Nina's Fashions, Inc., operates a chain of retail clothing stores in Michigan, Wisconsin, and Illinois. The company has been in business since 1953, and until about 15 years ago, all of its stores were in older, downtown locations. However, in the late 1970s, the chain opened its first suburban store which differed significantly from the older stores. The new store was much larger, stocking many more items than the old stores. Many new stores followed, which were primarily located in shopping malls and shopping centers.

The new stores were a resounding success, and over the past ten years, Nina's has been aggressively selling its older locations and opening suburban stores. The downtown areas in many of Nina's locations have been revitalized and are now filled with high-rise office buildings and upscale retail outlets, so downtown property values have skyrocketed. Thus, the sale of its old store properties resulted in large cash inflows to Nina's. Since the company's strategic plans call for it to lease the new suburban stores rather than to purchase them, the firm now has a "war chest" of excess cash.

Many alternative uses have been discussed for the excess cash, ranging from repurchases of stock or debt to higher dividend payments. However, management has decided to use the cash to make one or more acquisitions, since they believe an expansion would contribute the most to stockholders' wealth. One of the acquisition candidates is Chic, a chain of eleven stores which operates in northern Illinois. The issues now facing the company are (1) how to approach Chic's management and (2) how much to offer for Chic's stock.

Executives at Nina's are good at running retail clothing stores, but they are not finance experts and have no experience with acquisitions. Bob Sharpe, the treasurer, has an accounting background, but he did attend a three-day workshop on mergers at Harvard University last year specifically to learn something about the subject. Nina's had no acquisition plans at that time; Sharpe just felt that it would be useful to become familiar with the subject.

Table 1 contains some basic data that Sharpe developed relating to the cash flows Nina's could expect if it acquired Chic. The interest expense listed in the table includes (1) the interest on Chic's existing debt, (2) the interest on new debt that Nina's would issue to help finance the acquisition, and (3) the interest on new debt that Nina's would issue over time to help finance expansion within the new division. The required retentions shown in Table 1 represent earnings generated within Chic that would be earmarked for reinvestment within the acquired company to help finance growth. Note too that all the estimates in Table 1 are the incremental flows Chic is expected to produce and to make available to Nina's if it is acquired. Although specific estimates were only made for 2018 through 2021, the acquired company would be expected to grow at a 5 percent rate in 2022 and beyond.

Table 1

Incremental Cash Flows to Nina’s if Chic is Acquired

Chic currently finances with 30 percent debt; it pays taxes at a 20 percent federal-plus-state tax rate; and its beta is 1.3. If the acquisition takes place, Nina's would increase Chic's debt ratio to 60 percent, and consolidation, coupled with expected earnings improvements, would move Chic's federal-plus-state tax rate up to that of Nina's, 25 percent.

One part of the analysis involves determining a discount rate to apply to the estimated cash flows. Bob Sharpe remembers from the Harvard workshop that Professor Robert Hamada had developed some equations that can be used to unlever and then relever betas, and Sharpe believes that these equations may be helpful in the analysis:

Formula to unlever beta: bu= bL/ 1+(1-T)(D/s)

Formula to relever beta: bL= bu[1+(1-T)(D/s)]   

Here, b_U is the beta that Chic would have if it used no debt financing, T is the applicable corporate tax rate, and D/S is the applicable market value debt-to-equity ratio. Sharpe notes that the T-bond rate is 6 percent, and a call to the company's investment bankers produced an estimate of 11 percent market return.

Assume that you were recently hired as Bob Sharpe's assistant, and he has asked you to answer some basic questions about mergers as well as to do some calculations pertaining to the proposed Chic acquisition. Then, you and Sharpe will meet with the board of directors, and it will decide whether or not to proceed with the acquisition, how to start the negotiations, and the maximum price to offer. As you go through the questions, recognize that either Sharpe or anyone on the board could ask you follow-up questions, so you should thoroughly understand the implications of each question and answer. Your predecessor was fired for "being too mechanical and superficial," and you don't want to suffer the same fate.

Current amount of debt financing for Chic is $3,214,300 and no non-operating assets.

Questions

1.         Use the data contained in Table 1 to construct Chic's free cash flow and tax shields for 2018 through 2021. (Use APV method to value Chic)

2.         Conceptually, what is the appropriate discount rate to apply to the cash flows developed in question 2?

3.         What is the terminal value of Chic using both Free cash flows and tax shield; that is, what is the 2021 value of these cash flows that Chic is expected to generate beyond 2021? What is Chic's value to Nina's shareholders?

