Problem 3-3 A review of the ledger of Bonita Company at December 31, 2017, produces the following data pertaining to the preparation of annual adjusting entries. 1. Salaries and Wages Payable $0. There are eight employees. Salaries and wages are paid every Friday for the current week. Five employees receive $800 each per week, and three employees earn $550 each per week. December 31 is a Tuesday. Employees do not work weekends. All employees worked the last 2 days of December. 2. Unearned Rent Revenue $414,960. The company began subleasing office space in its new building on November 1. Each tenant is required to make a $5,720 security deposit that is not refundable until occupancy is terminated. At December 31, the company had the following rental contracts that are paid in full for the entire term of the lease. Date Term (in months) Monthly Rent Number of Leases Nov. 1 6 $6,700 5 Dec. 1 6 $6,770 4 3. Prepaid Advertising $15,600. This balance consists of payments on two advertising contracts. The contracts provide for monthly advertising in two trade magazines. The terms of the contracts are as shown below. Contract Date Amount Number of Magazine Issues A650 May 1 $7,200 12 B974 Oct. 1 8,400 24 The first advertisement runs in the month in which the contract is signed. 4. Notes Payable $58,300. This balance consists of a note for one year at an annual interest rate of 12%, dated June 1.

An exchange traded fund (ETF) is a security that represents a portfolio of individual stocks. Consider an ETF for which each share is equivalent to a portfolio of two shares of Amarillo National Bank (ANB), three shares of Canyon Buff Enterprise (CBF), and two shares of Tyson Foods (TSN). Suppose the current market price of each individual stock are shown below:

The price per share of the ETF in a normal market is:

A put is currently being traded on an underlying security. An investor buys a put option for $7 per share. The strike price is $100 per share and the option expires in three months.

a) What is the profit of this trade per share if in three months the price of the

underlying security is $117 per share?

b) How does you answer to part a) change if the price of the underlying security in

three months is $99 per share?

An exchange traded fund (ETF) is a security that represents a portfolio of individual stocks. Consider an ETF for which each share represents a portfolio of two shares of Apple Inc. (APPL), one share of Google (GOOG), and ten shares of Microsoft (MSFT). Suppose the current stock prices of each individual stock are as shown below:

Stock     Price
APPL      $200.23
GOOG   $570.51
MSFT      $29.61

If the ETF is currently trading for $1,200, what arbitrage opportunity is available? What trades would you make?

RTF Inc. has options traded on the CBOE. As a measure of its volatility, assume the stock price can either go up at $40 or down to $15. Interest rates that apply are 1%. Consider a strike 25 call option. Using this strike price and the two possible binomial prices for the stock, the dollar cash flow that a risk-free hedge will generate under each possible strike price will be?

Nazir Sdn Bhd is the largest seller of Petrochemical products in Malaysia. Traded on the Bursa Malaysia, sales exceed RM30 billion annually and market capitalization exceeds RM87 billion (as of December 31, 2019 balance sheet date). The company was incorporated in 1977. They focus on all aspects of product value including the process, development, marketing and sales of Petrochemical products, Fuel oil, Fertilizer and Diesel. On November 19, 2019 Nazir’s Board of Directors approved a new four-year, RM12 billion program to repurchase shares of Nazir’s Common Stock. At the same time, they declared a 14% increase in Dividends Per Share and a Two-For-One Stock Split. The market reacted favorably to the news and analysts interpreted the plan as a sign of financial strength and future performance. Interested in learning more about why the market reacted so strongly to the news, you should look more deeply at the financial statements of the firm.

You begin the task of finding some of the drivers that create stock value and financial strength over time. Given your limited background, you decide to focus on the last five years of income statements and an examination of key indicators such as EPS, dividends and Repurchase history.

Table 1. Income Statements for years 2015-2019 ended December 31.

