Grouper Inc. acquired 10% of the outstanding common shares of Gregson Inc. on December 31, 2016. The purchase price was $904,000 for 45,200 shares, and is equal to 10% of Gregson’s carrying amount. Gregson declared and paid a $0.80 per share cash dividend on June 15 and again on December 15, 2017. Gregson reported net income of $516,000 for 2017. The fair value of Gregson’s shares was $24 per share at December 31, 2017. Grouper is a public company and applies IFRS.

Required: a) Prepare the journal entries for Grouper for 2016 and 2017, assuming that Grouper cannot exercise significant influence over Gregson. The investment is accounted for using the FV-OCI model.

b) Prepare the journal entries for Grouper for 2016 and 2017, assuming that Grouper can exercise significant influence over Gregson.

Warren Corporation acquires a used machine (five-year property) on December 28, 2017, at a cost of $250,000. Henry Corporation also acquires another used machine (seven-year property) on January 19, 2017, at a cost of $75,000. The company does not make the § 179 elections.

a. Determine the depreciation deduction for these assets in 2017.   

b. Determine the depreciation deduction under H.R. 1 assuming these assets were placed in service on the same dates in 2018.

c. Warren Corporation also purchases Microsoft Office from Microsoft for use in its business as of January 1 of the current year at a cost of $30,000. No hardware was acquired. How much of the cost can Warren Corporation deduct this year?

d. Complete Form 4562 for Warren Corporation to report the depreciation and amortization for questions a. and c above.

Ethical Dilemma: For generations, the policy of Sears Roebuck and Company, the granddaddy of retailers, was not to purchase more than 50% of any of its suppliers' output. The rationale of this policy was that it allowed Sears to move to other suppliers, as the market dictated, without destroying the suppliers' ability to stay in business. In contrast, Walmart purchases more and more of a supplier's output. Eventually, Walmart can be expected to sit down with that supplier and explain why the supplier no longer needs a sales force and that the supplier should eliminate the sales force, passing the cost savings onto Walmart. Sears is losing market share, has been acquired by K-Mart, and is eliminating jobs; Walmart is gaining market share and hiring. What are the ethical issues involved, and which firm has a more ethical position?

Amazon, originally, was an online book seller, started in a garage in a Seattle suburb. Then they entered strategic alliances to expand products offered. Amazon now sells 50 times the number of items sold by Walmart and they even established country-specific sites such as UK, China, France, India, Japan, and Germany. Amazon is a widely diversified technology company, having products and services in the areas of music, movies, and TV shows. They also acquired Whole Foods Market in 2017, allowing them to compete with Walmart and other grocery stores. Also, Amazon is the largest cloud computing service provider globally. Amazon now continues to grow and be innovative.”

Based on what we learned, what is Amazon’s core business? What is their main corporate strategy? Please based your answer on the concepts we learned and justify why that is.

In our textbook, we learn that Disney has acquired several companies throughout the years including Marvel for $4 billion in 2009. One main advantage that this acquisition allowed Disney to do is increase the differentiation in their product offerings. They were able to add and entire line of superheroes to the Disney character family, which also allowed to add Marvel character theme park rides, toys, and other merchandise. Not only did this benefit Disney, but the acquisition also added value to Marvel. "Because of economies of scope and economies of scale, Marvel is becoming more valuable inside Disney than as a standalone enterprise" (Rothaermel).

Our question for you is, besides being able to increase their product offerings, what other benefits do you think this acquisition brought to Disney as a company?

Read this article and answer questions at the bottom.

The Rise of the Jumbo Student Loan

Most students with loan balances exceeding $50,000 in 2010 had failed to pay down any debtfour years late

During the housing boom of the 2000s, jumbo mortgages with very large balances became a flashpoint for a brewing crisis. Now, researchers are zeroing in on a related crack but in the student debt market: very large student loans with balances exceeding $50,000. A study released Friday by the Brookings Institution finds that most borrowers who left school owing at least $50,000 in student loans in 2010 had failed to pay down any of their debt four years later. Instead, their balances had on average risen by 5% as interest accrued on their debt. As of 2014 there were about 5 million borrowers with such large loan balances, out of 40 million Americans total with student debt. Large-balance borrowers represented 17% of student borrowers leaving college or grad school in 2014, up from 2% of all borrowers in 1990 after adjusting for inflation. Large-balance borrowers now owe 58% of the nation’s $1.4 trillion in outstanding student debt. “This is comparable to mortgage lending, where a subset of high-income borrowers hold the majority of outstanding balances,” write Adam Looney of Brookings and Constantine Yannelis of New York University. “A relatively small share of borrowers accounts for the majority of outstanding student-loan dollars, so the outcomes of this small group of individuals has outsized implications for the loan system and for taxpayers,” the authors say. The problem is particularly acute among borrowers from graduate schools, who don’t face the kinds of federal loan limits faced by undergraduate students. Half of today’s big balance borrowers attended graduate school. The other half went to college only or are parents who helped pay for their children’s education. Grad school borrowers tend to be among the best at paying off student debt because they typically earn more than those with lesser degrees. But the rising balances unearthed in the latest study suggest that pattern might be changing. Overall across the U.S., one-third of borrowers who left grad school in 2009 hadn’t paid down any of their debt after five years, compared to just over half of undergraduate students who hadn’t, federal data show. Mr. Yannelis and Mr. Looney, a former Treasury Department official under President Barack Obama, built the research out of exclusive access to federal student-loan and tax data. The findings on graduate schools are particularly noteworthy because the government offers little information on the loan performance of grad students, who account for about 14% of students at universities but nearly 40% of the $1.4 trillion in outstanding student debt. The data set accompanying the new study breaks down performance for students at 934 schools with 100 or more graduate borrowers whose loans first came due in 2009. At Nova Southeastern University , a large private nonprofit school in South Florida, just over half of the 10,319 graduate borrowers who departed in 2009 had reduced their balances by just a dollar or more five years later, the data show. Many sought or received advanced degrees in health fields. They collectively borrowed $412 million for grad school, or an average $40,000, excluding any debt from other schools, the study showed. George Hanbury, Nova Southeastern’s president, said many of the school’s former grad students went into health fields, where salaries often start low and then rise quickly later on. “They all have the capability to see higher incomes the longer they stay in their career, which means they have the greater capability to increase their rate of payback than they do in the earlier stage,” Mr. Hanbury said. He said the school’s former students earn more, on average, than workers with bachelor’s degrees. At Arizona State, a large public university in Tempe, 51% of the 4,000 grad students who left in 2009 had reduced their initial balances by 2014. Arizona State, through a spokesman, declined to comment. At Walden University, a large collection of graduate programs run by Wall Street giant Laureate Education Inc., 53% of 9,530 graduate borrowers paid down their balances by at least a dollar or more over five years. Many were enrolled in programs involving social services. Walden, in a statement emailed by a spokeswoman, said many former graduate students are in fields that often pay modestly at first but serve a social good. “This is consistent with our social mission where we are educating in professions like teaching, social work, and counseling, for example, and those professionals may not earn significant salaries right after graduation, but who are making a significant societal impact,” the statement said. Most borrowers from those schools aren’t in default. Instead, a big share of them are in debtrelief plans that lower monthly payments, known as income-driven repayment, or they’ve won permission from the government to postpone payments due to a range of circumstances, including unemployment or further study.

