Rierson owns a garment factory in Spain and sells designer clothes to US and other European countries. He is trying attract some investments from US that he can use to expand further into the US market. US investors are looking for stable cash flow, which is going to be a challenge given that the fashion industry is changing constantly and he can get stuck with unsold inventory. To allay their fears, Rierson decides to investment some of the capital raised into Italian 10 year Government Bonds. He explains that the return from these bonds will be used to improve his operations. Ignoring currency exposure, consider the following: (15 PTS)

a.    He decides to invest into ten year 1,000 EURO Government bond with 8% coupon rate and semi-annual coupons. If the bond is currently trading for a price of 957.35 Euros, what is the bond's yield to maturity? Assume is buys 10,000 of these bonds. (10 PTS)

b.    Suppose he is told that the yield to maturity has increased to 15% (expressed as an APR with semiannual compounding). What price is the bond trading for now? (5 PTS)

Megatronics Corporation, a massive retailer of electronic products, is organized in four separate divisions. The four divisional managers are evaluated at year-end, and bonuses are awarded based on ROI. Last year, the company as a whole produced a 13 percent return on its investment.

During the past week, management of the company’s Northeast Division was approached about the possibility of buying a competitor that had decided to redirect its retail activities. (If the competitor is acquired, it will be acquired at its book value.) The data that follow relate to recent performance of the Northeast Division and the competitor:

Management has determined that in order to upgrade the competitor to Megatronics’ standards, an additional $150,000 of invested capital would be needed.

Required:

1. 1. Compute the current ROI of the Northeast Division and the division’s ROI if the competitor is acquired.

2. 2. If divisional management is being evaluated on the basis of ROI, will the Northeast Division likely pursue acquisition of the competitor?

3. 3-a. Compute the ROI of the competitor as it is now and after the intended upgrade.

4. 3-b. If ROI is used as the basis for evaluation, would Megatronics Corporation likely be in favor of the acquisition of the competitor?

5. 4. Calculate the Northeast Division's ROI after acquisition of competitor but before upgrading.

6. 5-a. Assume that Megatronics uses residual income to evaluate performance and desires a 10 percent minimum return on invested capital. Compute the current residual income of the Northeast Division and the division’s residual income if the competitor is acquired.

7. 5-b. If divisional management is being evaluated on the basis of residual income, will the Northeast Division likely pursue acquisition of the competitor?

Megatronics Corporation, a massive retailer of electronic products, is organized in four separate divisions. The four divisional managers are evaluated at year-end, and bonuses are awarded based on ROI. Last year, the company as a whole produced a 15 percent return on its investment.

During the past week, management of the company’s Northeast Division was approached about the possibility of buying a competitor that had decided to redirect its retail activities. (If the competitor is acquired, it will be acquired at its book value.) The data that follow relate to recent performance of the Northeast Division and the competitor:

Management has determined that in order to upgrade the competitor to Megatronics’ standards, an additional $125,000 of invested capital would be needed.

Required:

1. 1. Compute the current ROI of the Northeast Division and the division’s ROI if the competitor is acquired.

2. 2. If divisional management is being evaluated on the basis of ROI, will the Northeast Division likely pursue acquisition of the competitor?

3. 3-a. Compute the ROI of the competitor as it is now and after the intended upgrade.

4. 3-b. If ROI is used as the basis for evaluation, would Megatronics Corporation likely be in favor of the acquisition of the competitor?

5. 4. Calculate the Northeast Division's ROI after acquisition of competitor but before upgrading.

6. 5-a. Assume that Megatronics uses residual income to evaluate performance and desires a 12 percent minimum return on invested capital. Compute the current residual income of the Northeast Division and the division’s residual income if the competitor is acquired.

7. 5-b. If divisional management is being evaluated on the basis of residual income, will the Northeast Division likely pursue acquisition of the competitor?

