A small, private firm has approached you for advice on its capital structure decision. It is in the specialty retailing business, and it had earnings before interest and taxes last year of $ 500,000.

• The book value of equity is $1.5 million, but the estimated market value is $ 6 million.
• The firm has $ 1 million in debt outstanding, and paid an interest expense of $ 80,000 on the debt last year. (Based upon the interest coverage ratio, the firm would be rated AA, and would be facing an interest rate of 8.25%.)
• The equity is not traded, but the average beta for comparable traded firms is 1.05, and their average debt/equity ratio is 25%.

a) Estimate the current cost of capital for this firm

b) Assume now that this firm doubles it debt from $1million to $2million, and that the interest rate at which it can borrow increases to 9%. Estimate the new cost of capital, and the effect on firm value.

Table 1

Quantity Total Revenue

0 $0

1 $5

2 $10

3 $15

4 $20

Refer to Table 1. For this firm, the average revenue is

$0.00

$5.00

$15.00

$20.00

8th State Bank prepares interim financial statements and follows an investment strategy of investing in trading securities. At the beginning of the third quarter of 2018, the bank held the following portfolio of trading securities:

Security	Cost	June 30, 2018 Fair Value
100 shares of Gordan Company common stock	$2,900	$2,800
600 shares of Olivia Company common stock	12,000	12,600
Totals	$14,900	$15,400

During the third quarter of 2018, the bank entered into the following trading securities transactions:

July 2	Received dividends of $1.50 per share on the Gordan Company common stock.
14	Sold 600 shares of Olivia Company common stock for $20 per share.
Aug. 9	Purchased 300 shares of Porter Company common stock for $36 per share.
24	Sold 100 shares of Gordan Company common stock for $30 per share.
Sept. 17	Purchased 500 shares of Union Company common stock for $22 per share.

On September 30, 2018, the Porter Company common stock had a quoted market price of $36.50 per share and the Union Company common stock had a quoted market price of $21 per share.

Required:

1.	Prepare journal entries to record the preceding information.
2.	Show what the bank reports on its third quarter 2018 income statement for these trading securities.
3.	Show how the bank reports these trading securities on its September 30, 2018, balance sheet. CHART OF ACCOUNTS8th State BankGeneral Ledger ASSETS 111 Cash 113 Investment in Trading Securities 121 Accounts Receivable 141 Inventory 152 Prepaid Insurance 181 Equipment 189 Accumulated Depreciation LIABILITIES 211 Accounts Payable 231 Salaries Payable 250 Unearned Revenue 261 Income Taxes Payable EQUITY 311 Common Stock 331 Retained Earnings REVENUE 411 Sales Revenue 431 Interest Income 432 Dividend Income 435 Gain on Sale of Trading Securities EXPENSES 500 Cost of Goods Sold 511 Insurance Expense 512 Utilities Expense 521 Salaries Expense 532 Bad Debt Expense 540 Interest Expense 541 Depreciation Expense 559 Miscellaneous Expenses 895 Loss on Sale of Trading Securities 910 Income Tax Expense 912 Unrealized Holding Gain/Loss: Trading Securities

On July 31, 2017, Coronado Company engaged Minsk Tooling Company to construct a special-purpose piece of factory machinery. Construction was begun immediately and was completed on November 1, 2017. To help finance construction, on July 31 Coronado issued a $303,600, 3-year, 12% note payable at Netherlands National Bank, on which interest is payable each July 31. $208,600 of the proceeds of the note was paid to Minsk on July 31. The remainder of the proceeds was temporarily invested in short-term marketable securities (trading securities) at 10% until November 1. On November 1, Coronado made a final $95,000 payment to Minsk. Other than the note to Netherlands, Coronado’s only outstanding liability at December 31, 2017, is a $28,200, 8%, 6-year note payable, dated January 1, 2014, on which interest is payable each December 31.

Collapse question part

(a)

Calculate the interest revenue, weighted-average accumulated expenditures, avoidable interest, and total interest cost to be capitalized during 2017.

