ACTG 4650

Assignment 7

Due April 16

Answer the questions associated with each of the following scenarios.  The companies in each scenario are publicly traded, have a calendar year and entered into the agreements in 2018.

1.         Company A entered into a two-year contract with a customer to maintain the    customer’s fleet of delivery vehicles.  Company A receives payments from the            customer at regularly scheduled intervals during the contract and provides             monthly maintenance services needed to keep the vehicles in working order.       How should Company A recognize revenue on this contract? What is the         justification for your answer?

2.         Company B enters into a contract to manufacture equipment for a customer.  The equipment is manufactured at Company B’s plant and is under Company B’s control while it is being built.  The customer makes a 20% deposit at the inception of the contract.  Periodic payments from the customer over the life of the contract equal an additional 30% of the contract price.  The remaining 50% of the contract price is due upon   delivery of the equipment. Company B expects the customer to make all required payments. If the customer terminates the contract, Company B is entitled to keep all amounts received but has no claim for further payments.   How should Company B recognize revenue on this contract? What is the justification for your answer?

3.         Company C enters into a contract to build a building for a customer.  The             contract price is $3,000,000 and contains incentive bonuses of $25,000 for    eachweek the building is completed prior to the target date for completion.  There      are also $25,000 penalties for each week work goes on beyond the target date.     The customer is a governmental entity which is required to get all new buildings            inspected prior to taking possession. The contract contains a $50,000 bonus if the             building passes the initial inspection.  Explain how Company C should determine     the transaction price associated with this contract.

4.         Company D enters into a contract with a customer to sell Products W, Z, Y, and Z             for a price of $150,000.  None of these products are sold together in smaller        bundles. Company D regularly sells product W for $40,000 and Product X for          $50,000.  Company D is aware that other companies sell Product Y for $20,000.         Product Z is a new product and there are no other companies selling this          product.  Company D knows that Product Z costs them $40,000 to produce and their normal markup on other similar products is 25% of cost.  How should           Company D allocate the transaction price to the performance obligations of this      contract? What is thejustification for your answer?

After reviewing the case for Nature Bros. Ltd., answer the following questions. After reviewing this material, make a list of additional information which should be supplied to support the sales projections. Comment on objectives: Are they reasonable, optimistic, or conservative? What marketing mix would best support this growth rate? Evaluate the information supplied regarding a new product development and physical assets in light of the pro forma income statements Morris developed. Is the capital sought appropriate for the circumstances? If more information is needed, state what it is and how it could be obtained. What sources should Morris approach for this amount of capital? Based on the current balance sheet, how much equity should he give up for the investment?

NATURE BROS. LTD. BACKGROUND Thanksgiving Day 1993 is the day that Dale Morris remembers as the “public debut” of his creation, a new seasoned salt mix. Although he was a salesman by temperament and career, his hobby was cooking. Having experimented with both traditional home cooking and more exotic gourmet cooking, Morris had developed an appreciation for many herbs and spices. He had also done a lot of reading about the health hazards of the typical American diet. When his mother learned that she had high blood pressure, Morris decided it was time for some action. He created a low-salt seasoning mix, based on a nutritive yeast extract, that could be used to replace salt in most cases. This Thanksgiving dinner, prepared for 25 family members and friends, would be his final testing ground. He used his mix in all the recipes except the pumpkin pie—everything from the turkey and dressing to the vegetables and even the rolls. As the meal progressed, the verdict was unanimously in favor of his secret ingredient, although he had a hard time convincing them that it was his invention and was only 10 percent salt. Everyone wanted a sample to try at home. Over the next two years, Morris perfected his product. Experiments in new uses led to “tasting parties” for friends and neighbors, and the holiday season found the Morris kitchen transformed into a miniature assembly line producing gift-wrapped bottles of the mix. Morris became something of a celebrity in his small town, but it wasn’t until the Ladies’ Mission Society at his church approached him with the idea of allowing them to sell his mix as a fund-raiser that he realized the possibilities of his creation. His kitchen-scale operation could support the sales effort of the church women for a short time, but if he wanted to take advantage of a truly marketable product, he would have to make other arrangements. Morris agreed to “test-market” his product through the church group while he looked for ways to expand and commercialize his operation. The charity sale was a huge success (the best the women had ever experienced), and, based on this success, Morris moved to create his own company. Naming his product “Nature Bros. Old Fashioned Seasoning,” he incorporated the company in 1995 as Nature Bros. Ltd. Morris used most of his savings to develop and register the trademarks, for packaging, and for product displays. He researched the cost of manufacturing and bottling his product in large quantities and concluded that he just didn’t have the cash to get started. His first attempts to raise money, in the form of a personal bank loan, were unsuccessful, and he was forced to abandon the project. For several years, he concentrated on his career, becoming a regional vice president of the insurance company he worked for. He continued to make “Nature Bros. Seasoning” in small batches, mainly for his mother and business associates. These users eventually enabled Morris to get financial support for his company. To raise $65,000 to lease manufacturing equipment and building space, he sold stock to his mother and to two other regional vice presidents of the insurance company. For their contributions, each became the owner of 15 percent of Nature Bros. Ltd. The process of getting the product to the retail market began in August 2002, and the first grocery store sales started in March 2003. The initial marketing plan was fairly simple—to get the product in the hands of the consumer. Morris personally visited the managers of individual supermarkets, both chains and independents, and convinced many to allow a tasting demonstration booth to be set up in their stores. These demonstrations proved as popular as the first Thanksgiving dinner trial nearly 10 years earlier. Dale Morris’s product was a hit, and in a short time, he was able to contract with food brokerage firms to place his product in stores in a 10-state region.