Megatronics Corporation, a massive retailer of electronic products, is organized in four separate divisions. The four divisional managers are evaluated at year-end, and bonuses are awarded based on ROI. Last year, the company as a whole produced a 15 percent return on its investment.

During the past week, management of the company’s Northeast Division was approached about the possibility of buying a competitor that had decided to redirect its retail activities. (If the competitor is acquired, it will be acquired at its book value.) The data that follow relate to recent performance of the Northeast Division and the competitor:

Management has determined that in order to upgrade the competitor to Megatronics’ standards, an additional $140,000 of invested capital would be needed.

Required:

1. Compute the current ROI of the Northeast Division and the division’s ROI if the competitor is acquired.

2. If divisional management is being evaluated on the basis of ROI, will the Northeast Division likely pursue acquisition of the competitor?

3-a. Compute the ROI of the competitor as it is now and after the intended upgrade.

3-b. If ROI is used as the basis for evaluation, would Megatronics Corporation likely be in favor of the acquisition of the competitor?

4. Calculate the Northeast Division's ROI after acquisition of competitor but before upgrading.

5-a. Assume that Megatronics uses residual income to evaluate performance and desires a 12 percent minimum return on invested capital. Compute the current residual income of the Northeast Division and the division’s residual income if the competitor is acquired.

5-b. If divisional management is being evaluated on the basis of residual income, will the Northeast Division likely pursue acquisition of the competitor?

Megatronics Corporation, a massive retailer of electronic products, is organized in four separate divisions. The four divisional managers are evaluated at year-end, and bonuses are awarded based on ROI. Last year, the company as a whole produced a 15 percent return on its investment.

During the past week, management of the company’s Northeast Division was approached about the possibility of buying a competitor that had decided to redirect its retail activities. (If the competitor is acquired, it will be acquired at its book value.) The data that follow relate to recent performance of the Northeast Division and the competitor:

Management has determined that in order to upgrade the competitor to Megatronics’ standards, an additional $125,000 of invested capital would be needed.

Required:

1. 1. Compute the current ROI of the Northeast Division and the division’s ROI if the competitor is acquired.

2. 2. If divisional management is being evaluated on the basis of ROI, will the Northeast Division likely pursue acquisition of the competitor?

3. 3-a. Compute the ROI of the competitor as it is now and after the intended upgrade.

4. 3-b. If ROI is used as the basis for evaluation, would Megatronics Corporation likely be in favor of the acquisition of the competitor?

5. 4. Calculate the Northeast Division's ROI after acquisition of competitor but before upgrading.

6. 5-a. Assume that Megatronics uses residual income to evaluate performance and desires a 12 percent minimum return on invested capital. Compute the current residual income of the Northeast Division and the division’s residual income if the competitor is acquired.

7. 5-b. If divisional management is being evaluated on the basis of residual income, will the Northeast Division likely pursue acquisition of the competitor?

Megatronics Corporation, a massive retailer of electronic products, is organized in four separate divisions. The four divisional managers are evaluated at year-end, and bonuses are awarded based on ROI. Last year, the company as a whole produced a 15 percent return on its investment.

During the past week, management of the company’s Northeast Division was approached about the possibility of buying a competitor that had decided to redirect its retail activities. (If the competitor is acquired, it will be acquired at its book value.) The data that follow relate to recent performance of the Northeast Division and the competitor:

Management has determined that in order to upgrade the competitor to Megatronics’ standards, an additional $125,000 of invested capital would be needed.

Required:

1. 1. Compute the current ROI of the Northeast Division and the division’s ROI if the competitor is acquired.

2. 2. If divisional management is being evaluated on the basis of ROI, will the Northeast Division likely pursue acquisition of the competitor?

3. 3-a. Compute the ROI of the competitor as it is now and after the intended upgrade.

4. 3-b. If ROI is used as the basis for evaluation, would Megatronics Corporation likely be in favor of the acquisition of the competitor?

5. 4. Calculate the Northeast Division's ROI after acquisition of competitor but before upgrading.

