.1 million. What is the aftertax salvage value of this manufacturing plant?

4. The company will incur $3,500,000 in annual fixed costs. The plan is to manufacture 13,000 RDSs per year and sell them at $10,800 per machine; the variable production costs are $9,900 per RDS. What is the annual operating cash flow, OCF, from this project?

5. Finally, DEI’s president wants you to throw all your calculations, all your assumptions, and everything else into a report for the chief financial officer; all he wants to know is what the RDS project’s internal rate of return, IRR, and net present value, NPV, are. What will you report?

Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large, publicly traded firm that is the market share leader in radar detection systems (RDSs). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a five-year project. The company bought some land three years ago for $5.4 million in anticipation of using it as a toxic dump site for waste chemicals, but it built a piping system to safely discard the chemicals instead. The land was appraised last week for $6.2 million. In five years, the aftertax value of the land will be $6.6 million, but the company expects to keep the land for a future project. The company wants to build its new manufacturing plant on this land; the plant and equipment will cost $32.72 million to build. The following market data on DEI’s securities is current:

DEI uses G.M. Wharton as its lead underwriter. Wharton charges DEI spreads of 8 percent on new common stock issues, 6 percent on new preferred stock issues, and 4 percent on new debt issues. Wharton has included all direct and indirect issuance costs (along with its profit) in setting these spreads. Wharton has recommended to DEI that it raise the funds needed to build the plant by issuing new shares of common stock. DEI’s tax rate is 35 percent. The project requires $1,525,000 in initial net working capital investment to get operational. Assume Wharton raises all equity for new projects externally.

a. Calculate the project’s initial Time 0 cash flow, taking into account all side effects. Assume that the net working capital will not require flotation costs. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, e.g., 1,234,567.)

b. The new RDS project is somewhat riskier than a typical project for DEI, primarily because the plant is being located overseas. Management has told you to use an adjustment factor of +2 percent to account for this increased riskiness. Calculate the appropriate discount rate to use when evaluating DEI’s project. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Scenario: You work in the marketing and media department of a mid-sized Connecticut company that publishes a popular newsletter about its industry (you can decide what the industry is). Currently, the newsletter is a print document published and distributed bi-monthly for free to hundreds of different readers around the world. You are one of the editors of the company’s newsletter.

With a change in policy and publishing, you need to send a mass email to your subscribers to inform them that your company’s newsletter will now be delivered electronically, by e-mail, and will be updated monthly instead of bimonthly. Customers who wish to receive the print version of the newsletter will be charged an annual handling fee of $30. Customers need to inform the company if they wish to cancel their subscriptions to the newsletter.

Be sure to present these changes positively—with your customers’ point of view in mind.

You may write on behalf of an existing company or create your own persona. Also, you may add details for why they change is being made such as digital marketplace, environmental concerns, economic adjustments, etc.

