You work for a small accounting firm in Halifax and are filling in as a temp during the winter
semester. It is February 5th 2020 and you are working on the January month-end accounting
file for a local mobile tire installation and repair business called The Good Rubber Company
(GRC) which has just opened. The following events happened during its first month of
operations.
1) On January 10th, GRC purchased $7,500 worth of inventory (new tires) from suppliers, on
account.
2) GRC also began its tire rotation and changeover service, collecting $110 from each of the 45
customers serviced that month.
3) At the beginning of the month GRC purchased a van and equipment for $30,000. GRC paid
$3,000 cash, and financed the rest from the supplier.
a) The interest rate on the outstanding balance is 5%, due annually (first payment of interest
and principle is PAYABLE NEXT January).
b) The estimated useful life of both the van and equipment is 10 years with no residual value
4) GRC was founded on January 1st with a cash investment from the one owner of $30,000 in
exchange for 3,000 shares.
5) Additionally, it sold eight (8) gift cards for $110 each, that can be redeemed for 1 service
each, at any point in the future. At the end of the month two (2) gift cards had been
redeemed / used.
6) GRC made a payment of $2,500 to its suppliers on January 15th, the remainder is due on
February 15th
.
7) The GRC paid $2,400 for a 1-year insurance policy to cover the Van used in operations as
well as general liability.
8) The owner of the company is also the operator (employee) and has elected to take a
monthly salary of $2,000. At the end of the month none of it had been paid.
General Journal entries for 1-3 have been completed (but not adjusting entries), please record
all the remaining necessary journal entries for the month of January. If no entry is required for
an event, please note it.
After this is complete please record all adjusting entries, update the general ledger (T-accounts)
and prepare an adjusted trial balance, income statement, and statement of financial position
for January 31st (please use the template provided, it is already formatted and some formulas
are already included) the company uses straight line depreciation. Do not worry about current
or non-current assets and liabilities for this month.
I will prepare a statement of cash flows, so you do not need to worry about that, however I am
concerned that our client will not understand the statement of cash flows, as this is the first
time they have received formal financial statements. Could you please prepare a professional
memo that explains the purpose of the cash flow statement, and the main business activities
that are included. It would be helpful to include examples for each business activity.
Bonus: Calculate the Return on Assets (ROA) for the month

California Coast General Stores

In December 2018, Steve Baily, the owner of California Coast General Stores announced the highest sales, $50, and profitability of $10 to its employees.

Founded in 1980, California Coast General Stores (CCGS), a regional west coast chain, owns several gas stations, mini-marts, and Auto rentals.

Explaining the original long-term success of the company, a financial analyst commented that the success of the company is due to its sustained growth rate, efficiency and cost savings. As a result, the company is cash rich and is looking to expand its operation.

One of the options that the company considered is to acquire a complementary company. John Marks, the company’s CFO and treasurer was asked to find the suitable acquisition. John identified Prestige Auto Shops, a chain which operates in several adjacent States. Prestige is a privately held company managed by three Johnson’s brothers. They own 10 million shares of the company and they have priced the stock price of the company internally at $20 per share.

Table-1 indicates John’s estimates of Prestige’s earnings potential if it came under CCGS’s management (in millions of dollars). The interest expense is based on Prestige’s existing debt, which is $20 million at a rate of 8 percent. It is expected new debt at rate of 8% to be issued over time to help finance investment in operating capital.

Security analysts based on comparable companies estimate the Prestige’s beta to be 1.28. The acquisition would not change Prestige capital structure, which is 25 percent debt-to value. John realizes that Prestige business plan requires investment in operating capital (net working capital and capital expenditures). The growth rate for operating capital is listed in table (1).

John estimates the risk-free rate to be 3 percent and the market risk premium to be 6 percent. He also estimates that free cash flows after 2023 will grow at a constant rate of 5 percent. Following are projections for sales and other items.

In theory, there are several valuation models. These models are Discounted Cash Flow based on WACC, Cash Flow to Equity (CFE), and AdjustedPresent Value (APV)which could be used to estimate the value of a firm.

