Problem 8-80A
Ratio Analysis

Consider the following information taken from GER's financial statements:

Also, GER's operating cash flows were $12,829 and $14,874 in 2020 and 2019, respectively.

Required:

Round your answers to two decimal places.

1. Calculate the current ratios for 2020 and 2019.

2. Calculate the quick ratios for 2020 and 2019.

3. Calculate the cash ratios for 2020 and 2019.

4. Calculate the operating cash flow ratios for 2020 and 2019.

5. Conceptual Connection: What are some reasons why GER's liquidity may be considered to be improving and some reasons why it may be worsening?

GER’s liquidity appears to hold constant when one looks only at the quick ratio . However, because the receivables and inventories  may not be easily converted to cash, the liquidity of GER may be worsening.

Packard Company engaged in the following transactions during Year 1, its first year of operations. (Assume all transactions are cash transactions.)

1. 1) Acquired $1,100 cash from the issue of common stock.
2. 2) Borrowed $570 from a bank.
3. 3) Earned $750 of revenues cash.
4. 4) Paid expenses of $280.
5. 5) Paid a $80 dividend.

During Year 2, Packard engaged in the following transactions. (Assume all transactions are cash transactions.)

1. 1) Issued an additional $475 of common stock.
2. 2) Repaid $325 of its debt to the bank.
3. 3) Earned revenues of $900 cash.
4. 4) Incurred expenses of $420.
5. 5) Paid dividends of $130.

What is the amount of Packard Company's net cash flow from financing activities for Year 2?

• Net outflow of $455.

• Net outflow of $325.

• Net inflow of $345.

• Net inflow of $20.

Michele Diaz is the founder of Diaz Manufacturing. Michele plans to expand her business. Company’s expansion plans require a significant investment, which she plans to finance with a combination of additional funds from outsiders plus some money borrowed from banks. Company’s financial records are not well maintained. Naturally, the new investors and creditors require organized and detailed financial statements than Michele has previously prepared. Ms. Diaz has assembled the following information:     

($ millions)

Michele Diaz is ready to meet with Austin Mark, the loan officer for Wells Fargo. She is asking to borrow $30 million. The meeting is to discuss the mortgage options available to the company to finance the new facility.

Austin begins the meeting by discussing a 30-year mortgage. The loan would be repaid in equal monthly installments. Because of the previous relationship between Diaz Manufacturing and the bank, there would be no closing costs for the loan. Austin states that the APR of the loan would be 6.00 percent. Ms. Diaz asks if a shorter mortgage loan is available. Austin says that the bank does have a 20-year mortgage available at the same APR.

Michele decides to ask Austin about a “smart loan” she discussed with a mortgage broker when she was refinancing her home loan. A smart loan works as follows: every two week a mortgage payment is made that is exactly one-half of the traditional monthly mortgage payment. (Hint: To determine how much is bi-weekly payment >>>calculate PMT as if it is 30-year mortgage and then divide by 2). The APR of the smart loan would be the same as the APR of the traditional loan.

Austin also suggests a bullet loan, or balloon payment, which would result in the greatest interest savings. At Michele’s prompting, he goes on to explain a bullet loan. The monthly payments of a bullet loan would be calculated using a 30-year traditional mortgage. In this case, there would be a 5-year bullet. This would mean that the company would make the mortgage payments for the traditional 30-year mortgage for the first five years, but immediately after the company makes the 60^th payment, the bullet payment would be due. The bullet payment is remaining principal of the loan. Ms. Diaz then asks how the bullet payment is calculated. Austin tells her that the remaining principal can be calculated using an amortization table, but it is also the present value of the remaining 25 years of mortgage payments for the 30-year mortgage.

Michele has also heard of an interest-only loan and asks if this loan is available and what the terms would be. Austin says that the bank offers an interest-only loan with a term of 10 years and an APR of 3.9 percent. He goes on to further explain the terms. The company would be responsible for making interest payments each month on the amount borrowed. No principal payments are required. At the end of the 10-year term, the company would repay the $30 million. However, the company can make principal payments at any time. The principal payments would work just like those on a traditional mortgage. Principal payments would reduce the principal of the loan and reduce the interest due on the next payment.

Tony is still unsure of which loan she should choose. She has asked you to answer the following questions to help her choose the correct mortgage.

