Retlaw Corporation (RC) manufactures time-series photographic equipment. It is currently at its target debt–equity ratio of 0.83. It’s considering building a new $46 million manufacturing facility. This new plant is expected to generate after-tax cash flows of $8.5 million in perpetuity. The company raises all equity from outside financing. There are three financing options: A new issue of common stock: The flotation costs of the new common stock would be 8% of the amount raised. The required return on the company’s new equity is 16%. A new issue of 20-year bonds: The flotation costs of the new bonds would be 4% of the proceeds. If the company issues these new bonds at an annual coupon rate of 8.0%, they will sell at par. Increased use of accounts payable financing: Because this financing is part of the company’s ongoing daily business, it has no flotation costs, and the company assigns it a cost that is the same as the overall firm WACC. Management has a target ratio of accounts payable to long-term debt of 0.140. What is the NPV of the new plant? Assume that RC has a 35% tax rate. (Enter the answer in dollars. Do not round intermediate calculations. Round the WACC percentage to 2 decimal places. Round the final answer to 2 decimal places. Omit $ sign in your response.) NPV $

If the company decides to move forward with its international expansion, what types of new customer categories will be created? Will the new customer constituents resemble the existing ones? Perform a hypothetical customer profitability model analysis on the new customers.

In your opinion is the US debt a problem for the United States or not? Given that monetary policy has an effect on interest rates, should monetary policy work with fiscal policy to reduce the impacts of debt? What are the pros and cons of monetary policy and fiscal policy working together? (Answer question based on the article below)

Article:

As Congress allocates trillions of dollars to support businesses and individuals impacted by the coronavirus pandemic, some project US debt skyrocketing to historical highs. This adds fuel to a long-running question: Does America’s growing debt load spell future trouble? In our view, focusing solely on the debt’s size doesn’t tell the whole story. By looking at the debt question differently, we think investors can defuse concerns about America’s allegedly ticking time bomb.

Even before the coronavirus dominated headlines, some worried about big deficits adding to America’s debt. In early May, US Treasury data show $25.1 trillion in total federal government debt outstanding. [i] While this figure includes intra-governmental holdings (i.e., money the government owes itself), even stripping this away leaves net public debt at a still-huge $19.1 trillion—nearly 2.5 times the amount on January 1, 2010. [ii]

In isolation, that big number doesn’t mean much. So to put this figure into perspective, many economists compare a country’s debt to its GDP. At the end of 2019, net public debt was 79.2% of US GDP—up from 52.3% a decade earlier and the biggest since the late 1940s. [iii] Moreover, coronavirus’ impact is almost assured to push the ratio far higher. Between Q1’s -4.8% annualized GDP decline (with worse likely in Q2) and rising debt as the government funds its coronavirus response, America’s debt-to-GDP ratio could exceed its post–World War II high of 106.1% in the not-so-distant future. [iv]

Large debt-to-GDP ratios inspire comparisons to countries like Greece, which defaulted multiple times in the past decade. But even these ratios alone don’t mean problems loom. What matters more: a country’s ability to meet interest payments. Governments don’t use GDP—an annual flow of economic activity—to meet those obligations. They use tax revenue. In fiscal year 2019, US interest payments accounted for about 10.8% of tax revenues. [v] This figure has been rising over the past 4 years, but it remains well below the 15%–18% range in effect during most of the 1980s–1990s. [vi] America had no trouble servicing its debt during these two decades. The economy boomed.

With Treasury yields historically low, many acknowledge financing debt today isn’t onerous—especially since the Treasury gets to refinance maturing debt at a cheaper rate. On May 5, 2010, the Treasury sold $24 billion in 10-year notes at a 3.51% interest rate. [vii] The Treasury effectively refinanced those at a mid-May 2020 auction of new 10-year notes. The interest rate? A far-lower 0.65%. [viii]

Which brings us to another point: Treasury bonds carry fixed rates, so rising rates don’t immediately threaten affordability. As of 12/31/2019, the weighted average maturity of US debt was nearly 70 months—higher than the 60-month historical average over the past 40 years. [ix] Hence, rates would need to rise significantly from here—and stay there for years as Treasury refinanced maturing bonds—to hit costs materially. That doesn’t seem likely today. Demand is strong, putting downward pressure on yields. With sovereign-debt yields low globally—Japan and Europe have lower rates than America—US debt remains more attractive in comparison.