Questions:

1.    What is the best model to value Prestige Company?

2.    Given the valuation model in part (1), what is the appropriate discount rate?

One Question = Please analyze this case, using International Trade methodology (not a short answer please) The Schwinn Bicycle Company illustrates the notion of globalization and how producers react to foreign competitive pressure. Founded in Chicago in 1895, Schwinn grew to produce bicycles that became the standard of the industry. Although the Great Depression drove most bicycle companies out of business, Schwinn survived by producing durable and stylish bikes sold by dealerships that were run by people who understood bicycles and were anxious to promote the brand. Schwinn emphasized continuous innovation that resulted in features such as built-in kickstands, balloon tires, chrome fenders, head and tail lights, and more. By the 1960s, the Schwinn Sting Ray became the bicycle that virtually every child wanted. Celebrities such as Captain Kangaroo and Ronald Reagan pitched ads claiming that “Schwinn bikes are the best.” Although Schwinn dominated the U.S. bicycle industry; the nature of the bicycle market was changing. Cyclists wanted features other than heavy, durable bicycles that had been the mainstay of Schwinn for decades. Competitors emerged, such as Trek, which built mountain bikes, and Mongoose, which produced bikes for BMX racing. Falling tariffs on imported bicycles encouraged Americans to import from companies in Japan, South Korea, Taiwan, and eventually China. These companies supplied Americans with everything ranging from parts to entire bicycles under U.S. brand names, or their own brands. Using production techniques initially developed by Schwinn, foreign companies hired low-wage workers to manufacture competitive bicycles at a fraction of Schwinn’s cost. As foreign competition intensified, Schwinn moved production to a plant in Greenville, Mississippi in 1981. The location was strategic. Like other U.S. manufacturers, Schwinn relocated production to the South in order to hire nonunion workers at lower wages. Schwinn also obtained parts produced by low-wage workers in foreign countries. The Greenville plant suffered from uneven quality and low efficiency, and it produced bicycles no better than the ones imported from Asia. As losses mounted for Schwinn, the firm declared bankruptcy in 1993. Eventually Schwinn was purchased by the Pacific Cycle Company that farmed the production of Schwinn bicycles out to low-wage workers in China. Most Schwinn bicycles today are built in Chinese factories and are sold by Walmart and other discount merchants. Cyclists do pay less for a new Schwinn under Pacific’s ownership. It may not be the industry standard that was the old Schwinn, but it sells at Walmart for approximately $180, about a third of the original price in today’s dollars. Although cyclists may lament that a Schwinn is no longer the bike it used to be, Pacific Cycle officials note that it is not as expensive as in the past either. One Question = Please analyze this case, using International Trade methodology (not a short answer please)

Please read case and answer the questions thank you.

As B2B e-commerce continues to grow, companies are placing more emphasis on upgrading their e-commerce infrastructure, taking many cues from B2C companies in the process. Streamlining their online stores and ensuring that potential customers can make purchases across a variety of channels has become just as important for B2B companies as it is for B2C companies. B2B e-commerce accounted for $6.7 trillion of the total $14.6 trillion in B2B trade in 2016, and that B2B e-commerce is expected to increase to around $9 trillion by 2020. For B2B e-commerce companies, there’s a lot at stake.Sana Commerce is a B2B e-commerce software company founded in 2008 and headquartered in the Netherlands. Sana provides B2B enterprise multichannel e-commerce, which is integrated with ERP systems. This means that Sana allows its clients to initiate transactions from physical stores, online stores, mobile app stores, telephone sales, or any other method. A number of companies offer these types of services, but Sana is unique in that it integrates within already installed enterprise resource planning (ERP) systems. Sana Commerce allows businesses to achieve better customer service, higher sales efficiency, and increased revenue. It’s compatible with many major ERP systems, including most versions of Microsoft Dynamics and SAP systems, and its Webshop is installed within that system, as opposed to functioning separately and interfacing with that system externally. This ensures that companies using Sana don’t have to make large investments in new ERP systems. Sana uses the pre-existing ERP’s business logic and information rather than forcing a complicated integration.This feature of Sana Commerce appeals to many companies, including Mechan Groep, distributor of agricultural machinery, wholesale goods, and aftersales supplies. Mechan Groep is based in Achterveld, Netherlands, employs 180 people, with clients in both the Netherlands and Belgium. The company earns 180 million euro per year, according to Mechan Groep CFO Rene Schwiete, who is featured in the video.Mechan Groep’s aftersales department uses Sana to better serve the needs of its dealers. Mechan Groep implemented Sana because of its preexisting use of SAP ERP software, and Sana’s Webshop worked within its larger SAP systems flawlessly. There are 105 dealers in Mechan Groep’s network. These dealers use Sana’s Webshop to access Mechan Groep supplies. Dealers can view inventory on a daily basis and select the urgency with which they need supplies. Mechan Groep’s custom Webshop offers over 700,000 items to Mechan Groep’s dealers.

