Despite some theoretical assertions, many investors do care a great deal about dividends. They believe that sure dividends today (a bird in the hand) are less risky than a return in the form of capital gains in the future.

The following table lists some factors that might affect an investor’s preference for dividends. Indicate whether the given factors are likely to make an investor prefer to receive more or fewer dividends.

In examining investors’ preferences for dividends, it is useful to begin with the concept of dividend irrelevance. Dividend irrelevance suggests that in a world with no taxes or brokerage (or transaction) costs, firms and investors are indifferent to the paying or receiving of dividends.

However, as these restrictions are relaxed, various factors suggest that firms should pursue high or low payouts. One such factor is:

Dividends received far into the future are significantly more uncertain than dividends received in the near future.

Based on the factor described, identify whether investors, in general, will tend to favor high or low payout ratios.

Favor a high payout

Favor a low payout

Erin and Mia are finance researchers and are discussing the Modigliani and Miller (MM) dividend irrelevance theory. Based on your understanding of MM’s argument and the impact of the assumptions applied to the argument, fill in the missing parts of their conversation.

ERIN: Modigliani and Miller (MM) dividend irrelevance theory is based on several assumptions. However, in the real world, these assumptions don’t apply.

MIA: True. If the transaction cost assumption is removed, then investors do care about how they receive their gains from their investment—capital gains or dividends.

ERIN: You are right, Mia. According to MM’s theory, investors who own low- or nondividend-paying stocks could   their holdings to satisfy current income requirements.

MIA: But in the real world, Erin, this is not a fair assumption. Transaction costs with each trade activity will   the investor’s earnings leading investors toward preferring regular dividends.

You have to be the chief Software Engineer, and your mission is to describe functional and non-functional requirements, as good and detailed as possible. When you are missing data, you have to make assumptions (sometimes wild ones). No one can really answer your questions, and you have a presentation to the higher management in 45 min sharp. By then, you have to construct a document, with a very small ( no more than 10 lines) executive description, and no more than two A4 pages (1.25 space, font 12) text. Good luck.

INFORMATION ABOUT THE PROJECT

Our company is seriously considering of bidding for the following project, and we ask you, the lead Software Engineer, to construct a draft document, with the functional and non-functional requirements. The better your document, the better job will do our business development team to construct a proposal.

Project abstract description

The project is about monitoring the two gates of the University, automate the entry of authorized personnel, plus record all car license plates, if they left at night, and also raise alarms if a car is in the parking for more than 5 days. Also the system needs to report cars that are still at the parking, or during any holiday, or when the University is closed officially (e.g., during summer holidays). During those periods, only high-ranking personnel is automatically allowed to enter (e.g., Deans). All others need to be stopped at the gate, and call their supervisor. For that purpose, the following descriptions have been gathered.

Notes

• Each security room next to each gate, will be equipped with the necessary hardware, in order for the guards to see the license plate camera, plus another camera facing the car driver. Also each car will be equipped with electronic id device. The entry bar will be connected to the system, and will be automatically raised, if the car and driver are both authorized.

• The license plate cameras have to have a good false positive rate. The driver-side camera will not do face recognition at the beginning, but the client wants this to be an option for the near future.

• The time it takes for one car to enter, is of great importance. The client needs to know this in detail.

• There should be a “manual override” button on the screen, but the system should keep all details possible, guard details, time, date, car & license picture, etc.

• The client will accommodate all data into their own facilities and infrastructure, but they will not provide any hardware/software for this project.

• The guards will be trained accordingly if desired.

• The data gathered should not be used for other purposes.

• The staff, students, faculty, are really worried about their personal data, and how those

  are going to be used. Some even claim that the data will be used to monitor their

  working time.

• Our company, is worried about the cost of this project, and we want to find innovative

  ways to keep the cost low, so we can bid a lower price, and get a competitive advantage

  against other bidders.

• Our company also is not very experienced in such projects, and they hired you to “make

the difference”.

be the chief Software Engineer, and your mission is to describe functional and non-functional requirements, as good and detailed as possible. When you are missing data, you have to make assumptions (sometimes wild ones). No one can really answer your questions, and you have a presentation to the higher management in 45 min sharp. By then, you have to construct a document, with a very small ( no more than 10 lines) executive description, and no more than two A4 pages (1.25 space, font 12) text. Good luck.

INFORMATION ABOUT THE PROJECT

Our company is seriously considering of bidding for the following project, and we ask you, the lead Software Engineer, to construct a draft document, with the functional and non-functional requirements. The better your document, the better job will do our business development team to construct a proposal.