1. What are the monthly payments for a 30-year traditional mortgage?

2. What are the payments for a 20-year tradition mortgage?

3. Prepare an amortization table for the first six months of the traditional 30-year loan. How much of the second payment is interest?

4. How long would it take for Diaz Manufacturing to pay off the smart loan assuming 30-year traditional mortgage payment?

Why is this shorter than the time needed to pay off the traditional mortgage? How much interest would the company save?  

5. Assume Diaz Manufacturing takes out a bullet loan under the terms described. What are the payments on the loan?

6. What is the amount of the last payment of the loan?

7. What are the payments for the interest-only loan?  

8. Which mortgage is the best for the company? Are there any potential risks in this action?

Digital Designs is a Michigan corporation, owned 100% by its founder Nicole Burke. The average annual gross receipts for the prior three years is $30,000,000. Digital Designs creates cartoon characters that are imprinted on its T-Shirts, magnets, stickers, and various other products. Its revenues largely come from sales of its products to retail stores through independent sales agents who receive a commission. The remainder of its revenues consists of royalties from licensees who pay Digital Designs a fee for the use of its cartoon images.

Digital Designs uses several independent contractors to manufacture its products. In manufacturing its products, Digital Designs creates cartoon characters and sends the original drawing as “flat art” to an independent printer. The printer photographs the cartoon drawing performs color separations and creates a “proof” of a particular product, which is shipped to Digital Designs for approval. The printer provides its own stock of blank T-shirts, paper, and ink, etc. and bears the risk of loss of the supplies and printed goods until they are shipped to Digital Designs. Once Digital Designs approves the proof, it sends a purchase order to the printer. The printer is not permitted to sell the products to anyone and does not have a proprietary interest in the cartoon characters created by Digital Designs. Once the printing is complete, the printer sends the finished products to Digital Designs, whose employees package the products for sale to retailers.

Prepare a memo to Nicole Burke discussing whether Digital Designs is considered a producer for purposes of Section 263A (UNICAP).

Sam Walton, founder of Walmart, had an early strategy for growing his business related to pricing. The “Opening Price Point” strategy used by Walton involved offering the introductory product in a product line at the lowest point in the market. For example, a minimally equipped microwave oven would sell for less than anyone else in town could sell the same unit. The strategy was that if consumers saw a product, such as the microwave, and saw it as a good value, they would assume that all the microwaves were good values. Walton also noted that most people don’t buy the entry-level product; they want more features and capabilities and often trade up. Choose one side, either defending this strategy or casting this strategy as an unethical act and create a discussion post with your viewpoints as to why you feel this is a valid strategy or is unethical.

Initial Setup and Series A NewCo has a pre?money valuation of $12 million. Combined, the founder shares and employee options pool total 9 million shares. NewCo seeks a $6 million Series A investment, for which investors receive shares of preferred stock that are convertible to shares of common stock.

Q1: What is the price per share at this time?

Q2: How many shares of preferred stock do the Series A investors receive?

Q3: What is the conversion price? (i.e., when converting a share of preferred stock into common stock, how many shares of common stock does the Series A investor get, and what is its value?)

Q4: What is the total equity stake of the Series A investors?

Q5: What is the total equity stake of the founders & employee options?

Scenario 3: Anti?Dilution Protection Series A investors negotiated broad?based weighted average conversion price protection.  The company seeks $8M, and Series B investors demand 8M shares.

Q16: What is the conversion price of Series A investor shares immediately after the B?round?

Q17: What is the total equity stake of the Series B investors?

Q18: What is the total equity stake of the Series A investors?

Q19: What is the total equity stake of the founders & employee options?

ABC Limited is a leading entertainment, artists and performance brokerage agency in Australia. ABC Ltd founder Mr. Right realised that China is a world-class media and entertainment platform and wants to begin penetrating the firm’s popular musical, magic shows there, but ABC Ltd has little international experience. Mr. Right is unaware of the various types of investment and nontariff trade barriers that ABC might face in China.