1.How does Mechan Groep staff fulfill each order as it comes in on Sana Webshop?

2.What type of clients does Mechan Groep serve? Why is the speed of Sana Webshop important?

3.What types of B2B e-commerce companies is Sana best suited for?

In 1998 a national vital statistics report indicated that about 2.3 % of all births produced twins. Is the rate of twin births the same among very young​ mothers? Data from a large city hospital found only 9 sets of twins were born to 481 teenage girls. Test an appropriate hypothesis and state your conclusion. Be sure the appropriate assumptions and conditions are satisfied before you proceed.

Are the assumptions and the conditions to perform a​ one-proportion z-test​ met?

No Yes

State the null and alternative hypotheses. Choose the correct answer below.

A. H0​: pequals0.023 HA​: pnot equals0.023

B. H0​: pequals0.023 HA​: pless than0.023

C. H0​: pequals0.023 HA​: pgreater than0.023

D. The assumptions and conditions are not​ met, so the test cannot proceed.

Determine the​ z-test statistic. Select the correct choice below​ and, if​ necessary, fill in the answer box to complete your choice.

A. z= __________ ​(Round to two decimal places as​ needed.)

B. The assumptions and conditions are not​ met, so the test cannot proceed.

Find the​ P-value. Select the correct choice below​ and, if​ necessary, fill in the answer box to complete your choice.

A. ​P-value+ ______ ​(Round to three decimal places as​ needed.)

B. The assumptions and conditions are not​ met, so the test cannot proceed.

What is your​ conclusion? Choose the correct answer below.

A) Reject H0. The proportion of twin births for teenage mothers is different from the proportion of twin births for all mothers.

B) Fail to reject H0. The proportion of twin births for teenage mothers is not different from the proportion of twin births for all mothers.

C)Reject H0. The proportion of twins births for teenage mothers is greater than the proportion of twin births for all mothers.

D) The assumptions and conditions are not met, so the test cannot proceed.

Sixteen-year-old Michelle Portman was out driving at night near Sandusky, Ohio with her friend Katie Webster in the front passenger seat. They came to a railroad crossing with multiple tracks, where the mechanical arm had descended and warning bells were sounding. A Conrail train had suffered mechanical problems and was stopped 200 hundred feet from the crossing, where it had been stalled for close to an hour. Michelle and Katie saw several cars ahead of them go around the barrier and cross the tracks, despite the fact that Ohio’s vehicle and traffic laws prohibited this practice. Michelle had to decide whether she would do the same.
Long before Michelle made her decision, the train’s engineer (a Conrail employee) had seen the heavy Saturday night traffic crossing the tracks and realized the danger. The conductor and brakeman also understood the peril, but rather than posting a flagman who could have stopped traffic when a train approached, they walked to the far end of their train to repair the mechanical problem. A police officer had come upon the scene, told his dispatcher to notify the train’s parent company Conrail of the situation, and left.
Michelle made the decision to cross the tracks. She slowly followed the cars ahead of her. Seconds later, both girls were dead. A freight train traveling 60 miles per hour struck the vehicle broadside, killing Michelle and Katie instantly.
Michelle’s mother sued Conrail for negligence. The company argued that it was Michelle’s decision, one that violated Ohio traffic laws, which led to her death. Ohio is a comparative negligence state. Discuss both the plaintiff’s claim and Conrail’s defense. What verdict will result?

Please answer in the IRAC format.

Issue

Rule

Analysis

Conclusion

Case Study - Whole Foods Market

Overview

Whole Foods Market is a supermarket chain that specializes in fresh, organic produce from local sources. As an international company with locations around the world, it has a large operation to watch over and a very specific mission to uphold: to sell the highest-quality natural and organic products available.