Questions

On June 30, 2020, Crane Limited issued $6 million of 20-year, 14% bonds for $6,902,766, which provides a yield of 12%. The company uses the effective interest method to amortize any bond premium or discount. The bonds pay semi-annual interest on June 30 and December 31.

Prepare the journal entries to record the following transactions: (Round answers to 0 decimal places, e.g. 5,275. Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

eTextbook and Media

List of Accounts

Show the proper presentation for the liability for bonds payable on the December 31, 2020 SFP. (Round answer to 0 decimal places, e.g. 5,275.)

ToysRGreat ($-based, located in Las Vegas) is completing a new assembly plant outside of Berlin, Germany. ToysRGreat expects to pay the final construction payment of amount of € 1,000,000 in three months. The current bid-ask quotes for the spot exchange rate are €0.5682-0.5714/$. The quotes for the three-month forward are € 0.5495-0.5525/$. Three-month Germany and U.S. interest rates are respectively 2.1-2.0% and 3.0-2.9% per annum, compounded quarterly. Note that the borrowing and lending rates (in that order) are presented for each currency. Three months later the $ is quoted at € 0.5236-0.5263 /$.

Using the above information to answer Problems # 1, # 2 and #3 ( PLEASE SHOW ALL WORK)

1 . If ToysRGreat uses forward hedge, how much has the forward market hedge costed (benefited) the company?

2 . If ToysRGreat uses money market hedge, how much has the MMH costed (benefited) the company?

3 . Which hedge is a better choice for the company today and why?

PLEASE SHOW ALL WORK

Mini Case Ch. 11

Shrieves Casting Company is considering adding a new line to its product mix, and the capital budgeting analysis is being conducted by Sidney Johnson, a recently graduated MBA. The production line would be set up in unused space in Shrieves’s main plant. The machinery’s invoice price would be approximately $200,000, another $10,000 in shipping charges would be required, and it would cost an additional $30,000 to install the equipment. The machinery has an economic life of 4 years, and Shrieves has obtained a special tax ruling that places the equipment in the MACRS 3-year class. The machinery is expected to have a salvage value of $25,000 after 4 years of use.

The new line would generate incremental sales of 1,250 units per year for 4 years at an incremental cost of $100 per unit in the first year, excluding depreciation. Each unit can be sold for $200 in the first year. The sales price and cost are both expected to increase by 3 percent per year due to inflation.

Further, to handle the new line, the firm’s net operating working capital would have to increase by an amount equal to 12 percent of sales revenues. The firm’s tax rate is 25 percent, and its overall weighted average cost of capital, which is the risk-adjusted cost of capital for an average project r, is 10%.

D. calculate annual net operating profit after sales (NOPAT). Then calculate the operating cash flow.

Assume you have just been hired as business manager of PizzaPalace, a pizza restaurant located adjacent to campus. The company's EBIT was $500,000 last year, and since the university's enrollment is capped, EBIT is expected to remain constant over time. Since no expansion capital will be required, PizzaPalace plans to pay out all earnings as dividends. The management group owns about 50% of the stock, and the stock is traded in the OTC market. The firm is currently financed with all equity; it has 100,000 shares outstanding; and P0 = $25 per share. When you took your MBA Financial Analysis course, your instructor stated that most firms' owners would be financially better off if the firms used some debt. When you suggested this to your new boss, he encouraged you to pursue the idea. As a first step, assume that you obtained from the firm's investment banker the following estimated costs of debt for the firm at different capital structures: % Debt Ratio rd 0% --- 20 8.0% 30 8.5 40 9.0 50 9.5 If the company were to recapitalize, debt would be issued, and the funds received would be used to repurchase stock. PizzaPalace is in the 40% state-plus-federal corporate tax bracket, its beta is 1.0 when debt ratio is 0%, the risk-free rate is 6%, and the market risk premium is 6%.

a. For each capital structure under consideration, calculate the WACC.

b. Now calculate the corporate value, the value of the debt that will be issued, and the resulting market value of equity.