PRESENT SITUATION As indicated in the balance sheet (see Exhibit 1), more capital is needed to support the current markets and expand both markets and products. Two new products are being developed: a salt-free version of the original product and an MSG-based flavor enhancer that will compete with Accent. Morris worked with a business consultant in drawing up a business plan to describe his company, its future growth, and its capital needs. OVERALL PROJECTIONS The first section discusses the objectives and sales projections for 2004 and 2005 (Exhibits 2 and 3). The resulting pro forma income statements for 2004 to 2005 are in Exhibits 4 and 5. 2004

OBJECTIVES The company’s objectives for 2004 are to stabilize its existing markets and to achieve a 5 percent market share in the category of seasoned salt, a 10 percent market share in salt substitutes, and a 5 percent market share in MSG products. Although the original product contains less than 10 percent salt, the company has developed a salt-free product to compete with other such products. The dollar volume for the seasoned salt category in the seven markets the company is in will amount to $7,931,889 in 2004. In 2003, sales of the company in the Oklahoma market were 5.5 percent of the total sales for that market for the eight-month period that the company was operational. Since these sales were accomplished with absolutely no advertising, the company can be even more successful in the future in all seven current markets with a fully developed and funded advertising campaign. The marketing approach will include advertisements in the print media, with ads on “food day” offering cents-off coupons. This program will take place in all seven markets, while stores will continue to use floor displays for demonstrations. Nearly 100 percent warehouse penetration should be achieved in 2004 in these markets. The goal for the category of salt substitutes for 2004 is 10 percent of the market share. This larger market share can be achieved since there are only a few competitors, Mrs. Dash, AMBI Inc. with Cordia Salt Alternative, and RCN with No Salt. The company’s product is superior in all respects and has a retail price advantage of 10 to 20 cents per can. In addition, the company’s product is much more versatile than competitors’ products. Aggressive marketing and advertising will emphasize the tremendous versatility of usage as well as the great taste and health benefits of the product. The informal consumer surveys at demonstrations indicated that consumers prefer Nature Bros. to competitors’ products by a wide margin. A new product, which is already developed, will be added during this time. Called “Enhance,” it too is a dry-mixed, non cooked, low-overhead, high-profit food product. Its category of MSG products has a dollar volume of $1,957,090 in these markets. This category includes only one main competitor, Accent, made by Pet Inc. Accent has not been heavily advertised, and it is a one-line product with little initial name recognition. The company’s new product will have a 10- to 20-cent per can retail price advantage to help achieve a 5 percent share of this category. In summary, 2004 will be spent solidifying the company’s present market positions. 2005