Sticking to this goal and keeping up with the demands of a rapidly expanding business aren’t always easy, however. In order to stay committed to stocking sustainable goods, Whole Foods relies on an organizational structure that combines aspects of a mom-and-pop operation with a traditional corporate hierarchy. Thanks to this unique organizational structure, the company has been able to expand to 360 stores and hire more than 58,000 employees without sacrificing its core principles.

Whole Foods got its start when John Mackey and Rene Lawson borrowed money from friends and family to open a small natural food store in Austin, Texas. The couple soon ended up living in the market after they were evicted from their apartment for storing some of their grocery stock there. Fortunately, business began to boom once the pair took on a couple of partners and merged with another store. But they quickly faced another huge setback when the most destructive flood Austin had experienced in 70 years took its toll on the market. Along with incurring damage to their building, the store also lost all of its produce and inventory. Thanks to a massive community cleanup effort, however, the market was soon back in business.

Whole Foods has never forgotten that lesson—that having a local, grass-roots structure sensitive to drastic and sudden changes in the business environment can keep an organization nimble and responsive. In the company’s early days, the staff was small enough that everyone could do every job. While this kept things running smoothly at first, the situation had to change as the company grew and opened more stores. It divided the labor between the four partners, with each specializing in one or more of the tasks critical to the business. After designating the leaders for departments like finance, human resources, and sales, Whole Foods began to look like a big company.

But John Mackey and his partners still wanted their stores to appear like small local markets, not corporate mega-grocers. That meant they had to make tough choices, like whether they should centralize supply in warehouses or depend on separate, local suppliers in each region they had stores. Whole Foods ultimately opted for the latter option. To stay responsive to market changes, each region received its own manager and the autonomy to make certain decisions about supply sources and pricing based on the needs of that region, without being slowed down waiting for responses from the home office. This decentralized structure gives Whole Foods the flexibility to adapt to important changes without involving needless bureaucracy.

Whole Foods Market continues to expand into new markets around the world. Despite that fact, it has managed to keep what is unique about its culture and pure about its mission: focusing on great, natural sources at the local level.

Economies of scales are important in business. In the case of Whole Foods, it made sense to centralize supply and apply concepts of Supply Chain Management so that cost of inventory could take advantage of quantity discounts to lower cost of goods.

Why do you think they decided not to do that and instead, allowed local stores to handle their own supply of goods?

Problem 1. Corporate Reorganizations. Middle Products Inc. (MPI), is a client of yours that is a closely held, calendar-
year, accrual-method corporation located in Grand Rapids, Michigan. MPI has two operating divisions. One division
manufactures lawn and garden furniture and decorative objects (furniture division), while the other division
manufactures garden tools and hardware (tool division). MPI’s single class of voting common stock is owned by three
unrelated shareholders as follows:
Shares Adjusted Basis FMV
Amanda Iris Green 300 $2,000,000 $3,000,000
Beth Rose Ruby 100 $1,200,000 $1,000,000
Cam Lily White 100 $800,000 $1,000,000
Totals 500 $4,000,000 $5,000,000
Open Spaces Living Company (OSLC), a publicly held corporation that does business in several midwestern states, has
approached MPI about acquiring its furniture division. OSLC has no interest in acquiring the tool division, however.
OSLC’s management is particularly interested in expanding its market into Michigan. Amanda, Beth, and Cam are
amenable to the acquisition provided it can be accomplished in a tax-deferred manner.
OSLC has proposed the following transaction for acquiring MPI’s furniture division. On April 30, OSLC will create a 100-
percent owned subsidiary, OSLC Acquisition Inc. (OSLC-A). OSLC will transfer to the subsidiary 60,000 shares of OSLC
voting common stock and $2,000,000. The current fair market value of the OSLC voting stock is $50 per share
($3,000,000 in total). Each of the three MPI shareholders will receive a pro rata amount of OSLC stock and cash.
As part of the agreement, MPI will sell the tool division before the acquisition, after which MPI will merge into OSLC-A
under Michigan and Ohio state laws (a forward triangular Type A merger). Pursuant to the merger agreement, OSLC-A
will acquire all of MPI’s assets, including 100 percent of the cash received from the sale of the tool division
($2,000,000), and will assume all of MPI’s liabilities. The cash from the sale of the tool division will be used to
modernize and upgrade much of the furniture division’s production facilities. OSLC’s management is convinced that the
cash infusion, coupled with new management, will make MPI’s furniture business profitable. OSLC management has no
plans to liquidate OSLC-A into OSLC at any time subsequent to the merger. After the merger, OSLC-A will be renamed
Michigan Garden Furniture Inc.
a. Does the proposed transaction meets the requirements to qualify as a tax-deferred forward triangular Type A
merger based on (i) the structure of the transaction and (ii) the judicial doctrines for such transactions (continuity of
interest, continuity of business enterprise, and business purpose)?