Q1. What types of investment barrier(s) might ABC Ltd face if they decide to enter into the China market? (around 100 words)

Review the case study provided below. In an APA-formatted Word document of at least 550 words, write an essay in which you answer the following four questions: 1. How would you describe the culture of Siemens before Kleinfeld's appointment as CEO? 2. Kleinfeld's leadership style was criticized as being “brash” and “American.” Is that a fair assessment? Why or why not? 3. Do you think the decision to “clean house” in the Siemens executive offices was the right one? Why or why not? 4. What challenges does Peter Löscher face in restoring the company's reputation?

Siemens' Commitment to “Clean Hands”

After CEO Klaus Kleinfeld put Siemens back on the road to recovery, a bribery scandal threatened to undo all the progress made. If things had turned out a little differently, Siemens CEO Klaus Kleinfeld might already be on his way to executive stardom, like his role model Jack Welch. Just two years after Kleinfeld took over the Munich electronics and engineering behemoth in January 2005, Siemens was on track to hit its aggressive internal earnings targets for the first time since 2000. In fact, it was expanding both sales and profits 168 faster than Welch's former domain, General Electric. The 2006 sales rose by 16 percent and profits by 35 percent, and the future was looking very positive.

Transforming Siemens was never going to be easy. With branches in 190 countries and over $100 billion in sales, the company has long been respected for its engineering expertise but criticized for its sluggishness. And Germany, with its long-standing tradition of labor harmony and powerful workers' councils, is highly resistant to the kind of change Kleinfeld tried to implement.

Against the odds, in just two years Kleinfeld had managed a major restructuring. He pushed Siemens' 475,000 employees to make decisions faster and focus as much on customers as on technology. He spun off underperforming telecommunications businesses and simplified the company's structure. When one group of managers failed to deliver, he broke up an entire division—at the end of 2005, it became clear that the Logistics & Assembly Systems Division, which made products such as sorting equipment used by the U.S. Postal Service, would deliver only a 2 percent profit margin. Most unpardonable in Kleinfeld's eyes was that the unit's managers waited too long to alert him to the problem. So Kleinfeld transferred the most profitable parts of the division, such as baggage-handling systems for airports, to other parts of Siemens. The rest was sold. Within weeks, an entire Siemens division with $1.9 billion in annual sales was vaporized.

Such aggressive tactics would inevitably lead to criticism of Kleinfeld's “American” style of leadership, but his eventual departure from Siemens (he is now CEO of aluminum giant Alcoa) came not, as many suspected, as a result of secret boardroom maneuvers. It came as a result of a need for a fresh start for the company after a scandal over bribery and corruption practices by senior managers to the tune of an estimated $2.5 billion.

In December 2008, Siemens announced that it would pay fines and other penalties totaling $800 million after pleading guilty in U.S. federal court to violations of the Foreign Corrupt Practices Act. The company also agreed to pay $540 million to German authorities in addition to a $274 million fine already levied for evidence of systematic bribery and corruption, including the use of airline tickets that could be exchanged

for cash, which executives in Siemens' medical division used to bribe clients in contract negotiations. Kleinfeld's eventual departure from Siemens came not, as many suspected, as a result of secret boardroom maneuvers, but as a result of a need for a fresh start for the company after a scandal over bribery and corruption practices by senior managers to the tune of an estimated $2.5 billion.

Thanks to full cooperation and transparency in the investigation, in addition to a multibillion-dollar internal investigation in which Siemens provided most of the evidence for its own prosecution, the company did not receive a ban from competing for future government contracts. However, having clearly demonstrated that much of its commercial prowess was achieved through a willingness to “grease the appropriate

palms” to win large government contracts from Nigeria to Norway, Siemens faced the challenge of rebuilding its reputation and proving that it can win business honestly (with “clean hands”)—even when competitors may continue to acquiesce to demands for bribes in order to win contracts.

The responsibility for rebuilding the company's reputation fell to Peter Löscher, as a designated (and untainted) outsider who previously headed divisions at GE (Siemens' greatest rival) to draw a line under the scandal and start a new era for the company. One of his first acts was to declare an amnesty for all 169 managers to come forward and share what they knew about the bribery practices—110 managers came forward and provided multiple new leads to internal and external investigators.

With Löscher's arrival and the need to wipe the slate clean, there was a dramatic housecleaning in the executive offices in addition to a cosmetic restructuring of the organization into three main divisions: industry, energy, and health care. It remains to be seen whether the restructuring is designed to improve operational efficiency or to make units more attractive to potential buyers.