OBJECTIVES The company intends to open eight new markets in 2005 that include Los Angeles, Phoenix, Portland, Sacramento, Salt Lake City, San Francisco, Seattle, and Spokane. These new markets make up 17.1 percent of grocery store sales, according to the Progressive Grocer’s Marketing Guidebook, the industry standard. In the category of seasoned salt, these markets have a dollar volume of $15,218,886 a year. Salt substitutes sell at a volume of $10,064,028, and the MSG category $3,285,528. With proper advertising, the company’s shares forecast in our current markets will also be realized. A 5 percent penetration of the seasoned salt category is a very conservative projection considering the strong health consciousness of the West Coast. The products will be introduced in shippers, used in store demonstrations, and supported with media advertising to achieve at least a 5 percent market share. This would result in sales of $760,943 in that category. A 10 percent penetration is targeted in the salt-free category. Using aggressive marketing, price advantage at retail, and better packaging, the company will be well positioned against the lower-quality products of our competitors. With the dollar volume of this category at $10,064,028, a conservative estimate of our share would be $1,006,420. In the category of MSG, a 5 percent share will be achieved. The main competitor in this category does very little advertising. Again, attractive packaging, aggressive marketing, high quality, and a retail price advantage of 30–40 cents per unit will enable the company to realize a 5 percent market penetration. This share of the West Coast markets will generate sales of $164,276. Total sales of all three products in these eight new markets will be around $1,931,639. The company plans to continue to solidify the markets previously established through the use of coupons, co-op advertising, quality promotions, and word-of-mouth advertising. Market share in these original markets should increase by another 2.5 percent in 2005. The dollar volume of the seasoned salt category in 2005 should be around $9,522,472, and our market share at 7.5 percent would amount to $714,185. The dollar volume for the salt substitute category would be $6,220,748, giving sales at 12.5 percent of $775,593. In the MSG category, a 7.5 percent market share of the $2,055,864 volume would give sales of $154,189. The company’s total sales for the existing markets in 2005 will be in excess of $1,643,967. The totals for 2005 sales of Nature Bros. Old Fashioned Seasoning will be $1,475,128. Nature Bros. Salt-Free volume should be $1,784,013. The sales of Enhance, our MSG product, should be $318,465. This will give us a total sales volume of $3,557,606 for all three products in 2005.

FINANCIAL NEEDS AND PROJECTIONS In this plan, Morris indicated a need for $100,000 equity infusion to expand sales, increase markets, and add new products. The money would be used to secure warehouse stocking space, do cooperative print advertising, give point-of-purchase display allowances, and pay operating expenses.

NEW PRODUCT DEVELOPMENT The company plans to continue an ongoing research and development program to introduce new and winning products. Four products are already developed that will be highly marketable and easily produced. Personnel are dedicated to building a large and profitable company and attracting quality brokers. The next new product targets a different market segment but can be brought online for about $25,000 by using our existing machinery, types of containers, and display pieces. A highly respected broker felt that the product would be a big success. The broker previously represented the only major producer of a similar product, Pet Inc., which had sales of $4.36 million in 1985. The company can achieve at least a 5 percent market share with this product in the first year. The company’s product will be at least equal in quality and offer a 17 percent price advantage to the consumer, while still making an excellent profit. Another new product would require slightly different equipment. This product would be initially produced by a private-label manufacturer. The product would be established before any major machinery was purchased. Many large companies use private-label manufacturers, or co-packers, as they are called in the trade. Consumer tests at demonstrations and food shows have indicated that each of these products will be strong. PLANT AND EQUIPMENT The company’s plant is located in a nearly new metal building in Rose, Oklahoma. The lease on the building limits payments to no more than $300 per month for the next seven years. The new computer-controlled filling equipment will be paid off in two months, and the seaming equipment is leased from the company’s container manufacturer for only $1 per year. The company has the capability of producing about 300,000 units a month with an additional $15,000 investment for an automatic conveyer system and a bigger product mixer. This production level would require two additional plant personnel, working one shift with no overtime. The company could double this production if needed with the addition of another shift. One of the main advantages of the company’s business is the very small overhead required to produce the products. The company can generate enough product to reach sales of approximately $4 million a year while maintaining a production payroll of only $37,000 a year. To meet the previously outlined production goals, the company will need to purchase another filling machine in 2005. This machine will be capable of filling two cans at once with an overall speed of 75 cans per minute, which would increase capacity to 720,000 units a month. A higher-speed seaming machine will also need to be purchased. The filling machine would cost approximately $22,000; a rebuilt seamer would cost $25,000, while a new one would cost $50,000. With the addition of these two machines, the company would have a capacity of 1,020,000 units per month on one shift. By 2006, the company will have to decide whether to continue the lease or buy the property where located and expand the facilities. The property has plenty of land for expansion for the next five years. The company has the flexibility to produce other types of products with the same equipment and can react quickly to changes in customer preferences and modify its production line to meet such demands as needed.

