We are interested in the relationship between the compensation of Chief Executive Officers (CEO) of firms and the return on equity of their respective firm, using the dataset below. The variable salary shows the annual salary of a CEO in thousands of dollars, so that y = 150 indicates a salary of $150,000. Similarly, the variable ROE represents the average return on equity (ROE)for the CEO’s firm for the previous three years. A ROE of 20 indicates an average return of 20%.
d) Use your software to estimate the model, this time by using the database below which excludes all the data points for which the salary of the CEO appears extraordinarily large considering the ROE of their firm. Report your results.
obs salary roe
1 1095 14.1
2 1001 10.9
3 1122 23.5
4 578 5.9
5 1368 13.8
6 1145 20
7 1078 16.4
8 1094 16.3
9 1237 10.5
10 833 26.3
11 567 25.9
12 933 26.8
13 1339 14.8
14 937 22.3
15 2011 56.3
16 1585 12.6
17 905 20.4
18 1058 1.9
19 922 19.9
20 1220 15.4
21 1022 38.7
22 759 16.4
23 1414 24.4
24 1041 15.6
25 1688 14.4
27 1160 16.1
29 476 16.2
30 1492 18.4
31 1024 14.2
32 1593 14.9
33 427 12.4
34 829 17.1
35 797 16.9
36 577 18.1
37 1342 10.9
38 1774 19.3
39 709 18.3
40 860 18.4
41 1336 13.8
42 516 13.7
43 931 12.7
44 815 15.1
45 1681 16.5
46 568 10.2
47 775 19.6
48 1188 12.8
49 782 15.9
50 1170 17.3
51 1469 8.5
52 916 16.4
53 1070 19.5
54 894 19.2
55 829 15.9
56 780 19.9
57 2327 28.1
58 717 25
59 1368 15
60 2028 12.6
61 1195 20.3
62 256 22.7
63 775 14.8
64 1407 13.2
65 543 10.3
66 874 17.7
67 1287 10
68 1248 15.6
69 875 6.8
70 925 12.4
71 798 13.1
72 760 15.8
73 600 12.8
74 991 15.3
75 1570 0.5
76 911 16.5
77 1360 15.1
78 700 13
79 741 11.1
80 1097 8.9
81 953 17.5
82 441 15.9
83 595 14.2
84 1067 9.3
85 1298 9.5
86 1798 15.5
88 1336 11.1
89 1750 15.9
90 912 16.4
91 1892 8.6
92 833 24.6
93 1142 15.4
94 1159 16.9
95 1283 7.2
96 2109 11.6
97 1039 26.4
98 992 21.4
99 1253 19.2
100 721 15.1
101 1351 9
102 1391 9.4
103 1245 19
104 1550 3.5
105 2150 22.1
106 1846 10.9
107 573 15.1
109 959 17.3
110 612 33.3
111 1820 22.8
112 1411 11.1
113 1026 12.4
114 1287 20.9
115 800 6.7
116 1115 7.1
117 1631 11.8
118 1910 14
119 996 10.1
120 918 6.4
121 1261 12.4
122 1053 17.6
123 1221 15.1
124 1738 23.6
126 1900 23.2
127 427 12.4
128 1700 44.4
129 360 2.1
130 459 18.4
131 1340 16.1
132 729 15.1
133 223 22.7
134 2101 23.4
135 1082 25.7
136 1781 27
137 791 19.9
138 2092 43.7
139 1573 16.4
140 1045 11.6
141 1694 24.8
142 453 26.2
143 1130 44.5
144 1334 22.3
145 1344 22.3
146 1585 35.1
147 1946 13.1
148 1619 11
149 1620 19.4
150 967 28.5
151 1431 43.9
152 1231 26.8
153 770 15.7
154 1594 15
155 1568 28.2
156 995 15.4
157 1077 20
158 1161 42.2
159 1401 19.6
160 1127 16.2
162 730 29.5
163 729 22.6
165 949 13
167 1502 48.1
168 807 18
169 713 18
170 1489 21.7
171 736 21.3
172 1226 26.9
173 543 30.5
175 890 15.6
176 1627 19.4
177 2408 29.1
178 2248 40.8
179 787 13.7
180 474 11.1
181 439 10.8
182 465 5.1
183 594 12.3
184 688 7.4
185 607 6.2
186 634 12.7
187 532 10.6
188 441 7.4
189 694 12.6
190 520 12.8
191 757 2.9
192 668 13.5
193 803 10.7
194 500 11.9
195 552 12.9
196 412 10.1
197 1100 7.3
198 959 14.6
199 333 13.8
200 503 8.9
201 448 14
202 732 12.9
203 720 14.5
204 808 14.7
205 930 9
206 525 15.5
207 658 12.1
208 555 13.7
209 626 14.4
e) Produce a histogram and a normal probability plot of the residuals of this regression. Does this regression appear to meet the conditions of absence of outliers and near normality?