Project abstract description

The project is about monitoring the two gates of the University, automate the entry of authorized personnel, plus record all car license plates, if they left at night, and also raise alarms if a car is in the parking for more than 5 days. Also the system needs to report cars that are still at the parking, or during any holiday, or when the University is closed officially (e.g., during summer holidays). During those periods, only high-ranking personnel is automatically allowed to enter (e.g., Deans). All others need to be stopped at the gate, and call their supervisor. For that purpose, the following descriptions have been gathered.

Notes

• Each security room next to each gate, will be equipped with the necessary hardware, in order for the guards to see the license plate camera, plus another camera facing the car driver. Also each car will be equipped with electronic id device. The entry bar will be connected to the system, and will be automatically raised, if the car and driver are both authorized.

• The license plate cameras have to have a good false positive rate. The driver-side camera will not do face recognition at the beginning, but the client wants this to be an option for the near future.

• The time it takes for one car to enter, is of great importance. The client needs to know this in detail.

• There should be a “manual override” button on the screen, but the system should keep all details possible, guard details, time, date, car & license picture, etc.

• The client will accommodate all data into their own facilities and infrastructure, but they will not provide any hardware/software for this project.

• The guards will be trained accordingly if desired.

• The data gathered should not be used for other purposes.

• The staff, students, faculty, are really worried about their personal data, and how those

  are going to be used. Some even claim that the data will be used to monitor their

  working time.

• Our company, is worried about the cost of this project, and we want to find innovative

  ways to keep the cost low, so we can bid a lower price, and get a competitive advantage

  against other bidders.

• Our company also is not very experienced in such projects, and they hired you to “make

the difference”.

ATC 14-1 Business Applications Case Preparing and using pro forma statements

Maria Gutierrez and Devin Duzan recently graduated from the same university. After graduation they decided not to seek jobs at established organizations but, rather, to start their own small business hoping they could have more flexibility in their personal lives for a few years. Maria’s family has operated Mexican restaurants and taco trucks for the past two generations, and Maria noticed there were no taco truck services in the town where their university was located. To reduce the amount, they would need for an initial investment, they decided to start a business operating a taco cart rather than a taco truck, from which they would cook and serve traditional Mexican-styled street food.

They bought a used taco cart for $25,000. This cost, along with the cost for supplies to get started, a business license, and street vendor license brought their initial expenditures to $29,000. They took $5,000 from personal savings they had accumulated by working part-time during college, and they borrowed $15,000 from Maria’s parents. They agreed to pay interest on the outstanding loan balance each month based on an annual rate of 4 percent. They will repay the principal over the next few years as cash becomes available. They were able to rent space in a parking lot near the campus they had attended, believing that the students would welcome their food as an alternative to the typical fast food that was currently available.

After two months in business, September and October, they had average monthly revenues of $20,000 and out-of-pocket costs of $16,000 for rent, ingredients, paper supplies, and so on, but not interest. Devin thinks they should repay some of the money they borrowed, but Maria thinks they should prepare a set of forecasted financial statements for their first year in business before deciding whether or not to repay any principal on the loan. She remembers a bit about budgeting from a survey of accounting course she took and thinks the results from their first two months in business can be extended over the next 10 months to prepare the budget they need. They estimate the cart will last at least five years, after which they expect to sell it for $5,000 and move on to something else in their lives. Maria agrees to prepare a forecasted (pro forma) income statement, balance sheet, and statement of cash flows for their first year in business, which includes the two months already passed.

Required

1. Prepare the annual pro forma financial statements that you would expect Maria to prepare based on her comments about her expectations for the business. Assume no principal will be repaid on the loan. [Note: Some amounts are different from the printed text version]

2. Review the statements you prepared for the first requirement and prepare a list of reasons why actual results for Devin and Maria’s business probably will not match their budgeted statements.

Cape Fear Marine Mini Case

Sarah Connor was recently hired by Cape Fear Marine Company to assist the company with its short-term financial planning and to evaluate the firm’s financial performance. Sarah graduated from college five years ago with a degree in finance and had been employed in the treasury department of a large firm in Raleigh, North Carolina since then.

Kyle Reese founded Cape Fear Marine Company 15 years ago. The company’s operations are located near Wilmington, North Carolina. The firm is structured as an LLC. Cape Fear Marine manufactures a diverse line of boats, ranging from low-end fishing boats to high-end luxury craft. The company and its products have received high reviews for safety and reliability, as well as awards for customer satisfaction.

