The purpose of this calculation question is for you to compute the fair value of the financial liabilities of XYZ Company.

XYZ Company has only 1 financial liability. It is a non-callable publicly traded bond. Here are your facts to input into this question:

• Maturity value of the bond = $260,000,000
• Coupon Rate for the bond is 5.38% paid semi-annually.
• Bond matures on the last day of the firm’s financial year.
• Last Financial Year end – the yield to maturity was 4.80% based on periodic compounding (not EAR)
• Last Financial Year end – bond had exactly 18 years to maturity
• This Year Financial Year end – the yield to maturity demanded by the market is 4.30% (based on doubling the periodic rate)

Required: Compute the fair value of the bond to be reported on this year’s balance sheet. Round to the nearest dollar and do NOT include the dollar sign in your response.

Your task is to determine the WACC for a given firm using what you know about WACC as well as data you can find through research. Your deliverable is a brief report in which you state your determination of WACC, describe and justify how you determined the number, and provide relevant information as to the sources of your data. Select a publicly traded company that has debt or bonds and common stock to calculate the current WACC. One good source for financial data for companies as well as data about their equity is Yahoo! Finance. By looking around this site, you should be able to find the market capitalization (E) as well as the β for any publicly traded company. There are not many places left where data about corporate bonds is still available. One of them is the Finra Bonds website. To find data for a particular company’s bonds, find the Quick Search feature, then be sure to specify corporate bonds and type in the name of the issuing company. This should give you a list of all of the company’s outstanding bond issues. Clicking on the symbol for a given bond issue will lead you to the current amount outstanding and the yield to maturity. You are interested in both. The total of all bonds outstanding is D in the above formula. If you like, you can use the YTM on a bond issue that is not callable as the pre-tax cost of debt for the company. Assumptions: As you recall, the formula for WACC is: rWACC = (E/E+D) rE + D/(E+D) rD (1-TC) The formula for the required return on a given equity investment is: ri= rf + βi * (RMkt-rf) RMkt-rf is the Market Risk Premium. For this project, you may assume the Market Risk Premium is 5% unless you can develop a better number. rf is the risk free rate. The risk free rate is normally the yield on US Treasury securities such as a 10-year treasury. For this assignment, please use 3.5%. You may assume a corporate tax rate of 40%. Use the company Johnson and Johnson

Review the provisions of the Sarbanes-Oxley Act of 2002 to address the accounting scandals in the late 1990s and early 2000s (Enron, WorldCom, etc.)BELOW:

List the existing provisions in the Act do you believe (if any) are unnecessary or over-regulate the profession?

As a result of corporate accounting scandals, such as those at Enron and WorldCom, the U.S. Congress enacted the Sarbanes-Oxley Act of 2002 (SOX). The purpose of SOX is to restore trust in publicly traded corporations, their management, their financial statements, and their auditors. SOX enhances internal control and financial reporting requirements and establishes new regulatory requirements for publicly traded companies and their independent auditors. Publicly traded companies have spent millions of dollars upgrading their internal controls and accounting systems to comply with SOX regulations. As shown in Exhibit 1-10, SOX requires the company’s CEO and CFO to assume responsibility for their company’s financial statements and disclosures. The CEO and CFO must certify that the financial statements and disclosures fairly present, in all material respects, the operations and financial condition of the company. Additionally, they must accept responsibility for establishing and maintaining an adequate internal control structure and procedures for financial reporting. The company must have its internal controls and financial reporting procedures assessed annually. Some Important Features of SOX SOX also requires audit committee members to be independent; that is, they may not receive any consulting or advisory fees from the company other than for their service on the board of directors. In addition, at least one of the members should be a financial expert. The audit committee oversees not only the internal audit function but also the company’s audit by independent CPAs. To ensure that CPA firms maintain independence from their client company, SOX does not allow CPA firms to provide certain nonaudit services (such as bookkeeping and financial information systems design) to companies during the same period of time in which they are providing audit services. If a company wants to obtain such services from a CPA firm, it must hire a different firm to do the nonaudit work. Tax services may be provided by the same CPA firm if pre-approved by the audit committee. The audit partner must rotate off the audit engagement every five years, and the audit firm must undergo quality reviews every one to three years. SOX also increases the penalties for white-collar crimes such as corporate fraud. These penalties include both monetary fines and substantial imprisonment. For example, knowingly destroying or creating documents to “impede, obstruct, or influence” any federal investigation can result in up to 20 years of imprisonment. SOX also contains a “clawback” provision in which previously paid CEO’s and CFO’s incentive-based compensation can be recovered if the financial statements were misstated due to misconduct. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 further strengthens the clawback rules, such that firms must recover all incentive compensation paid to any current or former executive, in the three years preceding the restatement, if that compensation would not have been paid under the restated financial statements. In other words, executives will not be allowed to profit from misstated financial statements, even if the misstatement was not due to misconduct.