b. Could the proposed transaction qualify as a reverse triangular Type A merger if OSLC-A merged into MPI?

Problem 2. Asset or Stock Sale. Continuing the facts of Problem 1 above. MPI identified a buyer for its tools division
that is willing to purchase the division’s assets or do a stock purchase. The assets of the division include manufacturing
equipment worth $1,500,000 with an adjusted basis of $300,000 and goodwill worth $500,000 with no basis. In order
to do a stock purchase, MPI would place the assets and operations of the tools division into a subsidiary corporation
called Tool Time, Inc. (or TTI) in exchange for 100 shares that would be sold to the buyer. What transaction would the
sellers prefer? Does your answer change if the buyer were willing to pay $100,000 more for an asset sale?

Case Study The Tale of Chromatic to Lucent

Instructions

Go to page 276 of your textbook From concept to Wall Street: A complete guide to entrepreneurship and venture capital and read the case study “The Sale of Chromatic to Lucent”.

In one paragraph, briefly summarize the case.

Then, discuss what you learned from the case.

What would you have done differently?

Case Study—The Sale of Chromatis to Lucent

In May 2000, Lucent Technologies announced it was acquiring an almost unknown private company, Chromatis, for approximately $5 billion in Lucent stock. An analysis of the foundation and sale of Chromatis sheds light on and provides a practical example of some of the issues reviewed in this book, with an emphasis on issues relating to the company’s sale.

Beginnings

Chromatis was founded in 1997 by Dr. Rafi Gidron and Orni Petrushka, two men who had cooperated before when they founded Scorpio Communications and sold it to U.S. Robotics for $72 million in cash in August 1996. Petrushka continued managing Scorpio under its new ownership, and Dr. Gidron worked at U.S. Robotics headquarters until it was bought out by 3Com.

Gidron and Petrushka say that after Scorpio was sold, they felt the need to experience again the sense of entrepreneurship involved in a startup. They started looking for a market in need of solutions which they were capable of offering. Gidron and Petruschka knew that after their successful experience with Scorpio, almost any initiative they would undertake would attract the keen interest of venture capital funds. Their success was not regarded as mere chance, due to their experience in corporate management and their solid theoretical background (Gidron, for instance, had been a Professor at Columbia University specializing in the area of communications).

The chosen target market was infrastructure for metropolitan communications networks (“metro”). The fundamental factors driving the market were the observations that while the volume of voice communications rises by 5–10% every year, data traffic was increasing exponentially. Consequently, without dramatically upgrading the efficiency of data communications transmissions, the existing metro infrastructure was not expected to be able to handle the data volume. A principal stimulus for the development of a market for products addressing the new congestion problem was the deregulation of the communications market in 1996, which opened the local calls market to competition. This change led to a massive wave of investments in infrastructure by existing companies, as well as by companies which wanted to enter the local markets. Obviously, the giant communications infrastructure companies such as Cisco, Lucent, Ciena, and Nortel, as well as younger companies such as Sycamore, were also interested in entering this market and capturing a significant share of it.

After concluding that communications companies were about to make massive capital investments in the metropolitan networking market, the entrepreneurs decided to examine it. First, they met with potential customers and studied their needs. This market-orientation approach, although the product was essentially technological, was different from the route Gidron and Petruschka had taken before when establishing Scorpio. This time, thorough market research was conducted before they started the development, in order to increase the likelihood of success.

Chromatis’ entrepreneurs aspired to develop a full networking solution which would optimize the capacity of optical fibers by increasing the volume of traffic transmitted through them. The system integrated hardware for multiplexing several different wavelengths (DWDM – Dense Wavelength Division Multiplexing), technology for transmitting data using IP (Internet Protocol), technology for connecting telephone exchanges, and other technologies. The system was to be installed at the facilities of communications carriers, and the target market was metropolitan telephone companies. Thus was Chromatis born.