The marine products/boating industry is fragmented, with a number of manufacturers. As with any industry, there are market leaders, but the diverse nature of the industry ensures that no manufacturer dominates the market. The competition in the market, as well as the product cost, ensures that attention to detail is a necessity.

To get Sarah started with her analysis, Kyle has provided the following financial data. Sarah has gathered the industry ratios for the boat manufacturing industry.

a.   Calculate all of the ratios listed in the industry table for Cape Fear Marine.

b.   Compare the performance of Cape Fear Marine with the industry as a whole. For each ratio, comment on why it might be viewed as a positive or negative relative to the industry.

Sharpton Fabricators Corporation manufactures a variety of parts for the automotive industry. The company uses a job-order costing system with a plantwide predetermined overhead rate based on direct labour-hours. On December 10, 2015, the company’s controller made a preliminary estimate of the predetermined overhead rate for 2016. The new rate was based on the estimated total manufacturing overhead cost of $3,402,000 and the estimated 63,000 total direct labour-hours for 2016:

Predetermined overhead rate = 3,402,000/63,000 = $54 per direct labour hours

This new predetermined overhead rate was communicated to top managers in a meeting on December 11. The rate did not cause any comment because it was within a few cents of the overhead rate that had Page 190been used during 2015. One of the subjects discussed at the meeting was a proposal by the production manager to purchase an automated milling machine centre built by Central Robotics. The president of Sharpton Fabricators, Kevin Reynolds, agreed to meet with the regional sales representative from Central Robotics to discuss the proposal.

On the day following the meeting, Reynolds met with Jay Warner, Central Robotics’ sales representative. The following discussion took place:

1. Reynolds: Lisa Winter, our production manager, asked me to meet with you since she’s interested in installing an automated milling machine centre. Frankly, I’m skeptical. You’re going to have to show me this isn’t just another expensive toy for Lisa’s people to play with.

2. Warner: That shouldn’t be too difficult, Kevin. The automated milling machine centre has three major advantages. First, it’s much faster than the manual methods you’re using. It can process about twice as many parts per hour as your current milling machines. Second, it’s much more flexible. There are some up-front programming costs, but once those have been incurred, almost no setup is required on the machines for standard operations. You just punch in the code of the standard operation, load the machine’s hopper with raw material, and the machine does the rest.

3. Reynolds: Yeah, but what about cost? Having twice the capacity in the milling machine area won’t do us much good. That centre is idle much of the time, anyway.

4. Warner: I was getting there. The third advantage of the automated milling machine centre is lower cost. Winters and I looked over your present operations, and we estimated that the automated equipment would eliminate the need for about 6,000 direct labour-hours a year. What is your direct labour cost per hour?

5. Reynolds: The wage rate in the milling area averages about $32 per hour. Fringe benefits raise that figure to about $41 per hour.

6. Warner: Don’t forget your overhead.

7. Reynolds: Next year the overhead rate will be about $54 per direct labour-hour.

8. Warner: So including fringe benefits and overhead, the cost per direct labour-hour is about $95.

9. Reynolds: That’s right.

10. Warner: Since you can save 6,000 direct labour-hours per year, the cost savings would amount to about $570,000 a year, and our 60-month lease plan would require payments of only $348,000 per year.

11. Reynolds: Sold! When can you install the equipment?

Shortly after this meeting, Reynolds informed the company’s controller of the decision to lease the new equipment, which would be installed over the Christmas vacation period. The controller realized that this decision would require a recomputation of the predetermined overhead rate for 2016, since the decision would affect both the manufacturing overhead and the direct labour-hours for the year. After talking with both the production manager and the sales representative from Central Robotics, the controller discovered that in addition to the annual lease cost of $348,000, the new machine would also require a skilled technician/programmer who would have to be hired at a cost of $50,000 per year to maintain and program the equipment. Both of these costs would be included in factory overhead. There would be no other changes in total manufacturing overhead cost, which is almost entirely fixed. The controller assumed that the new machine would result in a reduction of 6,000 direct labour-hours for the year from the levels that had initially been planned.

When the revised predetermined overhead rate for 2016 was circulated among the company’s top managers, there was considerable dismay.

Required:

1. Recompute the predetermined rate assuming that the new machine will be installed. Explain why the new predetermined overhead rate is higher (or lower) than the rate that was originally estimated for 2016.

2. What effect (if any) would this new rate have on the cost of jobs that do not use the new automated milling machine?

3. Why would managers be concerned about the new overhead rate?

4. After seeing the new predetermined overhead rate, the production manager admitted that he probably wouldn’t be able to eliminate all of the 6,000 direct labour-hours. He had been hoping to accomplish the reduction by not replacing workers who retire or quit, but that would not be possible. As a result, the real labour savings would only be about 2,000 hours—one worker. In the light of this additional information, evaluate the original decision to acquire the automated milling machine from Central Robotics.

