Recently, an analysis of Caterpillar Inc. found that it’s equity beta (the beta on its stock) is 1.03. The most recent annual dividend is $4.12/share. A survey of economist finds that the perceived market risk premium is around 6.5%. As of Oct 1, 2020, the yield on a 30-year U.S. Treasury was 1.45%. Given this information, answer the following questions.
a. Assuming dividends are NOT expected to grow in the future. What is the expected current share price given this information?
b. Assume dividends are expected to grow by 4% in perpetuity. Given this assumption, what is the expected current share price?
c. Assume that dividends are expected to grow abnormally for the next 3 years at a rate of 10%. Then, long-term dividend growth is expected to stabilize at 4% annually. Given this information, what is the expected current price?
d. The actual current price in mid-October is $168.75. Given this information and assuming a constant growth rate, what is the implied growth rate given this price?
e. Provide one or more possible explanations of why the actual price ($168.75) is so far above the prices calculated in parts (a), (b), and (c).
In: Finance
The International Banking Fund, the IBF, has forecasted that the global economy is likely to experience a contraction of 3% in 2020, due to the ravages of the COVID-19 pandemic on both developing and advanced economies. Investors believe that The Deutsche Bundesbank, the central bank of the Federal Republic of Germany, will employ direct foreign intervention strategies in the future, to minimize the economic fallout and increase the volume of exports. Assume the following information: 1 - year U.S. interest rate = 3% 1- year German interest rate = 6% Spot rate of euro = $1.09 What is the central bank likely to undertake and how will this affect the value of the euro? Without using an exchange rate model, what is your prediction for the one year forward rate given the likely action of Germany's central bank, all things being equal? Using the interest rate parity equation, was your prediction correct? What should the forward rate be? Based on the one year forward rate you predicted, which investor is likely to benefit from covered interest arbitrage? Compute the profit and yield to the investor who stands to benefit from covered interest arbitrage.
In: Finance
Sugar Land Company is considering adding a new line to its
product mix, and the capital budgeting analysis is being conducted
by a MBA student. The production line would be set up in unused
space (Market Value Zero) in Sugar Land’ main plant. Total cost of
the machine is $350,000. The machinery has an economic life of 4
years and will be depreciated using MACRS for 3-year property
class. The machine will have a salvage value of $35,000 after 4
years.
The new line will generate Sales of 1,750 units per year for 4
years and the variable cost per unit is $110 in the first year.
Each unit can be sold for $210 in the first year. The sales price
and variable cost are expected to increase by 3% per year due to
inflation. Further, to handle the new line, the firm’s net working
capital would have to increase by $30,000 at time zero (No change
in NWC in years 1 through 3 and the NWC will be recouped in year
4). The firm’s tax rate is 40% and its weighted average cost of
capital is 11%.
Estimate annual (Year 1 through 4) operating cash flows
|
Year 1 |
Year 2 |
Year 3 |
Year 4 |
|
|
Tot Sales |
||||
|
Var. Cost |
||||
|
Depreciation |
||||
|
EBIT |
||||
|
Taxes |
||||
|
Net Income |
||||
|
Depreciation |
||||
|
OCF |
In: Finance
In: Operations Management
Adom Agencies, for many years, have relied on a single
recruitment method. That is, to advertise positions in
the Daily Graphic. Advertisements were placed in this publication
one time, and interested candidates were
instructed to contact the company to request an application
package. The application package included a letter
detailing how to apply for the job; a brochure about the company;
an application form; and a copy of the
company’s development plan for the next three years. Other local
companies in the area also used the Daily
Graphic for recruitment, but in addition, they placed
advertisements in other local newspapers as well as on a
web site for their vacancies. Some even launched a page on their
organisation’s web site to enable candidates
to download all of the application information.
As part of the selection process, candidates submitted an
application form along with contact information for
two people who could provide references, and returned the
information to the appropriate department head.
Once the closing date had passed, designated staff members reviewed
the applications independently and graded
them A, B or C (where A is the highest mark and C is the lowest)
based on the candidate’s ability to meet the
selection criteria. The panel would then convene to discuss the
A-rated application forms and agree on a list of
candidates who would be invited to attend a selection day. The
staff members assessing the applications were
usually heads of departments from the relevant subject area.
Training was not offered to panel members to help
them to select the best candidates. Before the selection day,
references would be requested for all candidates.
Copies of the references would be provided to interview panel
members; employment offers were based on the
receipt of satisfactory references.
The agenda for the selection shows that the organization relied on
two selection methods for all of their
vacancies—an informal and formal interview. The first (informal)
interview was led by the Chief Executive
Officer (CEO) and an administrator. This was used to learn basic
information about the candidate and to review
the information on the application form. The second interview was
more detailed and explored a wide range of
issues with the candidates. The panel consisted of the CEO, HR
manager, Head of Department and a Senior
Officer. Due to time constraints, panel members were usually unable
to meet in advance, so they developed
their interview questions independently. Although the CEO chaired
the interviews, they were rarely carried out
in the same manner and the questions lacked a high level of
consistency. Also, no formal scoring system was
used. At the end of the interviews, there was a panel vote to see
which candidate should be offered the job. This
often led to a heated debate about candidate strengths and
weaknesses.