Building the Company

After deciding on their strategic direction, the entrepreneurs founded the company in 1997. The company was organized as a Delaware company with a development center in Israel, and its main offices were in Bethesda, Maryland (where several communications companies are centered and switching engineers are relatively abundant). The entrepreneurs used their own money for the initial capital. It was important to them that a leading U.S. fund participate in the first-stage financing round, which would expose them to customers and competitors in the target market. Therefore, they brought together the venture capital fund JVP (Jerusalem Venture Partners) and Crosspoint fund as their initial investors. JVP had previously invested in Scorpio, Gidron and Petruschka’s previous company, and since the entrepreneurs had had a good experience with the fund, and in particular its managing partners, Fred Margalit, they decided to allow the fund to act as the lead investor in the new company in the first round, which took place in March 1998, in which Chromatis raised $7 million. In October 1998, the company raised another $5 million, this round being led by Lucent Venture Partners. All of the previous investors also took part in the second round. In November 1999, when the company was finishing its beta testing and was ready to go to market, the company raised approximately $38 million from its previous investors, including Lucent’s venture capital fund, and from new investors, including the Soros and Hambrecht funds. This round was based on a company valuation of more than $100 million.

At first, Gidron and Petruschka acted as joint CEOs, but later recruited the outside CEO Bob Barron, who had approximately one year earlier declined a similar offer from Cerent, a company operating in a similar field which was later bought by Cisco for around $7 billion. Chromatis’ top management team also included some former Scorpio and U.S. Robotics employees.

All along the way, Chromatis recruited first-rate employees and managers. For example, it managed to recruit Mory Ejabat, one of the best known managers in the field of communications and the active CEO of the communications equipment company Ascend Communications, a company bought by Lucent one year earlier for more than $20 billion.

Before the sale, the company employed about 160 workers. In 1999, the company launched some beta trials with telecom companies, including Quest and Bell Atlantic, but had substantially no revenue.

The Transaction

In May 2000, Chromatis announced that it had been acquired by Lucent in a stock transaction based on a value of around $5 billion. Under the agreement, Lucent allotted 78 million of its shares to Chromatis, excluding the 7% stake of Lucent Venture Partners. Lucent allotted another 2.5 million of its shares to several key employees of Chromatis, contingent upon Chromatis meeting certain performance-based goals after the sale.

The deal left almost everyone involved in the industry dumbstruck. The company was founded less than two years before the sale and had no meaningful revenues or guaranteed contracts. Apparently, a successful combination of technology, management, and strategic alliances, particularly the one with Lucent, had a material impact on the mere fact of the company’s sale.

Analysis and Prologue

Confirmation that the optical networking industry had become a hot field in the capital market had already been given when Cisco bought Cerent, Chromatis’ competitor, in a $7 billion stock transaction in 1998. Without any comparable self-developed technology, it was only a matter of time before Lucent, one of Cisco’s most prominent competitors, would acquire a similar company. The area in which Chromatis operated appeared to be even hotter when Cisco announced that orders for Cerent’s product, which integrates data flow on fiber optic networks, had risen to approximately $2 billion per year.

As it appeared when the acquisition was announced, Chromatis’ price tag resulted not only from a comparison with the sale of Cerent to Cisco, but also from Lucent’s relative disadvantage in the metropolitan communications market in which Chromatis operated. Chromatis offered Lucent almost a complete solution for an existing and emerging need in the metropolitan communications market, a solution with which Lucent was familiar from a relatively early stage due to its investment in Chromatis through its venture capital fund. In other words, although Chromatis had an independent market (as its beta trials with telecom companies had proven) which enabled it to keep going as an independent company, Lucent always stood in the background as a potential buyer. Thus, the need to become acquainted with one another, a stage which is necessary in any merger negotiations, was obviated. From the perspective of real options, the introduction of Lucent’s venture capital fund to the company increased the likelihood that Lucent would acquire the company (as indeed was the case). In other words, introducing Lucent as an investor was tantamount to buying a partial put option. However, Chromatis paid no small premium for this option—stemming from the fact that Lucent’s competitors attributed a lower probability to their possibility of buying Chromatis. As discussed in the chapter on valuation, any decision on the creation of a binding and long-term relationship with a leading company in the field can entail a cost in the form of a reduced likelihood of relationships with competing companies.