Sharpton Fabricators Corporation manufactures a variety of parts for the automotive industry. The company uses a job-order costing system with a plantwide predetermined overhead rate based on direct labor-hours. On December 10, 2015, the company's controller made a preliminary estimate of the predetermined overhead rate for 2016. The new rate was based on the estimated total manufacturing overhead cost of $3,402,000 and the estimated 63,000 total direct labor-hours for 2016:

            Predetermined overhead rate = $2,475,000/52,000 hours

                                                           = $47.60 per direct labor-hour.

This new predetermined overhead rate was communicated to top managers in a meeting on December11. The rate did not cause any comment because it was within a few cents of the overhead rate that had been used during 2015. One of the subjects discussed at the meeting was a proposal by the production manager to purchase an automated milling machine center built by Central Robotics. The president of Sharpton Fabricators, Kevin Reynolds, agreed to meet with the regional sales representative from Central Robotics to discuss the proposal.

On the day following the meeting, Reynolds met with Jay Warner, Central Robotics’ sales representative. The following discussion took place:

Reynolds: Lisa Winter, our production manager, asked me to meet with you since she's interested in installing an automated milling machine center. Frankly, I’m skeptical. You’re going to have to show me this isn’t just another expensive toy for Lisa's people to play with.

Warner: That shouldn’t be too difficult, Kevin. The automated milling machine center has three major advantages. First, it's much faster than the manual methods you’re using. It can process about twice as many parts per hour as your current milling machines. Second, it's much more flexible. There are some up-front programming costs, but once those have been incurred, almost no setup is required on the machines for standard operations. You just punch in the code of the standard operation, load the machine's hopper with raw material, and the machine does the rest.

Reynolds: Yeah, but what about cost? Having twice the capacity in the milling machine area won’t do us much good. That center is idle much of the time, anyway.

Warner: I was getting there. The third advantage of the automated milling machine center is lower cost. Winters and I looked over your present operations, and we estimated that the automated equipment would eliminate the need for about 6,000 direct labor-hours a year. What is your direct labor cost per hour?

Reynolds: The wage rate in the milling area averages about $32 per hour. Fringe benefits raise that figure to about $41 per hour.

Warner: Don’t forget your overhead.

Reynolds: Next year the overhead rate will be about $54 per direct labor-hour.

Warner: So, including fringe benefits and overhead, the cost per direct labor-hour is about $95.

Reynolds: That's right.

Warner: Since you can save 6,000 direct labor-hours per year, the cost savings would amount to about$570,000 a year, and our 60-month lease plan would require payments of only $348,000 per year.

Reynolds: Sold! When can you install the equipment?

Shortly after this meeting, Reynolds informed the company's controller of the decision to lease the new equipment, which would be installed over the Christmas vacation period. The controller realized that this decision would require a recomputation of the predetermined overhead rate for 2016, since the decision would affect both the manufacturing overhead and the direct labor-hours for the year. After talking with both the production manager and the sales representative from Central Robotics, the controller discovered that in addition to the annual lease cost of $348,000, the new machine would also require as killed technician/programmer who would have to be hired at a cost of $50,000 per year to maintain and program the equipment. Both of these costs would be included in factory overhead. There would be no

other changes in total manufacturing overhead cost, which is almost entirely fixed. The controller assumed that the new machine would result in a reduction of 6,000 direct labor-hours for the year from the levels that had initially been planned.

When the revised predetermined overhead rate for 2016 was circulated among the company's top managers, there was considerable dismay.

Required:

Recompute the predetermined rate assuming that the new machine will be installed. Explain why the new predetermined overhead rate is higher (or lower) than the rate that was originally estimated for 2016.

What effect (if any) would this new rate have on the cost of jobs that do not use the new automated milling machine?

Why would managers be concerned about the new overhead rate?

After seeing the new predetermined overhead rate, the production manager admitted that he probably wouldn’t be able to eliminate all of the 6,000-direct labor-hours. He had been hoping to accomplish the reduction by not replacing workers who retire or quit, but that would not be possible. As a result, the real labor savings would only be about 2,000 hours—one worker. In the light of this additional information, evaluate the original decision to acquire the automated milling machine from Central Robotics.