Moreover, interest rates tend to move with inflation, and the latter looks unlikely to surge in the near future. Even after the spread widened between long and short rates since February’s end, the US yield curve is still around its flattest over the past 10 years. That weighs on bank lending and, relatedly, money supply growth—a key inflation component. When investors anticipate higher inflation to come, they will demand a higher premium to compensate for their loss in purchasing power. That isn’t likely to be the case with inflation benign. US debt could be on its way to making new records, but that doesn’t mean new problems will come with it.

Investing in stock markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns. International currency fluctuations may result in a higher or lower investment return. This document constitutes the general views of Fisher Investments and should not be regarded as personalized investment or tax advice or as a representation of its performance or that of its clients. No assurances are made that Fisher Investments will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts will be, as accurate as any contained herein.

The Trolley Dodgers

In 1890, the Brooklyn Trolley Dodgers professional baseball team joined the National League. Over the following years, the Dodgers would have considerable difficulty competing with the other baseball teams in the New York City area. Those teams, principal among them the New York Yankees, were much better financed and generally stocked with players of higher caliber.

After nearly seven decades of mostly frustration on and off the baseball field, the Dodgers shocked the sports world by moving to Los Angeles in 1958. Walter O’Malley, the flamboyant owner of the Dodgers, saw an opportunity to introduce professional baseball to the rapidly growing population of the West Coast. More important, O’Malley saw an opportunity to make his team more profitable. As an inducement to the Dodgers, Los Angeles County purchased a goat farm located in Chavez Ravine, an area two miles northwest of downtown Los Angeles, and gave the property to O’Malley for the site of his new baseball stadium.

Since moving to Los Angeles, the Dodgers have been the envy of the baseball world: “In everything from profit to stadium maintenance ... the Dodgers are the prototype of how a franchise should be run.”1 During the 1980s and 1990s, the Dodgers reigned as the most profitable franchise in baseball with a pretax profit margin approaching 25 percent in many years. In late 1997, Peter O’Malley, Walter O’Malley’s son and the Dodgers’ principal owner, sold the franchise for $350 million to media mogul Rupert Murdoch. A spokesman for Murdoch complimented the O’Malley family for the long-standing success of the Dodgers organization: “The O’Malleys have set a gold standard for franchise ownership.”2

During an interview before he sold the Dodgers, Peter O’Malley attributed the success of his organization to the experts he had retained in all functional areas: “I don’t have to be an expert on taxes, split-fingered fastballs, or labor relations with our ushers. That talent is all available.”3 Edward Campos, a longtime accountant for the Dodgers, was a seemingly perfect example of one of those experts in the Dodgers organization. Campos accepted an entry-level position with the Dodgers as a young man. By 1986, after almost two decades with the club, he had worked his way up the employment hierarchy to become the operations payroll chief.

After taking charge of the Dodgers’ payroll department, Campos designed and implemented a new payroll system, a system that only he fully understood. In fact, Campos controlled the system so completely that he personally filled out the weekly payroll cards for each of the Dodgers’ 400 employees. Campos was known not only for his work ethic but also for his loyalty to the club and its owners: “The Dodgers trusted him, and when he was on vacation, he even came back and did the payroll.”4

Unfortunately, the Dodgers’ trust in Campos was misplaced. Over a period of several years, Campos embezzled several hundred thousand dollars from his employer. According to court records, Campos padded the Dodgers’ payroll by adding fictitious employees to various departments in the organization. In addition, Campos routinely inflated the number of hours worked by several employees and then split the resulting overpayments 50-50 with those individuals.

The fraudulent scheme came unraveled when appendicitis struck down Campos, forcing the Dodgers’ controller to temporarily assume his responsibilities. While completing the payroll one week, the controller noticed that several employees, including ushers, security guards, and ticket salespeople, were being paid unusually large amounts. In some cases, employees earning $7 an hour received weekly paychecks approaching $2,000. Following a criminal investigation and the filing of charges against Campos and his cohorts, all the individuals involved in the payroll fraud confessed.

A state court sentenced Campos to eight years in prison and required him to make restitution of approximately $132,000 to the Dodgers. Another of the conspirators also received a prison sentence. The remaining individuals involved in the payroll scheme made restitution and were placed on probation.

Epilogue

The San Francisco Giants are easily the most heated, if not hated, rival of the Dodgers. In March 2012, a federal judge sentenced the Giants’ former payroll manager to 21 months in prison after she pleaded guilty to embezzling $2.2 million from the Giants organization. An attorney for the Giants testified that the payroll manager “wreaked havoc” on the Giants’ players, executives, and employees. The attorney said that the embezzlement “included more than 40 separate illegal transactions, including changing payroll records and stealing employees’ identities and diverting their tax payments.”5 A federal prosecutor reported that

the payroll manager used the embezzled funds to buy a luxury car, to purchase a second home in San Diego, and to travel.