Discuss the Following in a Single Initial Reply:

1) Organizations do not operate in a vacuum and are subject to governmental regulation. This is particularly true with publicly traded organizations. Based on business here in the United States - who can name a few regulatory bodies that directly relate to financial management?

2) What exactly is risk aversion and can it relate to cultural differences? Even if you have never been overseas - can you give an example of this here in the United States?

3) I believe that we all know what currency is - think about having a United States dollar in hand. From a financial management standpoint, why is it important to understand currency fluctuations? What are some of the key factors that cause fluctuation?

 Hamlin Steel Company wishes to determine the value of Craft​ Foundry, a firm that it is considering acquiring for cash. Hamlin wishes to determine the applicable discount rate to use as an input to the​ constant-growth valuation model. ​ Craft's stock is not publicly traded. After studying the required returns of firms similar to Craft that are publicly​ traded, Hamlin believes that an appropriate risk premium on Craft stock is about 7​%. The​ risk-free rate is currently 4​%. Craft's dividend per share for each of the past 6 years is shown in the following​ table:

a. Given that Craft is expected to pay a dividend of ​$3.64 next​ year, determine the maximum cash price that Hamlin should pay for each share of Craft. ​(Hint: Round the growth rate to the nearest whole​ percent.)

b. Describe the effect on the resulting value of Craft​ from:

​(1) A decrease in its dividend growth rate of​ 2% from that exhibited over the 2014​-2019 period.

​(2) A decrease in its risk premium to 6​%.

_________________________________________________________________

a. The required return on​ Craft's stock is ____%. ​(Round to the nearest whole​ percentage.)

The maximum cash price that Hamlin should pay for each share of Craft is $_________.​(Round to the nearest​ cent.)

b.​ (1) If the dividend growth rate decreases by​ 2%, the maximum cash price that Hamlin should pay for each share of Craft is ​$___________.​(Round to the nearest​ cent.)

​(2) If the risk premium decreases to 6​%, the required return on​ Craft's stock is ______​%. (Round to the nearest whole​ percentage.)

With a 10​% required​ return, the maximum cash price that Hamlin should pay for each share of Craft is ​$_________. ​(Round to the nearest​ cent.)

Price is a function of the current​ dividend, (1)____________​, and the​ risk-free rate, and the​ company-specific (2) ________. For​ Craft, the lowering of the dividend growth rate (3) ____________ future cash flows resulting in (4) ___________ in share price. The decrease in the risk premium reflected (5) ___________ in risk leading to (6) __________ in share price.  ​(Select the best answers from the​ drop-down menus.)

(1)

expected dividend growth rate

expected risk-free growth rate

expected risk premium growth rate

(2)

risk premium

risk discount

risk-free rate

(3)

increased

reduced

(4)

an increase

a reduction

(5)

an increase

a reduction

(6)

an increase

a reduction

The following is a list of 29 Nascar racers, arranged in descending order.
18, 21, 22, 25, 26, 27, 29, 30, 31, 33, 36, 37, 41, 42, 47, 52, 55, 57, 58, 62, 64, 67, 69, 71, 72, 73, 74, 76,77

-Find the % for the data value 74.

-Find the % for the data value 30

-Calculate the 44th percentile

-Calculate the 7th percentile

Question 3: Pricing Multiple Product Versions (show all work)

Casey’s company produces two versions of a software program, “Advanced” and “Basic”.

There are 3 segments of customers, the Managers, Executives and Students, and the respective segment sizes are 2000, 1000 and 5000. The per-unit cost of producing the Advanced version is $20, while the per-unit cost of producing the Basic version is $10. The willingness to pay (WTP) for each version, by segment, is given as follows:

WTP (Managers) = $100 (Advanced) and $55 (Basic)

WTP (Executives) = $62 (Advanced ) and $45 (Basic)

WTP (Students) = $45 (Advanced ) and $30 (Basic)

If Casey sells only the Advanced version, what is the optimal price it should charge and the profits? (Answer: $45, Profit=$200K)

If Casey decides to sell both versions, what are the optimal prices it should charge for each version? What is the optimal profit of the company? Assume that customers will buy if consumer surplus is at least 0 and that they need at least $1 extra in consumer surplus to switch between product versions. (Answer: Basic @ $30, Advanced @ $74, Profit=$228K)

Some types of capital investments have associated cash flows that are very difficult to estimate, while other types of capital investments have associated cash flows that are very easy to estimate. Name two capital investments from your chosen publicly traded entity, one that has associated cash flows that are easy to estimate and one that has associated cash flows that are difficult to estimate. Explain how these two types of investments differ and why the associated cash flows are easier or more difficult to estimate.