f) What are the units of the slope coefficient b1 in this equation? What is the impact on the salary of the CEO of firm i if the ROE increases by 1%?
g) Use your results to calculate a 95% interval to estimate the mean salary of CEOs whose firms have an ROE of 20 per cent.
In: Statistics and Probability
Anthony Bucker, the CEO of Bucker’s, Inc. is currently reviewing a proposal to purchase a set of equipment that would add a unique candle holder, what is known as “Angel Chimes”, to the company’s production line. Bucker’s, Inc. has been manufacturing galvanize-coated buckets, pans, watering cans, flower pots & vases, and various sizes of trash-cans for home and garden use for the past 25 years. With this new addition to its product line, Bucker’s, Inc. would penetrate further into decorative home-goods markets.
Angel Chimes is a unique, brass-made candle-holder. It was originally introduced in Sweden and has become a popular Christmas product in the entire Europe. It makes a delightful Christmas gift that could be enjoyed by all ages as part of joyous memories. The heat from the four candles spins a carousel of angels causing them to lightly tap the bells generating charming tinkling sounds. Celine Barber, the marketing manager at Bucker’s, believes that Angel Chimes could be sold for $6 each and a volume of 10,000 units could be reached within its first year of inception.
The semi-automated machine to be used in the production of Angel Chimes can be purchased for $170,000, but it requires $30,000 additional spending on delivery and installation. The cost of the material is estimated to be 40% while labor and overhead expenses will run around 12% of the sales price. The annual sales figure is estimated to grow at 5% per year. The equipment is expected to worn-out totally in ten years and can be sold for $20,000 only. For tax purposes, the equipment qualifies for Five-Year MACRS property (the appropriate percentages are provided in the following table):
|
MACRS Recovery Allowance Percentages for Five-Year Property |
|
|
Ownership Year |
Recovery Percentage (%) |
|
1 |
20 |
|
2 |
32 |
|
3 |
19 |
|
4 |
12 |
|
5 |
11 |
|
6 |
6 |
Anthony finds the Angel Chimes project quite attractive at first glance; however, he is cautious in implementing any capital budgeting proposal that could be detrimental to his company and its common stocks. As such, he asks you to run an assessment of Angel Chimes project via most reliable decision criteria, i.e., NPV and IRR. Currently Bucker’s WACC to apply to an average risk project is 14% and the company is subject to a marginal tax rate of 34%.
(a) Compute the NPV and IRR of the above proposal assuming a 34% tax rate. What is your recommendation to Mr. Bucker?
Anthony Bucker, while a college dropout (mainly due to financial challenges his parents and himself had to face during the first two semesters of his college years) proved to be a wise and successful businessman during his 25 years of practice in the industry. With his exceptional vision on decorative home-goods design and production, Anthony was quick to recognize that this new equipment could be utilized to introduce various additional and equally attractive tinkling candle-holders with different concepts and figures. This, however, would require the acquisition of an additional pressing machine for $30,000 to produce the new figures and characters. This piece of equipment, if purchased, will also qualify for Five-Year MACRS property and will be sold for $5,000 at the end of 10 years.
Anthony doesn’t anticipate any cannibalization affect since these additional candle-holders will be in demand all year around while Angel Chimes are proven to be a unique Christmas-season item. Celine’s analyses in this regard indicates that Bucker’s Inc. should be able to sell 7,500 units of these additional candle holders in the first year at $5 each. For the following years, the sales are estimated to grow at 5% per year. The cost of the material will be 40% while labor and overhead expenses will be negligible since the additional production can be accomplished without any over-time expectations from the workers.
b.) Compute the NPV and IRR of the Angle Chimes proposal together with this additional modification/investment. What is your recommendation to Mr. Bucker when two compatible proposals are considered/evaluated together?
In: Finance
Gerald is a CEO in Brainies Consulting, Inc. His income in the first year is m1 = $200 and in the second m2 = $200. Assume that the interest rate is r = 100%. His time horizon is limited to these two years.
