In each of following scenarios, explain and categorize the cost of inflation.

a. Because inflation has risen, the J. Crew clothing company decides to issue a new catalog monthly rather than quaterly.

b. Grandpa buys an annutity for $100,000 from an insurance company which promises to pat him $10,000 a year for the rest of his life. After buying it, he is surprised the high inflation triples the price level over next few yars.

c. Maria lives in an economy with hyperinflation. Each day after being paid, she runs to the store as quickly as possible so she can spend her money before is loses value.

d. Gita lives in an economy with an inflation rate of 10 percent. Over the past year, she earned a return of $50,000 on her million-dollar portfolio of stocks and bonds. Because her tax rate is 20 percent, she paid $10,000 to the government.

e. Your father tells you that when he was your age, he worked for only $4 an hour. He suggests that you are lucky to have a job that pays $9 an hour.

Edom Company, the lessor, enters into a lease with Davis Company to lease equipment to Davis beginning January 1, 2016. The lease terms, provisions, and related events are as follows:

Required:

1. In capital budgeting, a company might use which of the following as its discount rate?
2. 1. Return on total assets
   2. After-tax cost of debt
   3. Times interest earned
   4. Weighted average cost of capital

1. Which causes a company to become leveraged?
2. 1. Issuing high amounts of common stock
   2. Making an initial public offer (IPO)
   3. Having high fixed costs
   4. Having high variable costs

1. Which of the following correctly describes how a firm's required return is determined?
2. 1. Using the going market rate for risk-free securities
   2. As the present value of the firm's debt and equity
   3. As the opportunity cost that its investors forego
   4. Using the average rate paid for debt and the company's share price

1. All of the following are true of the free cash flow (FCF) analysis EXCEPT
2. 1. it can also be calculated using the operating cash flow figure from the statement of cash flows less capital expenditures.
   2. it includes adjustments for the difference between the change in total current assets and total current liabilities.
   3. it must be a positive amount for it to be interpreted positively by investors.
   4. it is considered a better representation of the value of the firm to shareholders than operating cash flow.

Bill Darby started Darby Company on January 1, Year 1. The company experienced the following events during its first year of operation: Earned $1,100 of cash revenue. Borrowed $2,200 cash from the bank. Adjusted the accounting records to recognize accrued interest expense on the bank note. The note, issued on September 1, Year 1, had a one-year term and an 9 percent annual interest rate. Required a. What is the amount of interest payable at December 31, Year 1? b. What is the amount of interest expense in Year 1? c. What is the amount of interest paid in Year 1? d. Use a horizontal statements model to show how each event affects the balance sheet, income statement, and statement of cash flows. Indicate whether the event increases (I) or decreases (D) each element of the financial statements. In the Statement of Cash Flows column, classify the cash flows as operating activities (OA), investing activities (IA) or financing activities (FA). Columns for events that have no effect on any of the elements should be left blank. The first transaction has been recorded as an example.

Case Study

Mary Tappin, an assistant Vice President at Galaxy Toys, was disturbed to find on her desk a memo from her boss, Gary Resnick, to the controller of the company. The memo appears below:

GALAXY TOYS INTERNAL MEMO

Sept 15

To: Harry Wilson, Controller

Fm: Gary Resnick, Executive Vice President

As you know, we won't start recording many sales until October when stores start accepting shipments from us for the Christmas season. Meanwhile, we are producing flat-out and are building up our finished goods inventories so that we will be ready to ship next month.

Unfortunately, we are in a bind right now since it looks like the net income for the quarter ending on Sept 30 is going to be pretty awful. This may get us in trouble with the bank since they always review the quarterly financial reports and may call in our loan if they don't like what they see. Is there any possibility that we could change the classification of some of our period costs to product costs, such as the rent on the finished goods warehouse?

Please let me know as soon as possible. The President is pushing for results.

Mary didn't know what to do about the memo. It wasn't intended for her, but its contents were alarming.

Required:

Q1:a. Why has Gary Resnick suggested reclassifying some period costs as product costs? (i.e., what is the reason behind such a suggestion and why do you think reclassifying period costs to product costs will improve the net operating income?)

Q2:b. Why do you think Mary was alarmed about the memo? (You might think of it from ethical and other perspectives).

Case Study

Mary Tappin, an assistant Vice President at Galaxy Toys, was disturbed to find on her desk a memo from her boss, Gary Resnick, to the controller of the company. The memo appears below:

GALAXY TOYS INTERNAL MEMO

Sept 15

To: Harry Wilson, Controller

Fm: Gary Resnick, Executive Vice President

As you know, we won't start recording many sales until October when stores start accepting shipments from us for the Christmas season. Meanwhile, we are producing flat-out and are building up our finished goods inventories so that we will be ready to ship next month.

Unfortunately, we are in a bind right now since it looks like the net income for the quarter ending on Sept 30 is going to be pretty awful. This may get us in trouble with the bank since they always review the quarterly financial reports and may call in our loan if they don't like what they see. Is there any possibility that we could change the classification of some of our period costs to product costs, such as the rent on the finished goods warehouse?

Please let me know as soon as possible. The President is pushing for results.

Mary didn't know what to do about the memo. It wasn't intended for her, but its contents were alarming.

Required:

Q1:a. Why has Gary Resnick suggested reclassifying some period costs as product costs? (i.e., what is the reason behind such a suggestion and why do you think reclassifying period costs to product costs will improve the net operating income?)

Q2:b. Why do you think Mary was alarmed about the memo? (You might think of it from ethical and other perspectives).

1. Archway Adventures has compiled data for 2017 on customer orders by region and product group as follows:

Let us assume that these are representative of the pattern of orders that they anticipate seeing in 2018.

1. Are the events “Toy” and “Rest of the World” independent? Explain.
2. The rows of the table are mutually exclusive categories. How would our summary be complicated if some orders were for multiple products?

2. 54.5% of Archway’s orders come from North America, 31.5% from Europe and the remaining 14% from the rest of the world. Among North American customers, 3% complained about late or lost deliveries. Similarly, complaints were received from 8% of European customers and 15% of customers from the rest of the world.

1. Construct a probability tree that shows all combinations of where orders originated and whether customers complained. Label all branches in terms of what the event is on the branch and the corresponding probability (e.g., P(A), PA’), P(B|A), P(B’|A),…). Also determine the probability for each ending joint event (e.g., P(Europe and Complain)).
2. Summarize all of the joint probabilities in a probability table.
3. What percentage of Archway customers complained about delivery problems?
4. Among those who complained, what percentage were from Europe?

The Bombay phenotype occurs when an individual human is homozygous for a recessive allele at the FUT1 locus. Individuals with this genotype do not make a precursor substance required to synthesize the A and B antigens that sometimes appear on human red blood cells. Regardless of their genotype at the ABO blood type locus, individuals who are homozygous for the Bombay phenotype allele at the FUT1 locus will appear to have blood type O on standard blood type tests.

Note: There are two possible alleles at the FUT1 locus: the normal allele, symbolized as H, and the Bombay phenotype allele, symbolized as h. There are three possible alleles at the ABO blood type locus, symbolized as A, B, and O. Alleles A and B are dominant to allele O. Alleles A and B have a codominant relationship with each other.

A man who is a heterozygous carrier of the Bombay phenotype allele and has blood type AB has children with a woman who is also a heterozygous carrier of the Bombay phenotype allele and has blood type O. Write out the full genotypes (including both loci) for each of these individuals. Specify which genotype belongs to the man and which genotype belongs to the woman.

What would be the probability of the two individuals producing offspring with each of the blood types below:

A, B, AB, O