Sinaloa Appliance, Inc., a private firm that manufactures home appliances, has hired you to estimate the company’s beta. You have obtained the following equity betas for publicly traded firms that also manufacture home appliances. ($ millions) Firm Beta Debt Market Value of Equity iRobot 0.93 $0 $ 3,190 Middleby's 1.88 759 7,490 National Presto 0.13 0 838 Newell Brands 1.08 11,938 26,670 Whirlpool 1.78 4,515 14,190

a. Estimate an asset beta for Sinaloa Appliance.

Read the Case: China’s Managed Float (p. 371) and then click on "Create Thread" to post your answers to the following questions: Why do you think the Chinese government originally pegged the value of the yuan against the U.S. dollar? What were the benefits of doing this to China? What were the costs? What do you think the Chinese government should do? Let the float, maintain the peg, or change the peg in some way?

In 1994, China pegged the value of its currency, the yuan, to the U.S. dollar at an exchange rate of $1 = 8.28 yuan. For the next 11 years, the value of the yuan moved in lockstep with the value of the U.S. dollar against other currencies. By early 2005, however, pressure was building for China to alter its exchange rate policy and let the yuan float freely against the dollar. Underlying this pressure were claims that after years of rapid economic growth and foreign capital inflows, the pegged exchange rate undervalued the yuan by as much as 40 percent. In turn, the cheap yuan was helping to fuel a boom in Chinese exports to the West, particularly the United States, where the trade deficit with China expanded to a record $160 billion in 2004. Job losses among American manufacturing companies created political pressures in the United States for the government to push the Chinese to let the yuan float freely against the dollar. American manufacturers complained that they could not compete against “artificially cheap” Chinese imports. In early 2005, Senators Charles Schumer and Lindsay Graham tried to get the Senate to impose a 27.5 percent tariff on imports from China unless the Chinese agreed to revalue its currency against the U.S. dollar. Although the move was defeated, Schumer and Graham vowed to revisit the issue. For its part, the Bush administration pressured China from 2003 onwards, urging the government to adopt a more flexible exchange rate policy. Keeping the yuan pegged to the dollar was also becoming increasingly problematic for the Chinese. The trade surplus with the United States, coupled with strong inflows of foreign investment, led to a surge of dollars into China. To maintain the exchange rate, the Chinese central bank regularly purchased dollars from commercial banks, issuing them yuan at the official exchange rate. As a result, by mid 2005 China’s foreign exchange reserves had risen to more than $700 billion. They were forecast to hit $1 trillion by the end of 2006. The Chinese were reportedly buying some $15 billion each month in an attempt to maintain the dollar/yuan exchange rate. When the Chinese central bank issues yuan to mop up excess dollars, the authorities are in effect expanding the domestic money supply. The Chinese banking system is now awash with money and there is growing concern that excessive lending could create a financial bubble and a surge in price inflation, which might destabilize the economy. On July 25, 2005, the Chinese finally bowed to the pressure. The government announced that it would abandon the peg against the dollar in favor of a “link” to a basket of currencies, which included the euro, yen, and U.S. dollar. Simultaneously, the government announced that it would revalue the yuan against the U.S. dollar by 2.1 percent, and allow that value to move by 0.3 percent a day. The yuan was allowed to move by 1.5 percent a day against other currencies. Many American observers and politicians thought that the Chinese move was too limited. They called for the Chinese to relax further their control over the dollar/yuan exchange rate. The Chinese resisted. By 2006, pressure was increasing on the Chinese to take action. With the U.S. trade deficit with China hitting a new record of $202 billion in 2005, Senators Schumer and Graham once more crafted a Senate bill that would place a 27.5 percent tariff on Chinese imports unless the Chinese allowed the yuan to depreciate further against the dollar. The Chinese responded by inviting the senators to China, and convincing them, for now at least, that the country will move progressively towards a more flexible exchange rate policy