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.

The condensed budgeted income statement for the Phan and Nguyen partnership for 2020 is as follows:

A cost behaviour analysis indicates that 75% of the cost of goods sold is variable, 42% of the selling expenses are variable, and 40% of the administrative expenses are variable. (Use the CVP income statement format in calculating profits.)

Calculate the break-even point in total sales dollars and in units for 2020. (Round contribution margin per unit to 1.25, contribution margin ratio to 1 decimal place, e.g. 15.2% and final answers to 0 decimal places, e.g. 5,275.)

Nguyen was a marketing major in university. He believes that the sales volume can be increased only by intensive advertising and promotional campaigns. He therefore proposed the following plan as an alternative to Phan’s: (1) increase variable selling expenses to $0.59 per unit, (2) lower the selling price per unit by $0.25, and (3) increase fixed selling expenses by $40,000. Nguyen quoted an old marketing research report that said that sales volume would increase by 60% if these changes were made.

Calculate Nguyen’s break-even point in dollars and units. (Round contribution margin per unit and contribution margin ratio to 2 decimal places, e.g. 15.25 or 15.25% and final answers to 0 decimal places, e.g. 5,275.)

Determine which plan should be accepted.

The Chief Executive Officer of your company Hoota Limited wants you to explain the accounting treatment of the following transactions following your return from an IFRS workshop on various accounting standards. You are the finance manager of your company.

Transaction One

Hoota Limited introduced two pension schemes, ‘CON’ and ‘BEN’ on 1 April 2019 for the benefit of its employees. The following information relates to the two schemes as at 1 April 2020:

CON Scheme

Under this scheme the company’s obligation is limited to its fixed annual contribution of K600,000. The membership of this pension scheme is senior management staff of the company.

At 1 April 2019, there were contributions paid in advance for the year ending 31 March 2020 amounting to K150,000. In the year ending 31 March 2020, the company made total contribution of K1,040,000 out of which K200,000 related to the year ending 31 March 2021. During the year to 31 March 2021, total contributions of K1,400,000 were made out of which K250,000 were made in advance for the year that followed.

BEN Scheme          

Under this scheme, the company guarantees benefits to the employees when they reach 60 years or after working for the company for 30 years whichever comes earlier. The membership of this pension scheme is employees other than senior management staff.

The following relates to the pension scheme:                                  K’000

Net plan assets at 1 April 2020                                                  500

Current service cost                                                                2,000

Contributions paid                                                                      800

Pension benefits paid                                                                  400

Net plan liability at 31 March 2021                                            200

Appropriate annual discount rate 12%

During the year to 31 March 2021, Hoota Limited adjusted the formula used to calculate the benefits payable to employees. This resulted in a decrease of K510,000 in pension benefits payable to employees.

Contributions and pension benefits were all paid at 31 March 2021.

The company has only recorded contributions paid in its financial statements for the year to 31 March 2021.

Required:

Explain how the two schemes, CON and BEN should be treated in the financial statements of Hoota Limited for the year to 31 March 2021.

Note: Include all relevant calculations in your explanation.                                                                                                                                                                                             

Transaction two

Hoota Limited deals in groceries and hardware products. The company has thus two divisions, groceries’ division and hardware’s division. It was formed six (6) years ago by two Zambians who are the directors of the company. They have been responsible for the day to day running of the business. One of the directors made the following comments: “we have not seen the need to disclose the performance of each division. We have only been interested in the overall performance of the company; disclosing the performance of each division is a waste of time and

does not add any value to our financial statements. Further, as far as I am concerned, there are no known criteria for identifying operating segments”.

Required:

Discuss the comments made by the director of Hoota limited, making reference to appropriate accounting standards.                                                                                               

                                                                                                                        [Total: 20 marks]

Using the numbers shown in parentheses, indicate how each separate question will affect the reconciliation of December 31, 2020. (Assume you are reconciling the balance per books and the balance per bank to the correct or adjusted balance). Write your answers on the space provided before each number. Use only CAPITAL LETTERS.

A. Add to bank balance
B. Deduct from the bank balance
C. Add to book balance
D. Deduct from book balance
E. No effect

1. Bank service charge for December, P 300, not recorded on books.

2. Checks totaling P 41,500 were outstanding at December 31, 2020.

3. Deposits totaling P 26,500 were in transit at December 31, 2020.

4. Check No. 601 dated November 30, 2020 was paid by the bank in December.

5. Check No. 607 for P 2,050 were recorded on the books as P 2,500.

6. A check from a customer was paid by the bank in December. It had been returned earlier in December for proper endorsement and was redeposited. No entry for the return or re-deposit had been made.


7. An interest charge was made to the account by the bank in error.

8. The December bank statement included the proceeds of a customer’s draft collected by the bank on December 30, 2020, but not recorded on the books.


9. Credit memorandum from the bank for December was not recorded in December. It was, however, recorded in January 2021.


10. A debit memo issued by the bank for P 450 recorded as a credit to cash.