Nevertheless, it is important to note that despite its relationship with Lucent, the company also attracted the interest of other companies that considered buying it, such as the communications equipment company Sycamore.

As was apparent all along, a major key to Chromatis’ success was recruiting leaders in every field. The two entrepreneurs understood that the product they were planning was needed in the market, understood how important it was to raise capital quickly, and how essential the money was, mainly to recruit the best people in the market in each field. The recruitment of such people, along with their superb product, enabled the company to demand and receive investments with the relatively high valuation of $100 million.

Lucent, on its part, had performed 33 acquisitions in the four years preceding its acquisition of Chromatis as part of its strategy of expanding into markets with faster growth rates than its traditional core business, and to complement lines of products it had had no time to develop independently in its laboratories. Starting from the point in which it entered the company as an investor, Lucent’s investment in Chromatis was clearly of interest to it for strategic reasons, namely, reinvigorating its leading position in the optical networking market. Chromatis was addressing the metropolitan networking market, which was particularly attractive to Lucent since this market lacked a dominant player such as Nortel was in the long haul networking market.

How can such a high acquisition price be explained when the annual value of the equipment market targeted by Chromatis was $2 billion (even when one takes into account projected sales of around $8 billion in 2004)? The explanation lies in the valuation of companies by strategic investors: From Lucent’s point of view, sales in Chromatis’ target market were expected to encourage sales of other equipment sold by the company. In addition, until that time, Lucent still depended on obtaining large contracts with, among other companies, AT&T, from which it was spun off. Therefore, expanding its spectrum of products in order to appeal also to smaller clients could help Lucent in broadening its product offering and the scopes of its contracts. In the acquisition of Chromatis, as well as in acquisitions in similar markets in which there are few major suppliers, the explanation for the price lies more in the acquirer’s strategic considerations than in the valuation of the target as an independent company. In addition, in stock transactions both the target and the acquirer take into account other considerations that could affect the value of the deal. For instance, the value of the acquirer’s stock, as well as the ability to sell the stock received in the transaction, could affect the value of the deal. A cash transaction is not equivalent to a stock transaction with the same announced value, as the plummeting of Lucent’s stock price in the coming year indicates.

In August 2001, Lucent had announced that it is shutting down the Chromatis division (originating from the acquisition of Chromatis). The potential clients for the products developed by Chromatis, the Competitive Local Exchange Carriers (CLECs), were themselves facing a dramatic reduction in sales with some of them collapsing into bankruptcy, and hence almost stopped acquiring new equipment. Lucent itself was facing a meltdown in most of its businesses, and was trying to reduce its own “burn-rate.” As part of its restructuring, which included the layoffs of over 50,000 employees and refocusing on existing products, Lucent gave up on Chromatis.

The closing of Chromatis only one year following its acquisition for $5 billion signifies the dramatic shakedown in the technology area in general, and the communication field in particular. This shakedown, which started in the later part of 2000, and which people felt was associated primarily with the “Internet bubble,” rapidly spread to most areas in technology. Again it was shown that the timing of investments, as well as of venture development and of exiting it, is by no means less important in determining the prospects of a venture, its entrepreneurs and its investors, than the actual strategy of the company, which includes an optimized composition of employees, technology, cost structure, “sweet spots” in target markets, innovative pricing models, and astute strategic alliances.

multiple choice questions

83.       Ollie negotiates an order instrument to Phil by

a.         assignment of its rights under a contract.

b.         delivery with any necessary indorsement.

c.         making an unconditional promise to pay.

d.         presenting it in response to a demand by B.

84.       Lauren transfers an instrument to Miguel in a form and by a means that makes Miguel a “holder.” This is

a.         a holding.

b.         an assignment.

c.         negotiation.

d.         presentment.

85.       Petra signs a check payable to Quincy, who in­dorses the back, gives it to Regional Credit Union, and receives cash. The transfer of the check from Quincy to the credit union is

a.         an assignment.

b.         a negotiation.

c.         a payment.

d.         a sale.