4.         Chic has 5 million shares of common stock outstanding. The shares are traded infrequently and in small blocks, but the last trade, of 500 shares, was at a price of $1.50 per share. Based on this information, and on your answers to Questions 1-3, what is the maximum price per share that should Nina's offer for Chic?

Chapter 5 Case

You are the Chief Financial Officer (CFO) for Zen Distributors Inc., a media broker that secure shelf space in independent bookstores for small publishing companies. As a member of the company’s executive team, you are preparing the operating budget for the fourth quarter of 2020. Your intent is to summarize the budget for team members and provide them with detailed schedules that support your overview.  

Zen’s general ledger provides you with current account data on September 30, 2020 (the end of the third quarter) of operations:

Jack Closer, Vice President of Sales, estimated that sales should increase slightly from their fourth quarter levels of the previous year. Per your request, he forwarded his monthly fourth quarter sales estimates to you, along with the current month’s actual sales and his forecast for January 2021.

You next met with Mary Balance, Zen’s Controller. Ms. Balance informed you that the company prices its products to ensure a 25% gross profit margin on sales. Zen has met that margin throughout the first three quarters of 2020, and she was confident that the firm would meet this target margin in the near term. Mary also told you that, on average, 60% of Zen’s customer pay in cash. Those customers receive a one percent discount on the invoice price.

The remaining 40% of the customers pay on account. Credit sales terms are n/2EOM. This means credit customers must pay the full invoice price by the end of the month following the month in which they purchased merchandise. Mary explained, “Our customers are pretty sophisticated, and they constantly manage their cash flows--just as we do. Consequently, if we make a credit sale in October, they will pay us by the end of November.” Finally, Mary said, “We screen our customers very carefully before extending them credit. Our customers pay what they owe us. We don’t have any bad debts, and we don’t expect any in the future.”  

Mary also provided you with third quarter monthly expense data to assist in constructing your budget. The next table presents that information:

She concluded that, “As you know, we pay our operating expenses in the month we accrue them.”

               Procurement officer Jim Washburn managed inventory so that its ending balance equaled 80% of the next month’s cost of goods sold. Washburn said, “We can construct monthly purchase budgets as follows: add desired ending inventory to cost of goods sold, which are 75% of sales, to determine required inventory for a month. Then we subtract that month’s beginning inventory to determine required purchases for the month.” Washburn also stated that the accounts payable clerk pays one-half of each month’s inventory cost in the month of acquisition, and the remaining 50% in the following month.

               Ashleigh McNamara, head of capital expenditures, informed you that Zen will make a cash purchase of $1,500 worth of hand-held scanning devices in early October. McNamara said “We will use operating cash to pay for the scanners because they are an inexpensive capital acquisition.” Per corporate policy, the firm will depreciate this equipment over thirty months on a straight-line basis. Ashleigh added, “They’ll be useless at the end of that time, so we will scrap them.”    

               In your role as CFO, you insist that Zen maintain an ending monthly cash balance of $4,000 to maintain financial flexibility. The company has an open line of credit with its banking partner to ensure that it can meet its cash balance goal. This agreement mandates a 12% annual interest rate for all short-term borrowings. Financing must take place at the beginning of the month in thousand dollar multiples. Repayments of borrowing must also occur in thousand dollar increments, and the bank only accepts interest payments when Zen repays principal.    

Required:

Compose a memorandum to Zen’s management team that highlights the key aspects of the 2020 fourth quarter operating budget. Supplement your summary with budgetary schedules and attach them to the executive summary. The budgetary flow that you select is as follows:

• Cash collections

• Inventory purchases

• Cash disbursements for purchases

• Cash disbursements for operating expenses

• Short-term financing budget (collections, disbursements, and financing)

You construct each of the above budgets on a monthly and quarterly basis.

               Finally, you conclude your budgets with projected (pro-forma) monthly and quarterly income statements and a pro-forma balance sheet on December 31. The company has a zero percent income tax rate, due to previous tax losses.  

Condensed balance sheet and income statement data for Swifty Corporation appear below:

Additional information:

1) Compute the following ratios for 2020 and 2021. (Round asset turnover, earnings per share and price earning ratio answers to 2 decimal places, e.g. 1.83 or 1.83% and all other answers to 1 decimal place e.g. 1.5%.)

2)

Based on the ratios calculated, indicate the improvement or lack thereof in Swifty Corporation’s financial position and operating results from 2020 to 2021.

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Current Attempt in Progress

Condensed balance sheet and income statement data for Swifty Corporation appear below:

Additional information:

Compute the following ratios for 2020 and 2021. (Round asset turnover, earnings per share and price earning ratio answers to 2 decimal places, e.g. 1.83 or 1.83% and all other answers to 1 decimal place e.g. 1.5%.)