THE BUSINESS SITUATION

                When Shelley Jones became president-elect of the Circular Club of Auburn, Kansas,

she was asked to suggest a new fundraising activity for the club. After a considerable

amount of research, Shelley proposed that the Circular Club sponsor a professional

rodeo. In her presentation to the club, Shelley said that she wanted a

fundraiser that would (1) continue to get better each year, (2) give back to the community,

and (3) provide the club a presence in the community. Shelley’s goal was to

have an activity that would become an “annual community event” and that would

break even the first year and raise $5,000 the following year. In addition, based on

the experience of other communities, Shelley believed that a rodeo could grow in

popularity so that the club would eventually earn an average of $20,000 annually.

                A rodeo committee was formed. Shelley contacted the world’s oldest and

largest rodeo-sanctioning agency to apply to sponsor a professional rodeo. The

sanctioning agency requires a rodeo to consist of the following five events:

Bareback Riding, Bronco Riding, Steer Wrestling, Bull Riding, and Calf Roping.

Because there were a number of team ropers in the area and because they

wanted to include females in the competition, members of the rodeo committee

added Team Roping and Women’s Barrels. Prize money of $3,000 would be paid

to winners in each of the seven events.

                Members of the rodeo committee contracted with RJ Cattle Company, a livestock

contractor on the rodeo circuit, to provide bucking stock, fencing, and

chutes. Realizing that costs associated with the rodeo were tremendous and that

ticket sales would probably not be sufficient to cover the costs, the rodeo committee

sent letters to local businesses soliciting contributions in exchange for

various sponsorships. Exhibiting Sponsors would contribute $1,000 to exhibit

their products or services, while Major Sponsors would contribute $600. Chute

Sponsors would contribute $500 to have the name of their business on one of the

six bucking chutes. For a contribution of $100, individuals would be included in

a Friends of Rodeo list found in the rodeo programs. At each performance the

rodeo announcer would repeatedly mention the names of the businesses and individuals

at each level of sponsorship. In addition, large signs and banners with

the names of the businesses of the Exhibiting Sponsors, Major Sponsors, and

Chute Sponsors were to be displayed prominently in the arena.

CaseA local youth group was contacted to provide concessions to the public and

divide the profits with the Circular Club. The Auburn Circular Club Pro Rodeo

Roundup would be held on June 1, 2, and 3. The cost of an adult ticket was set

at $8 in advance or $10 at the gate; the cost of a ticket for a child 12 or younger

was set at $6 in advance or $8 at the gate. Tickets were not date-specific. Rather,

one ticket would admit an individual to one performance of his or her choice—

Friday, Saturday, or Sunday. The rodeo committee was able to secure a location

through the county supervisors board at a nominal cost to the Circular Club. The

arrangement allowed the use of the county fair grounds and arena for a oneweek

period. Several months prior to the rodeo, members of the rodeo committee

had been assured that bleachers at the arena would hold 2,500 patrons. On

Saturday night, paid attendance was 1,663, but all seats were filled due to poor

gate controls. Attendance was 898 Friday and 769 on Sunday.

                The following revenue and expense figures relate to the first year of the rodeo.

Receipts

Contributions from sponsors $22,000

Receipts from ticket sales 28,971

Share of concession profits 1,513

Sale of programs 600

Total receipts $53,084

Expenses

Livestock contractor 26,000

Prize money 21,000

Contestant hospitality 3,341*

Sponsor signs for arena 1,900

Insurance 1,800

Ticket printing 1,050

Sanctioning fees 925

Entertainment 859

Judging fees 750

Port-a-potties 716

Rent 600

Hay for horses 538

Programs 500

Western hats to first 500 children 450

Hotel rooms for stock contractor 325

Utilities 300

Sand for arena 251

Miscellaneous fixed costs 105

Total expenses 61,410

Net loss $(8,326)

*The club contracted with a local caterer to provide a tent and food for the contestants. The

cost of the food was contingent on the number of contestants each evening. Information concerning

the number of contestants and the costs incurred are as follows:

Contestants Total Cost

Friday 68 $ 998

Saturday 96 1,243

Sunday 83 1,100

$3,341

On Wednesday after the rodeo, members of the rodeo committee met to

Discuss and critique the rodeo. Jonathan Edmunds, CPA and President of the

Circular Club, commented that the club did not lose money. Rather, Jonathan

said, “The club made an investment in the rodeo.”

Answer Questions Below

1. Do yo think it was necessary for shelly joes to stipulate that she (1) wanted a fundraiser that world continue to get better each year (2) give back to the community and (3) provide the club a presence in the community? Why or why not?

2. What did Johnathan Edmunds mean when he said the club had made an invstment in the rodeo?

5. Determine the fixed and variable cost components of the catering costs using the high low method?