Required:
a. Suggest two (2) alternative sources of recruitment that will
ensure that the best candidates are recruited.
Please explain your choices.
b. Judging from the case, in what ways can the selection process be
improved?
c. Discuss five (5) biases you can identify about the selection
process of Adom Agencies.
In: Economics
Bands, a Division of Euro Ltd., manufactures small planter boxes. In March 2019 the manager decided the business needed to have the security of a two-month loan of $100,000 starting on 1 May 2019 as its cash balance had been diminished because of recent equipment purchases. The bank would charge interest at the equivalent of 6 percent per annum on the loan and require the business to repay interest monthly commencing on 31 May 2019. The principal is paid at the end of the two-month term. To consider the loan application, the bank requested the provision of a number of budgets for May including the Cash Budget.
The following information is available:
* Budgeted sales are 90,000 units per month for April, June and July, and 100,000 units for May of 2019. The selling price is $20 per unit.
* Finished Goods inventory on April 1 for 24,000 units was $240,000. The company follows a policy requiring ending finished goods inventory each month to be 10% of next month’s sales. There is no WIP.
* The inventory of raw materials on April 1 was 11,400kg (@$20/kg). The ending inventory is required to be 20% of next month’s production requirements.
* Selling & administrative expenses are expected to be $75,000 plus 10% of sales (this includes depreciation of $12,500).
* The manufacturing costs budget (based on a practical capacity of 100,000 units per month) follows:
Materials (0.25 kg per box, $20 per kg) $500,000
Direct Labour (6 minutes per box @ $24 per hour) 240,000
Variable Overhead (allocated @$3 per DLH) 30,000
Fixed Overhead (allocated per unit) 100,000 Total $870,000
* Budgeted Fixed manufacturing overhead excludes $28,000 of depreciation.
REQUIRED:
a) Prepare the following budgets for April and May 2019:
(i) Production Budget (ii) Materials Purchases Budget in dollars
b) You have been provided with the following additional information: All sales are made on credit and customers pay 50% in the month of sale; 45% in the month following. The remaining 5% is uncollectable. Assume that materials are paid 50% in the month purchased and 50% in the following month. Labour and relevant overhead costs are paid in the month the liability is incurred. Selling and administration expenses are paid each month as incurred. The opening cash balance at 1 May (before the loan drawdown) was $500. Assume the short-term loan has been secured, prepare the Cash Budget for the month of May, 2019.
c) The CEO of Euro Ltd., a decentralised company with 4 major divisions (all profit centres), is concerned that the preparation of static budgets by the CEO has resulted in the company’s budgets less effective and not helpful for decision making in a constantly changing operating environment. What is the issue that the CEO is facing? How can this issue be addressed? Discuss the issue briefly and provide at least one recommendation to address the issue.
In: Accounting
It's common for the planning system to put financial executives in uncomfortable ethical positions. Plans are vehicles for communications to outsiders and they are usually put together by the finance department. But outside communications are ultimately the responsibility of the chief executive officer (CEO). That means that a CEO who doesn't like what a plan says can apply his or her “judgment” and tell outsiders something else.
Problems arise when CEOs use judgment to further their personal ends or just refuse to accept unpleasant realities. Chief financial officers (CFOs) get caught in the middle, because although they work for CEOs, they're supposed to have an overriding responsibility for truth and fairness in financial representations. They also have to stand up next to the CEO when the message is delivered and at least act as if they support every word.
Here's an illustration. Suppose the planning process at a division of a large corporation reveals that it's likely to lose market share and a great deal of money in the future. If the information is revealed to parent company executives in an upcoming meeting, they're likely to replace the division's president whose strategy is probably responsible for the poor performance. On the other hand, if a falsely optimistic plan is presented, the current president and his policies will continue in place, but the eventual loss is likely to be much larger.
The president plans to present the optimistic version of the plan. The division CFO feels this constitutes misleading corporate management. What is her ethical responsibility?
To appreciate this dilemma, it's crucial to understand that all plans are to some extent matters of opinion. No one can say with certainty that the division president is proposing to lie. He's just supporting a planning position that most people would find unrealistic if they knew all the details. The fact that it serves his own personal ends makes him suspect, but it doesn't prove he doesn't believe in the better plan. Optimistic people tend to believe what they want to in spite of overwhelming evidence to the contrary all the time!
If the CFO refuses to go along and insists on presenting the more likely plan herself, she'll be setting up a confrontation with her boss in front of senior management. That will probably destroy her relationship with the president forever. And she may not win. Remember that the corporate managers put the president in charge because they valued his judgment above that of others. They may still do that in spite of strong evidence that he's wrong. The fact that the CFO may eventually be proven right doesn't help because the damage will be done, and she'll be long gone by then.
On the other hand, if the CFO doesn't stand up and give her opinion, there's no doubt the unduly optimistic plan will be accepted. That will probably mean deeper losses for the company, which might lead to closing the division and laying off its employees. At that time, the corporate people will probably want to know why the division's management team didn't see the problem coming.