(a) Find PV and FV of Gerald’s income
(b) Show on the graph (C1; C2) Gerald’s budget set. Mark PV, FV, and the slope of his budget line.
(c) Explain what borrowing/lending strategy gives Gerald each of the two “extreme” consumption points. How much does he borrow/lend in the first period, how much does he pay back/receive in the second period?
(d) Suppose his utility function is:
U(C1; C2) = ln(C1) + ln(C2)
Find Gerard’s optimal choice analytically and show it on the graph. Does the optimal consumption involve saving or borrowing?
In: Economics
Willie Cheetum is the CEO of Happy Foods, a distributor of produce to grocery store chains throughout the Midwest. At the end of the year, the company’s accounting manager provides Willie with the following information, before any adjustment. Accounts receivable $ 1,040,000 Estimated percentage uncollectible 9 % Allowance for uncollectible accounts $ 34,000 (credit) Operating income $ 254,000 Willie’s compensation contract states that if the company generates operating income of at least $204,000, he will get a salary bonus early next year. Required: 1.
1. Record the adjusting entry for uncollectible accounts using the accountant’s estimate of 9% of accounts receivable.
2-a. After the adjustment is recorded in Part 1, what is the revised amount of operating income?
2-b. Will Willie get his salary bonus?
3. Willie instructs the accountant to record the adjustment for uncollectible accounts using 6% rather than 9% of accounts receivable. Now will Willie get his salary bonus? Yes or No?
4. By how much would total assets and operating income be misstated using the 6% amount?
| Total Assets | ||
| Operating Income |
In: Accounting
A explanation of how a person as a hospital chief executive officer (CEO) might create a population health strategy based on As a health care executive for a hospital, you have been responsible for caring for the patient in your hospital bed. In the last couple of years, your role has likely expanded to include determining how to keep patients from being re-hospitalized. With the implementation of the ACA, your role is expanding further to encompass population health.ACA foci. Be specific and provide examples.
In: Nursing
Getitall, the CEO of Gooddrug LLC claimed that in the US, drug companies should receive a patent of 100 years for each drug they develop. this allows them a prolonged llegal monopoly on the sale of that drug, provide better incentives to innovate and help consumer pay stable prices.
Jane, the FDA consultant strongly disagree with that statement.
Give reasons related to consumers, patients, and the market to support Jane's claim
In: Economics
You have been asked to perform and present a stock valuation to the CEO prior to the annual shareholders meeting next week. The two models you have selected to value the firm are the dividend discount model and the discounted cash flow model. Explain why the estimates from the two valuation methods differ. Address the assumptions implicit in the models themselves as well as those you made during the valuation process.
In: Accounting
1. You heard on the internet that the CEO of Boeing got a huge bonus because the firm’s return on equity (net income/equity) increased. Does this make sense to you?
2. What is implied by the fact that a firm’s equity multiplier increased while the firm’s ROE was constant?
3. What is implied by the fact that a firm’s return on assets increased while their profit margin decreased?
4. What ratios would you examine to explain why a firm’s operating margin decreased (be as specific as possible)? 4
5. In your opinion, what is the single most relevant traditional based performance measure (consider all of the ratios provided on the PDF document entitled “DuPont Ratios”)? Explain your selection!
6. In 2019, a firm issued a significant amount of debt (bonds) and repurchased their equity (stock) with the funds raised from the debt offering (a debt for equity swap). The objective of this dramatic increase in leverage was to lower the firm’s WACC. Their analysis suggests that the firm’s WACC will decrease from 8% to 6% due to this debt for equity swap. Based on the Dupont model, how would this change in capital structure impact the firm’s future performance (profitability)? Does your response change if you use operating income versus net income to complete the Dupont analysis?
7. What are the similarities and the differences between the following two performance measures: Operating Margin and Profit Margin?