Wall Street Journal

- July 11, 2011

By

ALEXANDRA BERZON

"Red Carpet for the Chinese - Hotels Add Menu Items, Translators, Other Services for

Growing Travel Segment"

The traditional Chinese rice porridge, called congee, will soon become a staple of hotel

breakfast buffets in America and abroad as U.S.-based hotel chains compete for

growing numbers of Chinese travelers.

The Chinese dish is part of a set of broader initiatives to attract Chinese travelers at

hotel giants Hilton Worldwide Inc. and

Starwood Hotels & Resorts Worldwide

. This summer, both hotel companies are rolling out hospitality standards centered on items

that cater to Chinese guests in hotels across the world

Congee breakfast is among the Chinese-style

amenities at the Hilton in San Francisco's

financial district.

Starwood plans to announce a program

Monday called "Starwood Personalized

Travel," which will require the company's

1,051 hotels—including the Sheraton, Westin

and W chains—to offer a set of specific

services for Chinese travelers, including in-room tea kettles, slippers and translation

services, in addition to new menu items.

The program will start at 19 hotels in cities such as New York, London, Mexico City,

Seoul and San Francisco, where Chinese business is rapidly growing. The program will

cover all Starwood hotels by the end of next year, the company said.

Hilton on Monday plans to announce a program for its Hilton Hotels & Resorts brand

called "Hilton Huanying"—from the Chinese word for "welcome." Hilton hotels can opt

into the program. Those that do—30 so far—must provide a front desk worker fluent in

Mandarin and a Chinese television station, as well as a full Chinese breakfast including

dim sum, congee and fried dough fritters, among other items. It will begin in August.

"Chinese travel is going to provide one of the great opportunities that we'll ever see in

the business," said Hilton Chief Executive Chris Nassetta.

Marriott International

Inc., meanwhile, is planning a new Chinese breakfast program in

the U.S. this fall that will include information for hotels on how to create a Chinese

breakfast.

Chinese foreign travel is still a small segment of overall global travel. But these moves

by hotel companies signal the growing importance that Chinese travelers are expected

to have in the coming years for the travel industry. They reflect both the leap in China's

economy and the loosening of restrictions on travel since as recently as a decade ago,

when Chinese were not allowed by their government to visit most countries.

"Outbound travel from Chinese is the next wave," said Starwood CEO

Frits van

Paasschen

.

The changes in part follow a script from the 1980s. As Japan's economy boomed, hotels

in many cities in the U.S. and around the world added Japanese breakfast items such

as rice, dried seaweed, pickled vegetables and miso soup to their menus.

The Starwood and Hilton Chinese programs are more formal and reach across their

portfolio of hotels. Attracting the new travelers is also urgent priority as growth in travel

dollars from many markets softens.

Global hotel brands have seen significant pick-up this year following deep declines

during the downturn. However the boost has been far greater in Asia than other regions,

reflecting in large part the growth of travel among Chinese.

In the first quarter of 2011, for example, Marriott saw revenue per available room in Asia

increase 17.2% compared to 5.8% in North America.

According to the U.S. Travel Association, 802,000 mainland Chinese residents visited

the U.S. in 2010, a 53% increase over the prior year. In 2005 just 270,000 Chinese

people visited the U.S. The Department of Commerce expects those numbers to reach

994,000 in 2011. The U.S. received $5 billion from Chinese visitors, according to the

Association, a 40% increase over 2009.

Japanese visitation in 2010 was much larger—around 3.1 million. Yet the trends are

divergent. From 2006 through 2009 travel from Japan declined each year, finally in

2009 reaching the lowest point since 1988, according to the Travel Association.

After Starwood executives noticed an enormous recent jump in the number of Chinese

subscribing to Starwood's loyalty program, a team led by Matt Gaghen, Starwood's vice

president of brand management, spent the last year researching the Chinese market

and discovered that language and food were two of the most important issues for

Chinese travelers.

As such, all Starwood hotels are to beginning efforts to hire at least one person on staff

who speaks a Chinese language. Chinese guests will receive a note from the general

manager translated into Chinese that offers the amenities available to them, such as tea

kettles, razors, toothbrushes and combs.

Since Starwood generally doesn't own hotels but sets standards for them, the changes

could mean a cost increase for hotel owners in some places that don't yet see many

Chinese travelers.

"We're planning and investing in this to get ahead and to appeal to Chinese at the

outset," Mr. Gaghen said.

Questions

25 possible points, 5 points per question.

1.

What services are hotel chains adding to cater to Chinese travelers? Identify 2-3

services that you can think of that are not mentioned in the article.

2.

