3.

(5.15) Manatees are large, gentle, slow-moving creatures found along the coast of Florida. Many manatees are injured or killed by boats. below contains data on the number of boats registered in Florida (in thousands) and the number of manatees killed by boats for the years between 1977 and 2013. (data are distorted):

(a) Find the correlation rr (±±0.001)

rr =

(b) Find the equation of the least-squares line (±±0.001) for predicting manatees killed from thousands of boats registered.

yˆy^ = +xx

(c) What would you predict (±±0.1) number of manatees killed by boats to be if there are 900,000 boats registered?

(d) Predict (±±0.1) manatee deaths if there were no boats registered in Florida.

The following table contains the historic returns from a portfolio consisting of large stocks and a portfolio consisting of long-term Treasury bonds over the last 20 years. T-bills returns represent risk-free returns. Analyze the risk-return trade-off that would have characterized these portfolios. The following dataset is also available in Excel format in Module 3 Resources on Canvas. Returns in the dataset are in percents. For example, 31.33 means 31.33% per year.

a. Estimate the annual risk premium of large stocks and T-bonds, respectively.

b. Estimate the annual volatility of large stocks and long-term T-bonds, respectively.

c. Estimate the Sharpe ratio of large stocks and long-term T-bonds, respectively.

d. Now assume that you have always invested half of your wealth in the stock and the other half in the T-bonds. Estimate the Sharpe ratio of your portfolio.

A company shipped 6,000,000 pounds of goods to customers at a cost of $3,000,000. Total revenue is $40 million. If an individual customer orders 10,000 pounds, calculate the amount of shipping cost assigned to the customer using activity-based costing.

A poll printed the results of a survey of 880Americans focusing on their perception of the quality of Japanese products. It has been observed that the sentiment towards Japanese products has actually improved over time. Is there sufficient evidence to conclude that American sentiment towards Japanese products changed from 1999 to 2005?

Step 8 of 10 :  Find the critical value of the test at the 0.05 level of significance. Round your answer to three decimal places.

Step 9 of 10: Make the decision to reject or fail to reject the null hypothesis at the 0.05 level of significance.

Step 10 of 10: State the conclusion of the hypothesis test at the 0.05 level of significance.

Recently several technology firms, including Facebook, Google, and Snapchat, have come under fire for issuing multiple classes of shares: some shares, held primarily by these companies' founders or management, with voting rights; and others, traded publicly, with reduced or no voting rights. Is this a corporate governance problem? Explain why or why not (in a manner that demonstrates understanding of corporate governance and employs vocabulary from Chapter 12). Would you still invest in these companies?

Use the following table to answer the next question. The base year is 2007.

Compared to the base year, the rate of inflation for the year 2007 is

Suppose you are given the following end of year stock price data for Random Inc. stock. Assume the returns are normally distributed, calculate the probability that an investor will earn more than 1.5% in a given year (e.g. Prob(Ret>1.5%)). (Enter percentages as decimals and round to 4 decimals). Year Price 2005 50.25 2006 66.49 2007 79.72 2008 83.81 2009 88.38 2010 84.39 2011 91.1 2012 82.17 2013 86.39 2014 76.35 2015 85.47 2016 86.07

1. Bosch is about to launch three new windshield wiper blades to the market: Envision, Icon, and Micro. Bosch expects to sell the wiper blades in the ratio 2:5:9 respectively. The prices of the blades will be $30, $23, and $13, and have variable costs of $7, $5, and $4, respectively. They plan to spend $2M in design, $4M in equipment and $50M to promote the new blades to acquire 20 million customers.
   1. Calculate the breakeven quantities for each wiper model. [3]
   2. Assume the replacement cycle for wiper blades is roughly a year, and the probability that these customers repurchase from Bosch the following year is 74%, 84%, 78% respectively, and the discount rate is 6% annually. Calculate the CLV for customers in each segment. (Hint: M = total contribution from part a. AC = FC/total number of customers) (Note: Just use the same AC for each segment) [6]
   3. Suppose the company is considering mailing out a $3 birthday coupon to encourage loyalty. What is the minimum retention rate for each segment required to maintain the same CLV found in part b (hint: rearrange the following formula in terms of r. M = total contribution from part a). [3]
   4. If the company is considering spending $40M next year targeted to an audience of 3 million customers, what would be the breakeven acquisition rate for each segment to justify spending $40M. (hint: calculate acquisition spending per customer and divide by CLVs from part b). [3]

Arrasmith Corporation uses customers served as its measure of activity. During February, the company budgeted for 36,800 customers, but actually served 27,200 customers. The company uses the following revenue and cost formulas in its budgeting, where q is the number of customers served:

Revenue: $5.30q

Wages and salaries: $35,000 + $1.64q

Supplies: $1.04q

Insurance: $12,200

Miscellaneous expenses: $8,200 + $0.48q

The company reported the following actual results for February:

Required:

Prepare the company's flexible budget performance report for February. Label each variance as favorable (F) or unfavorable (U). (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