Excessive executive compensation in the financial services industry ranks high among examples of failed corporate governance. Corporate government at the government-sponsored mortgage giants Fannie Mae and Freddie Mac were particularly weak. The politically appointed board at both enterprises failed to understand the risks of sub-prime loan strategies being employed, did not adequately monitor the decisions of the CEO, did not exercise effective oversight of the accounting principles being employed (which led to inflated earnings), and approved executive compensation systems that allowed management to manipulate earnings to receive lucrative performance bonuses. The audit and compensation committees at Fannie Mae were particularly ineffective in protecting shareholder interest., with the audit committee allowing the company’s financial officers to audit report prepared under their direction and used to determine performance bonuses. Fannie Mae’s audit committee also was aware of management’s use of questionable accounting practices that reduced losses and recorded one-time gains to achieve financial targets linked to bonuses. In addition, the audit committee failed to investigate formal charges of accounting improprieties filed by a manager in the Office of the Controller.

Fannie Mae’s compensation committee was equally ineffective. The committee allowed the company’s CEO, Franklin Raines to select the consultant employed to design the mortgage firm’s executive compensation plan and agreed to a tiered bonus plan that would permit Raines and other senior managers to receive maximum bonus without great difficulty. The compensation plan allowed Raines to earn performance-based bonuses of $52 million and a total compensation of $90 million between 1999 and 2004. Raines was forced to resign in November 2004 when the Office of Federal Housing Enterprise Oversight found that Fannie Mae’s executives had fraudulently inflated earnings to receive bonuses linked to financial performance. Securities and Exchange Commission investigators also found evidence of improper accounting at Fannie Mae and required the company to restate its earnings between 2002 to 2004 by $6.3 billion.

Poor governance at Freddie Mac allowed its CEO and senior management to manipulate its financial data to receive performance-based compensation as well. Freddie Mac’s CEO Richard Syron received 2007 compensation of $19.8 million while the mortgage company’s share price declined from a high of $70 in 2005 to $25 at year end 2007. During Syron’s tenure as CEO, the company became embroiled in a multibillion-dollar accounting scandal, and Syron’s personally disregarded internal reports dating to 2004 that cautioned of an impending financial crisis at the company. Forewarnings within Freddie Mac and by Federal Regulators and outside industry observers proved to be correct, with loan underwriting policies at Freddie Mac and Fannie Mae leading to combined losses at the two firms in 2008 of more than $100 billion. The price of Freddie Mac’s shares had fallen to below $1 by the time of Syron’s resignation in September 2008.

Both organisations were placed into a conservatorship under the direction of the U.S. Government in September 2008 and were provided bailout funds of more than $160 billion by early 2011. The U.S. Federal Housing Finance Agency estimated that the bailout of Fannie Mae and Freddie Mac would potentially reach $200 billion to $300 billion by 2013.