What types of marketing research would you recommend to hotel chains to better

understand the services that Chinese travelers will want and expect?

3.

Besides hotels, what other firms could benefit from the increase in Chinese

travelers, and how should they tailor their services for this market?

4.

If your future employer is a firm that targets Chinese consumers, what skills and

experience will you need to contribute to your employer's efforts?

5.

Which aspect(s) of the business environment (economic, technological,

sociocultural, political/legal) are being affected the most in this article? Provide

specific examples.

A) What will happen to the inflation and unemployment by connecting the AD-AS model to the Short Run Phillips Curve?

B) Suppose this continues until 2020. Consider what the economy will be like in 2020. Elaborate on what impacts this economic state will have on ability to make interest payments.

conditions for a perfect futures contract hedge. To illustrate the hedge, use an abattoir (consumer) who is required to purchase 20,000 kg of live cattle in December 2020.

Futures contract on live cattle:

Contract size: 10,000 Kg

Contract maturity: Dec. 2020

on April 5, 2019 janeen camoct took out an 10.5% loan for $32,000 the loan is due March 9, 2020. use ordinary interest to calculate interest.

what total amount will janeen pay on March 9, 2020? (ignore leap year)

Barry Yellen, CPA, is a sole practitioner. The largest audit client in his office is Rooster Sportswear. Rooster is a privately owned company in Chicken Heights, Idaho, with a 12-person board of directors. Barry is in the process of auditing Rooster's financial statements for the year ended December 31, 2019. He just discovered a related-party transaction that has him worried. For one thing, the relationship has existed for the past two years, but Barry did not discover it. What's just as troubling is that the client hid it from him. Rooster bought out Hen Sportswear two years ago but still operates it as a separate entity, and since then has systematically failed to disclose to the private investors related-party transactions involving the CEO of Rooster, Frank Footer. It seems that Footer is borrowing money from Hen and is deeply in debt to the CEO of that company, who is his brother-in-law. Also, Hen has hired relatives of Footer, most of whom are unqualified for their jobs, and pays them an above-market salary. This has been hidden from Barry as well. Barry was informed by an anonymous tipster that Rooster operates a secret off-balance-sheet cash account to pay for cash bonuses to senior officers, travel and entertainment expenses, an apartment rental for Footer, and cash and noncash gifts to local government officials to "grease the wheels" when permits need to be expedited in favor of Rooster. Barry doesn't know what to make of it, because he is too focused right now on the related-party transactions with Hen Sportswear. Barry is in the process of questioning Hans Burger, CPA, who is the CFO of Rooster, about these transactions. Burger explains that he had raised these issues with Footer but was instructed in no uncertain terms to leave them alone. He did just that. Burger told Barry he needed this job and wouldn't jeopardize it out of a sense of "ethics." Barry is in his office back at the firm and reflecting on how best to handle this matter.

Questions

2. What are related-party transactions? Why are related-party transactions a particularly sensitive area? What do you think Barry should do with respect to audit obligations for these transactions?

Part 1: Using the company profile below, identify TWO material misstatement risks- either at the entity-level (i.e. risk of material misstatement at the overall financial statement level) or account assertion level. For each account or entity-level risk identified, briefly describe why it qualifies as risky.

Part 2: Using the comparative financial information given in the next tab, identify THREE specific account-related misstatement risks. For each risk, briefly describe why it qualifies as a risk and the related accounts and assertions that potentially may be violated.

Company Profile: Your audit firm has been engaged to issue an opinion on the financial statements of CNX Corporation which sells and leases office equipment. Initially, CNX focused on selling and leasing copiers but CNX is finding that its customers, as is the general trend, are becoming increasingly paperless and adopting cloud computing as opposed to maintaining their own servers. This change in the business environment has hurt CNX’s sales of copiers, printers, and computer servers, and CNX is feeling the need to shift to selling cloud computing solutions on a subscription basis to better serve its customers. CNX's revenue has been declining over the past 3 years, but this was the first year that CNX experienced a net loss. In response, the CEO Darren Paul, issued a press release stating, “Our repositioning will necessarily require some additional expenses in the initial years, but we are confident that it will set the stage for CNX to exploit the explosive growth in cloud computing solutions." CNX benefits from its long established relationships with its exisiting customers, giving it an advantage over other companies in the same industry; however, cloud-based software companies are increasingly establishing their own sales forces to sell directly to customers. CNX has a reputation for being a good corporate citizen, and the CEO and CFO serve on the boards of major charities. CNX has had the same accounting team in place for the past ten years and has lower than average employee turnover throughout its ranks. This is your firm's eighth audit of CNX. There have been no disagreements over accounting issues in any of the previous audits.