Interest revenue

$

Weighted-average accumulated expenditures

$

Avoidable interest

$

Interest capitalized

$

1. A researcher estimates that the average revenue of the largest businesses in the U.S. is greater than $24 billion. A random sample of 50 companies is selected, and the revenues in billions of dollars are recorded. Assume a Normal distribution with a standard deviation of $30 billion. Is there enough evidence at an 8% level of significance to support the researcher’s claim?

178	30	91	44	35	61	56	46	20	32	41	38	36	15	25	31	30	19	19	19	24	16	15	15	19
122	28	28	20	27	29	16	16	19	15	25	25	18	14	15	24	23	17	17	22	22	21	20	17	20

1. Identify the proper Test or Confidence interval:

2. Complete the Test or Confidence Interval.

CASE CHAPTER 15: QUANTITATIVE DATA ANALYSIS: HYPOTHESIS TESTINGPERCEPTIONS OF ORGANIZATIONAL ATTRACTIVENESSINTRODUCTION When Song Mei Hui moved from being Vice President for Human Resources at Pierce & Pierce in Shanghai to her international assignment in New York, she was struck by the difference in perception of Pierce & Pierce as an employer in China and the United States. Pierce & Pierce in China stands for an attractive and popular place to work, as opposed to its image as an employer in the United States, which was one of an unattractive, traditional, and uninspiring place of work. This difference in perception was bothering Song Mei Hui, because a strong and appealing ‘employer brand’ has the capacity to attract (and retain) talent as denoted by the number of university graduates aspiring to work for companies such as SAS, Google, Cisco, and the Boston Consulting Group.According to Song Mei Hui, the drivers of employer attractiveness have evolved into a complex and challenging set in this day and age. Even though she believes that the success of the organization itself is at the cornerstone of being an attractive employer (and Pierce & Pierce is flourishing indeed), she feels that a wide variety of factors contribute to being successful in attracting and retaining talent. “For many employees, being a part of a profitable, thriving corporation is a reward on its own,” she says. “However, this is obviously not enough. Opportunities for empowerment, a feeling of achievement, a substantial compensation package, and a culture of grooming and development also play a major role in the decision making process of today’s young professionals. Job candidates are looking for a career, and not just for a job.”Song Mei Hui has hired a graduate student in management, Timothy Brice, to develop and test a model of employer attraction. The results of Timothy’s study should help Pierce & Pierce to become more popular as an employer in the United States and hence to attract and retain talented young professionals. Timothy has conducted a literature review and in-depth interviews with graduate students and young professionals who have just started their careers in order to establish the drivers of employer attractiveness. Based on the results of the literature review and the qualitative study, he has developed the following model. CONCEPTUAL MODEL AND HYPOTHESESFigure 1: A conceptual model of employer attraction EMPLOYER BRAND IMAGE From this model, Timothy has derived the following hypotheses. The effect of Brand Image on Employer attraction Employer brand image can be defined as the potential applicants’ perceptions of instrumental and symbolic attributes of an organization (cf. Backhaus and Tikoo, 2004; Lievens and Highhouse, 2003; Lievens, 2007; Martin, Beaumont, Doig and Pate, 2005). The instrumental dimension includes tangible attributes related to the job and/or the organization such as ‘job opportunities’, whereas the symbolic dimension includes (the perception of) intangible attributes of an employer (as if it were a person) such as ‘sincerity’ and ‘being exciting’. Both instrumental and symbolic attributes have been found to affect applicant attraction to an employer (Backhaus and Tikoo, 2004; Cable and Turban, 2001; Turban and Greening, 1997). Therefore, the following hypotheses are proposed:H1a: The more positive the perception of instrumental attributes of an employer, the stronger applicant attraction to the organization. H1b: The more positive the perception of symbolic attributes of an employer, the stronger applicant attraction to the organization. Feelings of significant others.If significant others in someone‘s surrounding (e.g., family and friends) tell this person that a company is a much better employer than other employers, someone’s level of attraction to Instrumental attributes:-Workplace atmosphere-Job opportunities-Industry characteristicsEmployer attractionSymbolic attributes:-Excitement-Sincerity-PrestigeSubjective normsCONCEPTUAL MODEL AND HYPOTHESESFigure 1: A conceptual model of employer attraction EMPLOYER BRAND IMAGE From this model, Timothy has derived the following hypotheses. The effect of Brand Image on Employer attraction Employer brand image can be defined as the potential applicants’ perceptions of instrumental and symbolic attributes of an organization (cf. Backhaus and Tikoo, 2004; Lievens and Highhouse, 2003; Lievens, 2007; Martin, Beaumont, Doig and Pate, 2005). The instrumental dimension includes tangible attributes related to the job and/or the organization such