When initially confronted about her embezzlement scheme, the payroll manager had “denied it completely.”6 She confessed when she was shown the proof that prosecutors had collected. During her sentencing hearing, the payroll manager pleaded with the federal judge to sentence her to five years’ probation but no jail term. She told the judge, “I cannot say how sorry that I am ... that I did this, because it’s not who I am. I have no excuse for it. There is no excuse in the world for taking something that doesn’t belong to you.”7

required:

-Describe some of the key internal controls you'd expect to find in a payroll system.

-What internal control weaknesses were evident in the Dodgers’ payroll system?

-What "red flag" was present that should have alerted management to Campos' scheme?

-Identify audit procedures that might have led to the discovery of the fraudulent scheme masterminded by Campos.

Morning Sky, Inc. (MSI), manufactures and sells computer games. The company has several product lines based on the age range of the target market. MSI sells both individual games as well as packaged sets. All games are in CD format, and some utilize accessories such as steering wheels, electronic tablets, and hand controls. To date, MSI has developed and manufactured all the CDs itself as well as the accessories and packaging for all of its products.

The gaming market has traditionally been targeted at teenagers and young adults; however, the increasing affordability of computers and the incorporation of computer activities into junior high and elementary school curriculums has led to a significant increase in sales to younger children. MSI has always included games for younger children but now wants to expand its business to capitalize on changes in the industry. The company currently has excess capacity and is investigating several possible ways to improve profitability.

MSI is considering outsourcing the production of the handheld control module used with some of its products. The company has received a bid from Monte Legend Co. (MLC) to produce 18,000 units of the module per year for $25.00 each. The following information pertains to MSI’s production of the control modules:

MSI has determined that it could eliminate all variable costs if the control modules were produced externally, but none of the fixed overhead is avoidable. At this time, MSI has no specific use in mind for the space that is currently dedicated to the control module production.

Required:
1. Compute the difference in cost between making and buying the control module.

2. Should MSI buy the modules from MLC or continue to make them?

3-a. Suppose that the MSI space currently used for the modules could be utilized by a new product line that would generate $28,000 in annual profit. Recompute the difference in cost between making and buying under this scenario.

3-b. Does this change your recommendation to MSI?

Part 1 :

Compute the difference in cost between making and buying the control module.

Part 2

Should MSI buy the modules from MLC or continue to make them?

Part 3 A :

Suppose that the MSI space currently used for the modules could be utilized by a new product line that would generate $28,000 in annual profit. Recompute the difference in cost between making and buying under this scenario.

Part 3B:

Does this change your recommendation to MSI?

1. You find a zero coupon bond with a par value of $10,000 and 17 years to maturity. If the yield to maturity on this bond is 4.2 percent, what is the price of the bond? Assume semiannual compounding periods. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

2. Union Local School District has a bond outstanding with a coupon rate of 2.8 percent paid semiannually and 16 years to maturity. The yield to maturity on this bond is 3.4 percent, and the bond has a par value of $5,000. What is the price of the bond? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Case Study #4

Becky Stevens, Judy Alcott, and Eric Wilson were talking after their pinning ceremony the night before graduation about the professional nursing careers they planned to pursue. Becky said, “Well, I am not sure exactly what I want to do, but I know that I loved our occupational health clinicals. I am not sure where I want to work, but I think I would like to do something like Debbie Strong, RN, who was our preceptor at the First National Bank. She had such an interesting job planning car seat safety programs and breast screening programs for the female employees at the bank. I will be moving back to South Carolina after graduation, so I guess I will have to wait to see what openings there are for occupational health nurses there. I wish I could find out more about the exact responsibilities most occupational health nurses have and what types of businesses usually hire such nurses.” Eric said, “Why don’t you check the Occupational Health Nurses Association website? I bet you could find lots of information there. Judy, where do you plan to work?” Judy responded, “I want to work in the same hospital where my mother and aunt worked for years. I am just not sure what I want to do though, because I am not sure what positions are available. What about you, Eric?” Eric replied, “Well, I have been thinking about flight nursing, but I bet they would want me to have some critical care experience first. I am also considering applying to a graduate program to become a nurse anesthetist, so I need to check on admission requirements.” Becky said, “I sure am glad to hear that none of you already knows where you will work. I thought that most of our class had already interviewed and had job offers.” Judy said, “I am just glad that we have a lot more options than my mother and my aunt, who graduated from nursing school 30 years ago and worked at the same hospital on the same floor for their entire careers.”