In: Finance
Kersten Brown, the CEO of Pleasanton Studios, is having a tough week - all three of her top management level employees have dropped in with problems. One executive is making questionable decisions, another is threatening to quit, and the third is reporting losses (again). Kersten is hoping to find simple answers to all her difficulties. She is asking you (her accountant) for some advice on how to proceed. Pleasanton Studios owns and operates three decentralized divisions: Entertainment, Streaming, and Parks. Pleasanton Studios has a decentralized organizational structure, where each division is run as an investment center. Division managers meet with the CEO at least once annually to review their performance, where each division manager's performance is measured by their division's return on investment (ROI). The division manager then receives a bonus equal to 10% of their base salary for every ROI percentage point above the cost of capital. The Entertainment division manager, John Freeman, was the first to knock on Kersten's door this morning. Entertainment, Pleasanton Studios' first endeavor, produces movies for the big screen. Entertainment has been in operation since 1965. Last month, John had mentioned a proposal to build a new animation studio. The build would cost $4,910,000 with an estimated life of 20 years and no salvage value and would allow Entertainment to start producing animated movies. Animated movies were projected to bring in an additional $1,210,000 in revenues each year, but would increase annual production costs by $574,000. John had dropped in to let Kersten know he had decided not to move forward with the animation studio. This surprised Kersten - her quick mental calculation indicated that the studio would have a payback period of 8 years, much shorter than the expected life of the studio. Not entirely sure that her quick assessment was valid, Kersten needed to check with her accountant on the matter. Next to Kersten's door was the manager of Streaming, which produces short-form (30 minute to one hour) episodes in addition to streaming the movies developed by Entertainment. Customers then buy subscriptions to the service. Run by division manager Reyna Imanah, Streaming was introduced in 2016 and has increased subscriptions by 20% every year since. Reyna's complaint was that, based on the current bonus payout schedule, John Freeman's bonus last year was significantly higher than hers. She points to the increasing subscription rates at Streaming, and says that her division is being punished for having opened so recently (her division's facilities are much more recent than those in Entertainment). She currently has an employment offer from another company at the same base pay rate, and stated that she will accept this offer unless she feels her performance is being appropriately acknowledged and compensated. Kersten needs to look at the relative performance across divisions to determine how to proceed with Reyna. Pleasanton Parks is a theme park based on the movies from Entertainment and the series from Streaming. For many years, it was a popular year-round destination, with characters, rides, and a hotel. This park has lost popularity in recent years, and has been 'in the red' for the past two years. If the park is not profitable this year, you will need to decide whether to permanently close that division. Included in the 'Fixed COGS' for Parks is an annual $1,650,000 mortgage payment on the land and buildings for the park, which would still need to be paid (as a corporate level cost) if the park is closed and that segment is removed from the financial statements. Incidentally, you recently had a conversation with a Marriott Hotels executive, who would like to expand into the area. If you decided to close Parks, you are fairly certain that you could lease the hotel facilities to Marriott for $650,000 annually. A partial report of this year's financial results for Pleasanton Studios can be found in Table 1 below. The 'Selling and admin costs' listed in Table 1 are directly incurred by each division, and are determined at the beginning of each year (that is, they do not change with increased/decreased production). In addition to the divisional information above, there are $2,000,000 in corporate costs that are currently allocated evenly between the three divisions. These costs are primarily due to employee benefits costs, which are billed at the corporate level. If the Parks division is closed, the decreased employee base would reduce allocated corporate costs by $500,000. Pleasanton Studios has a cost of capital of 12 percent (and Kersten uses the cost of capital as their required rate of return) and are subject to 32% income taxes. Before she can make any decisions, Kersten needs to evaluate this year's performance results. She sets off to see you, the company's accountant, for answers.
Table 1: Pleasanton Studios current year data Experience Streaming Parks Revenues $54,583,520 $30,184,570 $7,564,270 Fixed COGS $3,356,850 $4,074,530 $3,159,430 Variable COGS $40,257,310 $22,020,695 $3,698,928 # of customers 15,264,200 1,420,060 30,240 # of employees 11,562 1,954 1,378 Average net operating assets $29,014,000 $19,252,000 $420,000 Selling and admin costs $3,259,520 $944,620 $231,900
a. Evaluate this year's performance results for the three divisions. Your financial analysis should include a segmented income statement for Pleasanton Studios, as well as the current annual ROI, residual income and EVA for the three divisions. b. Evaluate Entertainment's decision not to invest in the new animation studio (i.e., was the decision appropriate and in the best interests of Pleasanton Studios), including the appropriate financial analyses to support your evaluation. c. Evaluate the validity of Reyna Imanah's complaint regarding her evaluated performance. Explain why it is (or is not valid), and what further information would be necessary. d. Provide a recommendation on whether to close the Parks division, including all necessary financial analyses.
In: Accounting
In: Statistics and Probability