The trail balance sheet of Moe’s Mowing, Inc is dated August 31, 2019: Assets Liabilities Cash 6,000 Account Payable 5,000 Account Receivable 400 Notes payable 2,500 Supplies 6000 salary payable 2,000 Prepaid rent 13,000 Loan Payable 13,000 Inventory 2,500 Unearned Revenue 4000 Total current assts 27,900 Total Liabilities 26,500 Cars 7,500 building 1500 Shareholder’s Equity furniture 2500 Common Stocks 6,700 Retained Earning 6,200 Total fixed asset 11,500 Total owner's equity 12,900 Total Assets 39,400 Total Liabilities and Equity 39,400 During the month of September, the business incurred the following transactions: 9/1/2019 Deposited $5,000 cash in the business’s bank account. The company received the cash and issued common stocks. 9/2/2019 The company purchased a car for $1,750 on account from Melton Supply 9/3/2019 The company bought equipment, paying cash, 1,750 9/4/2019 The company purchased office supplies for $1000 cash. 9/5/2019 The company provided services to the Walker Company for $18000 on account. 9/6/2019 The company paid $500 to Melton Office Supply 9/7/2019 The company borrowed a short-term debt (notes payable) from the bank, $20,000 9/8/2019 The company received $8,000 in cash for services provided to a new customer. 9/9/2019 Shortly after opening the business, the company paid the month’s rent of $650. 9/10/2019 1% of the inventory has been expired (bad goods expense). 9/11/2019 The company paid $100 cash to repair car. 9/12/2019 Sold merchandise on account to Kara Elsworth, $14,500, term 2/10, n/30 9/13/2019 The company sold 12% of its furniture for cash at price of $40,000. 9/14/2019 Kara Elsworth returned $500 of the merchandise purchased on September 11 9/16/2019 The company received $1,100 cash from Walker Company 9/16/2019 Declared and paid dividends of $600. 9/17/2019 Collecting 70% of accounts receivable. 9/18/2019 Collected payment from Kara Elsworth for September 11 sale. 9/19/2019 The company paid 35% of its accounts payable. 9/20/2019 Supplies on hand at month-end, $4000 9/21/2019 Salary owed but not paid yet $1000 9/22/2019 Prepaid rent expired, $8,000 9/23/2019 $2000 out of the unearned service revenue was earned during September. 9/24/2019 The loan accrues interest at 1% per month. No interest was paid in September 9/25/2019 The bookkeeper recorded a collection from accounts receivable of $100 as $10 9/26/2019 On May 18, Moe’s Mowing, Inc purchased on account equipment costing $450. The transaction was journalized and posted as a debit to Equipment $45 and a credit to Accounts Payable $45. The error was discovered on 9/26/2019. 9/27/2019 Income tax is 2.5% Required: Record theses business transactions in Journal entry, and create the financial statements

The data set of Froot loops list data from 100 boxes, and 27% of them are red color.  the Florida candy company claims that the percentage of red color depot loops is equal to 24%. use 0.05 significance level to test that claim. show work of how you,
1) identify the claim.
2)give symbolic form that must be true when the original claim is false.
3) identify Null and alternative hypothesis. 4)select significance level.
5) identify the test statistic
6)find P values
7) make a decision
8)restate decision in nontechnical terms.

Multiple Choice

• $1,439.10

• $3,095.70

• $68,004.54

• $1,242.39

Exercise 2: Why should an investor consider the issue of exchange rates when analysing share investments? In your answer explain what impacts a change in exchange rates might have on the performance of a corporation and its share price.

Exercise 3: a) A company makes a $50 000 deposit for six months at 6.40 per cent per annum simple interest. How much interest will the company earn? 2 b) A bank accepts a $15 000 deposit to mature in 135 days, and it pays 5.90 per cent per annum. How much interest will it have to pay? c) A bank accepts a deposit of $105 000 for a term of one year and 97 days, with an interest rate of 6.25 per cent per annum simple interest. Interest is payable six monthly and at the maturity date. How much interest will be paid in total?

Exercise 4: Discuss the nature and purpose of derivative products. In your answer consider the different types of derivative products, the risks managed by these products and the differences between exchange-traded contracts and over-the-counter contracts.

Exercise 5: Define a futures contract. Describe the basic principles behind the use of futures contracts to manage risk exposures.

Sonic, Inc., sells business software. Currently, all of its programs come on disks. Due to their complexity, some of these applications occupy as many as seven disks. Not only are the disks cumbersome for customers to load, but they are relatively expensive for Sonic to purchase. The company does not intend to discontinue using disks altogether. However, it does want to reduce its reliance on the disk medium.

Two proposals are being considered. The first is to provide software on computer chips. Doing so requires a $300,000 investment in equipment. The second is to make software available through a computerized “software bank.” In essence, programs would be downloaded directly from Sonic using telecommunications technology. Customers would gain access to Sonic’s mainframe; specify the program they wish to order; and provide their name, address, and credit card information. The software would then be transferred directly to the customer’s hard drive, and copies of the user’s manual and registration material would be mailed the same day. This proposal requires an initial investment of $240,000.

The following information pertains to the two proposals. Due to rapidly changing technology, neither proposal is expected to have any salvage value or an estimated life exceeding six years.

The only difference between Sonic’s incremental cash flows and its incremental income is attributable to depreciation. A minimum return on investment of 15 percent is required.

a. Compute the payback period of each proposal.

b. Compute the return on average investment of each proposal.

c. Compute the net present value of each proposal using the tables in Exhibits 26–3 and 26–4.

d. What nonfinancial factors should be considered?