Sources: Chris Isidore, “Fannie, Freddie Bailout: $153 Billion…and counting,” CNNMoney, February 11, 2011;” Adding up the government’s Total Bailout Tab, “ New York Times Online, February 4, 2009; Eric Dash, “Fannie Mae to restate results by $6.3 Billion because of Accounting,” New York Times Online, www.nytimes.com, December 7, 2006; Annys Shin, “Fannie Mae sets executive salaries,” Washington Post, February 9,2006,p.D4; and Scott DeCarlo, Eric Weiss, Mark Jickling, and James R.Cristie, Fannie Mae and Freddie Mac: Scandal in U.S. Housing (Nova Publishers,2006), pp. 266-286.

QUESTION 1

A) Fannie Mae and Freddie Mac are two examples of poor execution of corporate governance in mortgage financial institutions. Identify and discuss the corporate governance issues in this case study.

Glen Avon Inc. specializes in the production of telecommunication satellites. The company has

a 6-month fiscal end on December 31 and June 30. In 2004 the company decides to expand their

operations and finances it by issuing 4,000 bonds at a 14% coupon rate (annual). The bonds pay

interest on October 31 and April 30, and are due on April 30, 2019.

a. (3 points) Assuming the bonds are issued on April 30, 2004 at 104, record the journal

entry(ies) for the issue.

b. (5 points) Record the proper adjusting entry(ies) for the 6-month fiscal end on June 30, 2004.

c. (4 points) Record the interest payment on October 31, 2014.

d. (8 points) On November 30, 2014, the company purchases 90 percent of the bonds back at

110 plus accrued interest. Record the proper journal entry(ies) for the repurchase.

     Meadows Laboratories holds a valuable patent for a “gazak”. The history of costs

     associated with the “gazak” are as follows.

           Date                 Activity          Cost

     2000 – 2001     Research conducted to develop “gazak”                       $117,000

     Mar. 2002         Design and construction of a prototype                             81,500

     Oct. 2002          Testing simulations                                                           36,750

     Feb. 2003         Redesigning based on simulation results                         41,250

     Apr. 2004          Legal fees paid for patent granted May, 2004                   69,955

     May. 2008         Legal fees paid to successfully defend patent                  23,205

     Jan. 2010          Research aimed at modifying the “gazak” design             17,500

     Oct. 2013          Legal fees paid to successfully defend patent                  11,240

     Meadows assumed a useful life of 17 years for the patent in May, 2004. On January

     1, 2012, it revised its useful life estimate downward to 6 remaining years.

     Amortization is computed for a full year if the cost is incurred prior to July 1, and no

     amortization for the year if the cost is incurred after June 30. The company’s year

     ends December 31.

Instructions – Compute the carrying value of the “gazak” on each of the following dates:

1. December 31, 2005
2. December 31, 2008
3. December 31, 2011
4. December 31, 2013
5. December 31, 2015

The following data represent the dividend yields​ (in percent) of a random sample of 28 publicly traded stocks. (a) Compute the​ five-number summary. ​(b) Draw a boxplot of the data. (c) Determine the shape of the distribution from the boxplot.

Which of the following statements is correct about the AGI limitation? A. Only contributions to certain organizations qualify for the 50% AGI limitation. B. The contribution of a patent by the inventor is subject to the 30% AGI limitation. C. The fair market value of land given to a university is subject to the 20% AGI limitation. D. The fair market value of publicly traded long-term gain stock given to a charitable organization can be fully deducted under the 50% AGI limitation

Choose an entrepreneur that interests you. Living or deceased, famous or not so famous – it doesn’t matter. It can be big or small, publicly traded or private.

1. Provide a history of this individual and their business.  
2. Describe how they gained their inspiration and experience that led to the business they ultimately ran.
3. Describe their business venture as best as you can. Include as many facts as possible.
4. Explain why you chose this particular entrepreneur
5. And Most importantly, what did you learn from researching this person.