Questions

1. In what ways can new graduates investigate career options?

2. How can new graduates decide about the nursing roles they would most enjoy?

3. How should graduates view their first position in nursing?

4. How can Eric find out the admission requirements for a nurse anesthetist graduate program? A flight nursing program?

To what extent have you built your own brand? Is this something that you have ever considered before?

Networking has the potential to open doors and create possibilities for jobs and partnerships. Networking establishes connections between individuals and access to information that one might not normally have access to. Reaching out to strangers can be an intimidating and nerve-racking experience. In business, the more central you are, the more power you have. Creating connections and ties to other people affords you the opportunity for power and the ability to more closely control your future, so while at times networking might feel awkward and uncomfortable, it is a necessary and important part of establishing and maintaining a career.

Online social networking sites play an important role in this networking process for individuals both professionally and personally. With 1,200 employees in 2010, Facebook has 350 million users around the world, and LinkedIn has over 60 million members in over 200 countries. A new member joins LinkedIn every second, and about half of the members are outside the United States. These online sites have created new opportunities for networking and allow individuals to branch out beyond their normal world of industry, school, and business. The key is to avoid costly missteps as employers have begun to search online for information about prospective and current employees. In 2009, 8% of companies reported that they had fired an employee for misuse of social media.

Many of these online sites have become a tool for business. For example, LinkedIn targets working professionals and provides them a way to maintain lists of business connections and to use those connections to gain introduction to people using mutual contacts. Unlike other social networking sites, LinkedIn is almost entirely used by professionals. The power of social networking flows in both directions. Employers can screen applicants through their online accounts and recruiters more than ever are using these sites to view background information, individual skill sets, and employment history, which can be cross-referenced with submitted applications. Job seekers can review the profiles of those at top management firms and search for mutual contacts. LinkedIn also provides statistics about firms, which can be useful information for individuals looking at potential employers.

Networking is about building your brand and managing relationships. Using social networks as a vehicle to market one’s self and make professional connections is becoming increasingly common, as well as using loose ties or connections through others to open doors and land jobs. In an increasingly high-tech and digital world, it is important to be aware and conscience of the digital footprint that we create. But with careful cultivation these online networks can present many opportunities.

The Task: Your job is to act as an advertising agency and develop a 30 or 60-second radio ad. You are the creative team, the copywriter, and the producer! On page 358 of the book, you will find an example of what a script for a radio ad looks like. Follow that script for an outline, being sure to include the name of your client, agency, length of the commercial, etc. As far as sound effects go, assume you would have access to any you would need. For your information, SFX stands for sound effects; V/O for voice-over; and AVO for announcer voice-over. Include a script, written in good form, of the commercial.

Also, include an explanation of your rationale for creating the ad. Use the following ad review questions to get you started. Your rationale should be no less than one (1) page. This is mandatory and worth 5 points!

• Inform vs persuade vs to remind?
• Narrative vs autobiography vs drama?
• B2B vs B2C.
• Who is the ad aimed at?
• What do you think the objective of the ad is?
• Do you think it will be effective?
• Target market? Placement? Duration?
• Use of colors, music, pictures etc.

Remember, you are an agency trying to get hired, so "sell" your work and ideas!

The Client: You should choose one of the clients below to work for. The information contained about them is for some background. You may choose to utilize some, all, or none of the information for your commercial. You make all of the decisions, but remember, you’re commercial must pass your clients approval and the only way it will is if they believe it will satisfy their objectives.

Client #1 – Partnership for a Drug-Free America -- This organization is looking for an anti-drug commercial to run on pop-music stations. They are targeting the ages from 12 to 28. They are particularly concerned that the use of the drug “Ecstasy” is rising. They are a non-profit organization and have a low budget.

Client #2 – Anyone Ford -- This group is a long-time retailer of new and used Ford automobiles in the Wichita area. Their commercials in recent years have been “over-the-top” and tried to attract attention as well as lure people into their location, regardless of income level. They are open Monday through Saturday, from 8:00 a.m. to 10:00 p.m. and are located at 7700 E. Kellogg in Wichita.

Client #3 – Snooty Furniture, Inc. -- This company is new to the Wichita area. They specialize in very expensive, custom made furniture. They are located at 2450 N. Rock Rd in Wichita and cater to the highest income levels. They are open from 9:00 a.m. to 4:00 p.m. Tuesday through Thursday.

Client #4 – Butler Community College -They are looking to increase enrollment and increase the reputation of the school. More info can be found at www.butlercc.eduLinks to an external site.

Remember two important things: 1) your client and 2) your audience.