as ‘job opportunities’, whereas the symbolic dimension includes (the perception of) intangible attributes of an employer (as if it were a person) such as ‘sincerity’ and ‘being exciting’. Both instrumental and symbolic attributes have been found to affect applicant attraction to an employer (Backhaus and Tikoo, 2004; Cable and Turban, 2001; Turban and Greening, 1997). Therefore, the following hypotheses are proposed:H1a: The more positive the perception of instrumental attributes of an employer, the stronger applicant attraction to the organization. H1b: The more positive the perception of symbolic attributes of an employer, the stronger applicant attraction to the organization. Feelings of significant others.If significant others in someone‘s surrounding (e.g., family and friends) tell this person that a company is a much better employer than other employers, someone’s level of attraction to Instrumental attributes:-Workplace atmosphere-Job opportunities-Industry characteristicsEmployer attractionSymbolic attributes:-Excitement-Sincerity-PrestigeSubjective norms that particular organization will grow. It is generally recognized that potential applicants often consult other people (e.g., family, friends, and/or acquaintances) about jobs and organizations(e.g., Van Hoye and Lievens, 2007)”. What’s more, Turban (2001) found that university personnel’s beliefs about organizations affect students’ attraction to that organization. Kilduff (1990) also found that in the early stages of job search, college students are heavily influenced by the beliefs of their friends and classmates. These findings all point at the relevance of social influences to potential applicants in influencing the level of employer attraction. Hence, the following hypothesis is proposed: H2: The more positive significant others are about an organization, the stronger applicant attraction to the organization. To test these hypotheses, Timothy has undertaken a quantitative field study. He has collected data using a questionnaire measuring the variables in his model and a couple of respondent characteristics such as age, gender, and level of education with closed-ended questions. The results of this study are provided next. RESULTSTable 1 provides the means and standard deviations of the variables of interest to this studyand the results of a multiple regression analysis that was conducted to test the hypotheses of this study. Table 1 Summary statistics and results of the regression analysis Adjusted R2dfFMSDBSEtpRegression.3657, 897.304-----.000aConstant--2.213.5224.238.000Instrumental attributesWorkplace atmosphere4.32.75.088.152.577.565Job opportunities4.73.75.390.1362.868.005Industry characteristics4.24.74.275.1861.473.144Symbolic attributesExcitement3.78.91.071.149.474.637Sincerity5.13.80.109.137.794.429Prestige4.05.81.146.1151.268.208Subjective norm4.981.13.317.1003.169.002 Employer attraction3.711.23----Note. df = degrees of freedom; F = F-statistic; M = Mean; SD = Standard deviation; B = Unstandardized beta coefficient; SE = standard error; t = t-statistic; p = significance level; Scale 1-7 a. Predictors: (Constant), Workplace atmosphere, Job opportunities, Industry characteristics, Excitement, Sincerity, Prestige, Subjective norm.b. Dependent Variable: Employer Attraction.N= 197 (88 men and 109 women). QUESTIONS1. a. Discuss the following statement: “One of the most important issues in regression analysis concerns model specification (the determination of which independent variables should be included in or excluded from a regression equation).” b. Do you like Timothy’s model? Is it, for example, in line with Song Mei Hui’s ideas? 2. What’s the difference between simple regression analysis and multiple regression analysis?3. Why can’t Timothy run a series of simple regressions (for instance three or seven) to test the hypotheses of his study? 4. Provide the equation of Timothy’s model. 5. Interpret the results of the regression analysis. Discuss: a. the model fit; b. the significance of the model; c. the constant; d. the statistical validity of the beta coefficients; e. the face validity of the results.6. A common problem encountered in regression analysis is multicollinearity. a. What is multicollinearity and how does it affect the estimates of the regression coefficients?b. Describe two ways to test for multicollinearity. Which one do you prefer?c. Suppose that multicollinearity is a problem in this study. What can Timothy do about it? d. Do you expect that multicollinearity is a problem in this study? Explain.7. Timothy suggests that Pierce & Pierce should create more exciting jobs to attract more employees since the mean of the independent variable “excitement” is relatively low. Do you agree?8. What managerial conclusions can you draw based on the results of the regression analysis? 9. Song Mei Hui believes that the gender of potential employees may affect the original relationship between prestige and employer attraction. She asks Timothy to test this idea.a. How can Timothy test this idea? b. Provide a new equation of the model: include Song’s ideas about the moderating effect of gender on the relationship between prestige and employer attraction.10. Discuss the following statement: “Regression analysis does not address the issue of causality.”