What are the CFO's options? What would you do?
In: Finance
Bands, a Division of Euro Ltd., manufactures small planter boxes. In March 2019 the manager decided the business needed to have the security of a two-month loan of $100,000 starting on 1 May 2019 as its cash balance had been diminished because of recent equipment purchases. The bank would charge interest at the equivalent of 6 per cent per annum on the loan and require the business to repay interest monthly commencing on 31 May 2019. The principal is paid at the end of the two-month term. To consider the loan application, the bank requested the provision of a number of budgets for May including the Cash Budget.
The following information is available:
* Budgeted sales are 90,000 units per month for April, June and July, and 100,000 units for May of 2019. The selling price is $20 per unit.
* Finished Goods inventory on April 1 for 24,000 units was $240,000. The company follows a policy requiring ending finished goods inventory each month to be 10% of next month’s sales. There is no WIP.
* The inventory of raw materials on April 1 was 11,400kg (@$20/kg). The ending inventory is required to be 20% of next month’s production requirements.
* Selling & administrative expenses are expected to be $75,000 plus 10% of sales (this includes depreciation of $12,500).
* The manufacturing costs budget (based on a practical capacity of 100,000 units per month) follows:
Materials (0.25 kg per box, $20 per kg) $500,000
Direct Labour (6 minutes per box @ $24 per hour) 240,000
Variable Overhead (allocated @$3 per DLH) 30,000
Fixed Overhead (allocated per unit) 100,000
Total $870,000
* Budgeted Fixed manufacturing overhead excludes $28,000 of depreciation.
REQUIRED:
a) Prepare the following budgets for April and May 2019:
(i) Production Budget
(ii) Materials Purchases Budget in dollars
b) You have been provided with the following additional information:
All sales are made on credit and customers pay 50% in the month of sale; 45% in the month following. The remaining 5% is uncollectable.
Assume that materials are paid 50% in the month purchased and 50% in the following month. Labour and relevant overhead costs are paid in the month the liability is incurred. Selling and administration expenses are paid each month as incurred. The opening cash balance at 1 May (before the loan drawdown) was $500.
Assume the short-term loan has been secured, prepare the Cash Budget for the month of May, 2019.
c) The CEO of Euro Ltd., a decentralised company with 4 major divisions (all profit centres), is concerned that the preparation of static budgets by the CEO has resulted in the company’s budgets less effective and not helpful for decision making in a constantly changing operating environment.
What is the issue that the CEO is facing? How can this issue be addressed? Discuss the issue briefly and provide at least one recommendation to address the issue.
In: Accounting
CASE STUDY
Adom Agencies, for many years, have relied on a single recruitment
method. That is, to advertise positions in
the Daily Graphic. Advertisements were placed in this publication
one time, and interested candidates were
instructed to contact the company to request an application
package. The application package included a letter
detailing how to apply for the job; a brochure about the company;
an application form; and a copy of the
company’s development plan for the next three years. Other local
companies in the area also used the Daily
Graphic for recruitment, but in addition, they placed
advertisements in other local newspapers as well as on a
web site for their vacancies. Some even launched a page on their
organisation’s web site to enable candidates
to download all of the application information.
As part of the selection process, candidates submitted an
application form along with contact information for
two people who could provide references, and returned the
information to the appropriate department head.
Once the closing date had passed, designated staff members reviewed
the applications independently and graded
them A, B or C (where A is the highest mark and C is the lowest)
based on the candidate’s ability to meet the
selection criteria. The panel would then convene to discuss the
A-rated application forms and agree on a list of
candidates who would be invited to attend a selection day. The
staff members assessing the applications were
usually heads of departments from the relevant subject area.
Training was not offered to panel members to help
them to select the best candidates. Before the selection day,
references would be requested for all candidates.
Copies of the references would be provided to interview panel
members; employment offers were based on the
receipt of satisfactory references.
The agenda for the selection shows that the organization relied on
two selection methods for all of their
vacancies—an informal and formal interview. The first (informal)
interview was led by the Chief Executive
Officer (CEO) and an administrator. This was used to learn basic
information about the candidate and to review
the information on the application form. The second interview was
more detailed and explored a wide range of
issues with the candidates. The panel consisted of the CEO, HR
manager, Head of Department and a Senior
Officer. Due to time constraints, panel members were usually unable
to meet in advance, so they developed
their interview questions independently. Although the CEO chaired
the interviews, they were rarely carried out
in the same manner and the questions lacked a high level of
consistency. Also, no formal scoring system was
used. At the end of the interviews, there was a panel vote to see
which candidate should be offered the job. This
often led to a heated debate about candidate strengths and
weaknesses.
Required:
a. Suggest two (2) alternative sources of recruitment that will
ensure that the best candidates are recruited.
Please explain your choices. [5 Marks]
b. Judging from the case, in what ways can the selection process be
improved? [10 Marks]
c. Discuss five (5) biases you can identify about the selection
process of Adom Agencies.
[5 Marks]
In: Accounting
In: Accounting