ADDITIONAL INFORMATION

Required:

1. Compute BASIC EPS for each year. Re-run EPS with a modified number of shares; add back the number of shares repurchased to the weighted average number of common shares outstanding. Determine the EPS result before repurchases. Interpret the difference between the BASIC EPS to the EPS modified.

2. Compute the total payout in Ringgit, as a percent of net income, and per share. Discuss trends over time

[Total 20 marks]

"The characteristics of two stocks traded in the economy are as follows: Stock A, expected return=13%, standard deviation=60%; Stock B, expected return=8%, standard deviation=40%. Correlation between A and B is -1. If the market risk premium is 4%, what is the expected return for a portfolio with a beta of 1.5 in a CAPM universe?"

The Securities and Exchange Commission (SEC) is mandated to regulate the financial statements of publically traded reporting corporations.   Recently, the SEC has renewed their focus on Non-GAAP reporting issues that are impacting the valuation process of regulated companies.

In 2003, the SEC issued Reg G which restricted a company’s ability to deviate from compliance with GAAP regulatory pronouncements. Prior to the issuance of REG G, major reporting issues pertaining to ENRON had resulted in the SEC becoming aware of misleading reports due to Non-GAAP Compliance Issues. Recently, 380 out of the S & P’s 500 reporting entities reporting a DECREASE to GAAP Net Income but an INCREASE to Non-GAAP Net Income. WHY? The primary differences were the result of EXCLUDED EXPENSES on the Non-GAAP Compliant reports. Many reporting entities were classifying certain routine, recurring operating expenses as NONRECURRING items. For example: Restructuring Costs and / or Impairment Costs are NOT included in the Non-GAAP reports because the management team felt the financial value of the company’s results were undermined by these rare costs. This process is allowed by the SEC…but…redefining operating expenses as Non-Recurring expenses in an attempt to enhance their financial results has become a motivating driver to this problematic process.

The SEC brought their first “Pro Forma Financial Reporting Case on January 16, 2002 against Trump Hotels & Casinos. The case centered upon the abuse of Pro Forma earnings which resulted in a misleading Q3 1999 Pro Forma Earnings Release which was inflated to exceed the analysts expectations. In 2009, the SEC brought similar charges against SafeNet Inc’s management team charging them with a scheme aimed at reclassifying recurring operating expenses as non-recurring (Nov 2009.)

Groupon, in their Initial Public Offering (IPO) filings in 2011 stated …”they do not measure themselves in conventional ways.” The result was overstated profits that lead to inflated stock valuation prices and the need to restatement prior financial reports. Many in the business world believe that many companies are focused on reported EBE = Earnings BEFOR Expenses…rather than EBITA = Earnings Before Interest , Taxes & Amortization.

In an article dated June 29, 2016, the financial reporting community stated that reporting companies “inflated profits by $164 Billion using Non-GAAP Measures” which clearly indicates the problem is on-going and material.

Start your research process by reading SEC 100 Gen rules. You can also refer to Sarbannes-Oxley (SOX) legislation where the pronouncement “strongly discourages Non-GAAP reporting. Read the issues the SEC had with Trump Casinos, SafeNet Inc and Groupon. I want you to discuss the GAAP vs. Non-GAAP compliance issue and integrate the following questions into your response.

1.) Does the use of Non-GAAP reports impair the ability to compare prior periods and competitors reports?

2.) Does the Non-GAAP numbers provide a reasonable source of reliable information?

3,) Should corporations be REQUIRED to report ALL numbers in accordance with GAAP…even during the quarterly, non-audited venue?

4.) Is there a need to translate complex GAAP based information into more useful financial data?

10. An exchange traded fund (ETF) is a security that represents a portfolio of individual stocks. Consider an ETF for which each share represents a portfolio of two shares of Apple Inc. (APPL), one share of Google (GOOG), and ten shares of Microsoft (MSFT). Suppose the current stock prices of each individual stock are as shown below:

If the ETF is currently trading for $1200, what arbitrage opportunity is available? What trades would you make?