ArticPalmTree Ltd. is evaluating the following two independent short-term financing arrangements.  What is the annual percentage cost for each financing alternative?

a. A 30-day loan secured against inventory from First Financial Co. with the following terms: (3 points)

1. • Inventory value equals $27 million
   • The financing company will lend up to 50% of the inventory value.
   • 0.20% processing fee (every 30 days) based on the total inventory value
   • Loan rate is 6% annually.
   • Calculate the effective annual interest rate.

b. Delay payments we make to our suppliers: (2 points)

• We currently have terms of 2/10 net 30 days and pay on the 10^th day.
• We now will pay on the 30^th day
• Calculate the effective annual interest rate.

Question 1:   

Consider the following Table: (1x5=5)

Output	VC	FC	TC
0	O	10	10
1	10		20
2	17		27
3	25		35
4	40		50
5	60		70
6	110		120

With the help of the above Table, calculate the following:

ATC of 5 units  ______________________________________________

AFC of 2 units _______________________________________________

AVC of 6 units _______________________________________________

MC of 2 units ________________________________________________

AFC of 1 unit ________________________________________________

What would happen to the demand for "Minarda" in the following situations? Will the demand curve shift to the left, shift to the right or stay unchanged?

Dew's price reduces by 10%. ( ________________________________________)

Shani and Coca-Cola raise their prices by 25%. ( _____________________________)

7'Up'sprice declines by 20%. ( _____________________)

XYZ Company has terminated 300employees. ( ________________________________________)

Sprite reduces its price by 20%. ( __________________________________________)

Problem 1:

  

An ophthalmologist’s office operates 52 weeks per year. It purchases disposable contact lenses for $11.70 per pair. The following information is available about these lenses.

Demand = 90 pairs/week

Order cost = $54/order

Annual holding cost = 27% of purchasing cost

Desired cycle-service level = 80%

Lead time = 3 weeks

Standard deviation of weekly demand = 15 pairs

Current on-hand inventory is 320 pairs, with no open orders or backorders.

Part I   Currently, the company uses a continuous review system,

A) What is the EOQ? What would be the average time between orders (in weeks)?

B) What should be the safety stock? What should the reorder point be?

c) An inventory withdrawal of 10 pairs was just made. Is it time to reorder?

26. Suppose that over the last 30 years, company ABC has averaged a return of 10%. Over the same period, the Treasury bond rate has averaged 3%. The current estimate of the Treasury bond rate is 5%. Using the historical approach, what is the estimate of ABC’s expected return.

A. 13.0% B. 12.5%

C. 12.0%

D. 11.0%

27. Standard deviation measures:

A. systematic risk.

B. unsystematic risk.

C. total risk.

D. beta risk.

28. Investors can eliminate what type of risk by diversifying?

A. systematic risk

B. unsystematic risk

C. beta risk

D. total risk

29. Which type of risk affects many different securities?

A. return risk

B. variance risk

C. unsystematic risk

D. systematic risk