6. 5-a. Assume that Megatronics uses residual income to evaluate performance and desires a 12 percent minimum return on invested capital. Compute the current residual income of the Northeast Division and the division’s residual income if the competitor is acquired.

7. 5-b. If divisional management is being evaluated on the basis of residual income, will the Northeast Division likely pursue acquisition of the competitor?

Megatronics Corporation, a massive retailer of electronic products, is organized in four separate divisions. The four divisional managers are evaluated at year-end, and bonuses are awarded based on ROI. Last year, the company as a whole produced a 13 percent return on its investment.

During the past week, management of the company’s Northeast Division was approached about the possibility of buying a competitor that had decided to redirect its retail activities. (If the competitor is acquired, it will be acquired at its book value.) The data that follow relate to recent performance of the Northeast Division and the competitor:

Management has determined that in order to upgrade the competitor to Megatronics’ standards, an additional $150,000 of invested capital would be needed.

Required:

1. Compute the current ROI of the Northeast Division and the division’s ROI if the competitor is acquired.

1A. If divisional management is being evaluated on the basis of ROI, will the Northeast Division likely pursue acquisition of the competitor?

1C. Compute the ROI of the competitor as it is now and after the intended upgrade.

1D. If ROI is used as the basis for evaluation, would Megatronics Corporation likely be in favor of the acquisition of the competitor?

1E. Calculate the Northeast Division's ROI after acquisition of competitor but before upgrading.

1F. Assume that Megatronics uses residual income to evaluate performance and desires a 10 percent minimum return on invested capital. Compute the current residual income of the Northeast Division and the division’s residual income if the competitor is acquired.

1G. If divisional management is being evaluated on the basis of residual income, will the Northeast Division likely pursue acquisition of the competitor?

Match the descriptions/use to the most appropriate terms that follow:

1. _____Used widely to estimate fair values for many tangible assets acquired in business combinations. Estimates fair values by reference to the current price of replacing an asset with one of comparable utility.

2. ____Acquiring companies totals give a true representation of consolidation figures.

3._____It is easy to apply and often reflects cash flows from the subsidiary.

4. _____Pharmaceutical and high-tech industries have allocated significant portions of acquired business to this particular financial statement account.

5. ______The fair value of many liabilities assumed can be determined by reference to trades for similar debt

A. Goodwill Impairment

B. Market Approach

C. FASB ASC Topics 810

D. FASB ASC Topic 350

E. Equity Method

F. Cost Approach

G. Income Approach

H. Acquired In-Process Research and Development

I. Initial Value Method

J. Partial Equity Method

K. Goodwill

L. Gain on Bargain Purchase

The current assets and current liabilities sections of the balance sheet of Crane Company appear as follows.

The following errors in the corporation’s accounting have been discovered:

(a1) Calculate the following adjusted balances.

New Tech Corporation is based in Warwick, U.K. The Corporation will sell a network monitoring system to Open Telecom Group. The system costs US$50,000,000 and will be paid by Open Telecom Group in six-months. New Tech Corporation plans to control any exchange rate risk incurred from this transaction. To hedge the exchange rate risk, New Tech Corporation buys a six-month put option on US dollars, with a strike price £0.80/US$ for a premium of £0.06/US$. At the moment, the spot exchange rate is US$1.3220/£ and the six-month forward rate is US$1.5235/£. Assume the six-month effective interest rate in U.K. is 0.5% per annum and in U.S. is 1.5% per annum.

(a) If New Tech Corporation uses money market instruments to hedge exchange rate risk, elaborate how the Corporation implement and assess the sterling proceeds incurred.

(b) New Tech Corporation treats the forward exchange rate as an unbiased predictor of the future spot exchange rate, what would be the proceeds this time with using put options on US dollars?

(c) Jeff is the financial manager of New Tech Corporation, he stated that there will be no difference between the option and money market hedge for the corporation. Explain and analyze Jeff’s belief. Provide any necessary calculation