86.       Ivy signs a check payable to Jon and gives it to him. Jon in­dorses the back, and transfers the check to Ked. To negotiate the check to Luis, Ked must

a.         write “Ked” on the back.

b.         write “pay to the order of Luis [signed] Ked” on the back.

c.         deliver the check to Luis.

d.         obtain Luis’s signature on the back.

Fact Pattern 25-A1 (Questions A5–A8 apply)

Rollo obtains a check payable to his order from Simone. Rollo signs the back and gives the check to Trey. Trey writes “Pay to Trey” above Rollo’s signature.

87.       Refer to Fact Pattern 25-A1. When Trey writes “Pay to Trey” above Rollo’s signature, Rollo’s signature becomes

a.         a blank indorsement.

b.         a qualified indorsement.

c.         a special indorsement.

d.         a restrictive indorsement.

88.       Refer to Fact Pattern 25-A1. When Trey writes “Pay to Trey” above Rollo’s signature, the check becomes

a.         a bearer instrument.

b.         an order instrument.

c.         a promissory note.

d.         a nonnegotiable instrument.

89.       Refer to Fact Pattern 25-A1. By writing “Pay to Trey” above Rollo’s signature, Trey

a.         avoids the risk of loss from theft of the instrument.

b.         relieves himself from liability on the instrument.

c.         converts the check into a nonnegotiable instrument.

d.         locks the instrument into the bank collection process.

90.       Refer to Fact Pattern 25-A1. After Trey writes “Pay to Trey” above Rollo’s signature, further negotiation of the check

a.         requires Rollo’s re-indorsement and delivery.

b.         requires delivery alone.

c.         requires Trey’s indorsement and delivery.

d.         is not possible.

91.       Velma transfers a note by signing it and delivering it to Woz. Woz is

a.         a delivery person.

b.         an indorsee.

c.         a note passer.

d.         a promisee.

92.       Dora receives a check from Eagle Corporation. Dora in­dorses the check to First National Bank by writing “pay to First Nat’l Bank only” and signing her name. This is

a.         a blank indorsement.

b.         a qualified indorsement.

c.         a restrictive indorsement.

d.         a special indorsement.

93.       Gina writes and signs a check payable to “Happy Market.” Ira, Happy’s manager, indorses the check “For deposit only.” This is

a.         a blank indorsement.

b.         a qualified indorsement.

c.         a restrictive indorsement.

d.         a special indorsement.

94.       To pay for investment advice from financial consultants Smith and Jones, Tony signs a check payable to “Smith or Jones.” A proper in­dorsement of the check is

a.         not possible.

b.         “Smith” and “Jones” only.

c.         “Smith” only, or “Jones” only, but not “Smith” and “Jones.”

d.         “Smith” only, or “Jones” only, or “Smith” and “Jones.”

95.       Blythe, an accountant for Credits & Debits, acquires a negotiable instru­ment from Eton by promis­ing to pay its face value in thirty days. Blythe ac­quires the status of an HDC when she

a.         acquires possession of the negotiable instrument.

b.         agrees with Eton to buy the negotiable instrument.

c.         pays the face value due on the instrument.

d.         transfers the instrument to another party.

96.       Jill, in good faith and for value, gets from Kit a check “payable to the order of bearer.” Jill does not know that Kit stole the check. Jill is

a.         an HDC.

b.         not an HDC, because Kit did not acquire the check for value.

c.         not an HDC, because Kit did not acquire the check in good faith.

d.         not an HDC, because the check is a bearer instrument.

97.       Florencia, who is not a GigaBank customer, attempts to cash a check drawn on the bank. The check is considered dishonored if GigaBank

a.         refuses to pay it.

b.         charges a fee to cash it.

c.         asks Florencia for reasonable identification.

d.         asks Florencia to sign a receipt for the payment on the check.

98.       Clem gets a $100 check as a gift from Daria. Clem crudely increases the amount of the check to $1,00—the alteration is obvious—and transfers it to eReady Sets, Inc., in exchange for a 3D HD TV. eReady deposits the check in its bank account at First Town Bank. HDCs of this check include

a.         Clem, eReady, and First Town Bank.

b.         Clem only.

c.         eReady and First Town Bank only.

d.         none of these parties.

99.       Enter answer “A”

100.    Enter answer “A”