Risk Assessment- Exercise #2 Social Konnections Inc. (SKI or the “Company”) is a global Internet company that runs Social Konnections, a large social media networking Web site. SKI has experienced steep growth since its launch in 2005, and the Company went public in 2007. SKI currently has over 500 million active users who visit the site to connect with others, express themselves, and play games. Last year, substantially all of SKI’s revenue came from advertisers who market their products and services to SKI’s active users through advertisements placed on the Web site or its various mobile platforms. The founder of the company serves as the CEO and is also on the chairman of the board of directors. The CFO is also one of the co-founders of the company. Both have been serving in these roles since 2005. In Q1 of the current fiscal year, SKI acquired Corporate Collaborations (CC), an entity that manages private and public social media networks for corporations. CC’s customers are primarily national and global companies whose employees connect over its platform. In addition to hosting private social media networks for corporations, CC provides services to develop the networks it manages. CC’s revenues are earned through the performance of multiyear revenue contracts with its customers. In the current year, CC is expected to produce approximately 20 percent of SKI’s consolidated revenue. SKI’s investors are focused on the growth prospects of the Company’s legacy open social media platform operations and its new corporate revenue unit. The Company’s MD&A disclosures include (1) various user and revenue metrics to help financial statement users assess its traditional operations and (2) backlog information to help users assess CC’s operations. Advertising Revenue SKI creates advertising space on its Web site and mobile applications and sells the space to advertisers either directly, or through advertising agencies. According to Mr. Cook, the amount an advertiser pays is dependent on the number of views the ad receives or the number of user clicks (depending on the type of advertisement defined in the underlying contract) and the revenue is recorded in the period in which the views or clicks are made. Ms. Drew has learned that simple advertising can be purchased directly from SKI through SKI’s advertising Web site at standard rates, with the advertisements and terms input directly into the Company’s ad delivery platform. However, most advertising revenue is generated directly through the advertising sales team, which has the ability to help advertisers develop more sophisticated advertising campaigns. Management has established minimum pricing and volume thresholds for these advertisements; however, the sales staff is given significant latitude in securing contracts with customers. Extra commissions are paid to sales individuals who sign longer-term contracts that meet minimum revenue targets. Once a contract is signed, the ad development department creates the ad content and obtains the customer’s approval. The approved ad and the contract are electronically sent to the ad scheduling department, and the advertisement is uploaded into the Company’s ad delivery platform. The ad delivery platform is a robust system and is designed to capture all the nuances associated with the contract. For example, an advertiser may wish to have its ads displayed only to users whose IP addresses are from a specific geographic location, or the contract may be structured to provide the advertiser with variable pricing or incentives (such as a set of free advertisements) once a certain level has been paid for. In summary, the delivery platform captures all the relevant pricing information associated with the contract to allow for real-time revenue recognition according to the terms of the contract. After the contract is entered into the system, a summary of the contract setup is provided to the sales manager that worked with the customer. The sales manager then reviews the contract setup for accuracy. The Company’s ad delivery platform automatically tracks the advertising activity each day and reports the activity to its customers, who are then billed weekly for the aggregate ad activity. Ms. Drew’s Concern Ms. Drew is concerned about several things she has learned regarding the appropriateness of management’s revenue recognition policies. Financial Statements Balance Sheet: Account Prior year (1 year ago)** Two years ago Assets* $100m $80m Liabilities $40m $30m Equity $60m $50m Revenue $30m $18 Expenses $22m $19 Net Income $8m ($1m) loss *Assets consist primarily of cash, land/building, patents, goodwill, and other assets. ** As you plan your audit this is the latest financial information available. Controls The Company’s has various controls in place. The CFO performs a checklist on a monthly basis to review the performance of the company. The CFO reports to the CEO every quarter. The CEO reports to the chairman of the board of directors once a year before the financial statements are prepared and released to the public. The company has over 10 thousand employees around the world, of which 4 thousand work at the headquarters. All employees receive the company’s code of ethics that was prepared in 2005 when the company was founded. The CEO was in recent trouble when he posted controversial messages on the social platform that offended people of a certain group. The company has One hundred different controls across the company and across the world related to operations of the company and revenue. The company uses 10 different IT systems as the company is growing quickly it has had to adopt and adds new systems whenever they are needed. The leaders of one of the main divisions recently left to go work for Facebook, and has not been replaced for the last 4 months. Controls have changed a lot since last year because the company is so dynamic and the environment is so fast paced. Employees are always trying to keep up with the new systems and new controls. Audit Because of SKI’s continued growth, the audit committee has requested that the Company choose a new audit firm with experience in auditing public technology companies. Kristine Drew, a senior auditor, is the in-charge accountant on the proposal and planning of the SKI audit. In addition to her supervisory and administrative responsibilities, Ms. Drew is responsible for auditing revenue and determining the risk assessment for the audit. Ms. Drew has read the Company’s disclosed accounting policies and is interviewing the revenue controller, Bill Cook, and various sales personnel to develop in-depth process flow documentation that will serve as the basis for the team’s risk assessment. Required: 1. What would you set Audit risk, Control Risk, Inherent Risk, and Detection risk? (Very low, low, medium, or high) 2. Are there are significant or fraud risks that you have identified? (If any why are they fraud or significant risks?) 3. What other information do you need to plan your audit approach? Where would you get this information from? For each piece of information indicate where you might receive it from and how? (ex: who else is on the board of directors- obtained through inquiry.) 4. What benchmark would you use to calculate materiality? Why? (ex: revenue, EBITDA, Equity, Assets, etc) 5. Using the benchmark and guidance in the book calculate “overall materiality” for your audit? (ex: 8% of Equity ($60m)= $2.4m). 6. For Revenue what assertions are the most important for you to test? 7. For Revenue what are your concerns with each of those assertions based on the information above? 8. What are the things about testing revenue that you are concerned about (specifically what parts of the company’s process if any concern you)? (Example: An employee could steal money from the bank account, or revenue could be modified in the accounting software by an employee.) (Focus on the actual real process for the company described above to make this determination.) 9. For your audit approach would you choose to test controls or primarily perform substantive procedures? If so what would be your mix of control testing to substantive testing? (ex: 50% controls, and 50% substantive) 10. Would you accept this audit? If not why not?