You are the sole shareholder and CEO of your own local newspaper. The company’s only assets are $25,000 in cash. In one year the company’s only bank loan is due. The principal together with the last interest payment amounts to $27,500. If the newspaper is unable to sell enough ads to repay, all its assets will be taken over by the bank. There are three investment opportunities available: (1) do nothing; (2) use the $25,000 to buy lottery tickets that will pay $2,500,000 in one year with probability 0.01 and $0 otherwise; and (3) investing the $25,000 in an advertisement salesperson training program that lasts one year and returns $50,000 with probability 0.50, and $25,000 otherwise. Assume the discount rate is 0%. Answer the following questions:

a) Which of the 3 investment opportunities would you prefer?

b) Which of the 3 investments would the bank prefer?

c) How much would the bank have to pay you to make you choose the investment project that the bank prefers? Hint: The payment has to make both the bank and the shareholder (you) at least as well off as compared to the choice from part a).

Question 1 10 marks Charles, the CEO of JB Inc., and Frank, the accountant for JB Inc., were recently having a meeting to discuss the upcoming release of the company’s financial statements. Following is an excerpt of their conversation:

Charles: These financial statements do not show the hours of hard work that we have put in to restore this company to financial health. In fact, these results may actually prevent us from obtaining loans that are critical to our future.

Frank: Accounting does allow for judgment. Tell me your primary concerns, and let us see if we can work something out.

Charles: My first concern is that the company does not appear very liquid. As you can see, our current assets are only slightly more than current liabilities. The company has always paid its bills, even when cash was tight. It is not really fair that the financial statements don’t reflect this.

Frank: Well, we could reclassify some of the long-term investments as current assets instead of noncurrent assets. Our expectation is that we will hold these investments for several years, but we could sell them at any time; therefore, it is fair to count these as current assets. We could also reclassify some of the accounts payable as noncurrent. Even though we expect to pay them within the next year, no one will ever look close enough to see what we have done. Together these two changes should make us appear more liquid and properly reflect the hard work we have done.

Charles: I agree. However, if we make these changes, our long-term assets will be smaller and our long-term debt will be larger. Many analysts may view this as a sign of financial trouble. Is there not something we can do?

Frank: Our long-term assets are undervalued. Many were purchased years ago and recorded at historical cost. However, companies that bought similar assets are allowed to record them at an amount closer to their current market values. I have always thought this was misleading. If we increase the value of these long-term assets to their market value, this should provide the users of the financial statements with more relevant information and solve our problem, too.

Charles: Brilliant! Let us implement these actions quickly and get back to work.

Required: 1. Describe any ethical issues that might arise because of Charles and Frank’s conversation. (6)

2. Name at least 4 companies that misled its stakeholders by making use of Unethical accounting practices (4)

Mr. Piko Taro is a CEO of PPAP, Inc., a firm that manufactures high quality pens and produces apples and pineapples. Taro is considering replacing an old pineapple picking machine, which was bought for $2.5 million five years ago, with a new semi-auto pineapple picking machine. The new machine can be purchased for $3 million and it costs $250,000 to have it delivered and installed today. When the old machine was purchased five years ago, the machine was to be depreciated according to a 5-year MACRs schedule. Taro believes that the old machine can be sold for $200,000 today if the firm decides to replace it with the new one. The new machine will be depreciated using the straightline method over a 5 year life. The projected sales of pineapples harvested by the new machine will be $850,000 in Year 1, after which the sales will grow at a rate of 15 percent each year. Total fixed costs are $115,000 per year, while variable costs are 15 percent of each year’s sales. After 5 years, the firm will stop pineapple production and sell the machine for $350,000. Net working capital of $200,000 will be required immediately (Year 0) as well as in each year. PPAP’s tax rate is 21 percent.

Taro has hired you as a consultant: He wants you to estimate the project’s NPV and other discount cash flow criteria.

Q1. What is the project’s Year 0 net cash flow? Round your answer to two decimal places. (10 pts)

Q2. Calculate the net cash flows for Years 1, 2, 3, 4, and 5. Round your answer to two decimal places. (5 pts*5 years=25 pts)

Q3. What is the payback period? Round your answer to two decimal places. (5 pts)

Q4. If the discount rate is 15 percent, what is the NPV? Round your answer to two decimal places. (5 pts)

Q5. At exactly what discount rate should the firm be break-even, in terms of NPV? Round your answer to two decimal places. (5 pts)

Mini Case

With the growth in demand for exotic foods, Possum Products’s CEO Michael Munger is considering expanding the geographic footprint of its line of dried and smoked low-fat opossum, ostrich, and venison jerky snack packs. Historically, jerky products have performed well in the southern United States, but there are indications of a growing demand for these unusual delicacies in Europe. Munger recognizes that the expansion carries some risk. Europeans may not be as accepting of opossum jerky as initial research suggests, so the expansion will proceed in steps. The first step will be to set up sales subsidiaries in France and Sweden (the two countries with the highest indicated demand), and the second is to set up a production plant in France with the ultimate goal of product distribution throughout Europe.

Possum Products’s CFO, Kevin Uram, although enthusiastic about the plan, is nonetheless concerned about how an international expansion and the additional risk that entails will affect the firm’s financial management process. He has asked you, the firm’s most recently hired financial analyst to develop a 1-hour tutorial package that explains the basics of multinational financial management. The tutorial will be presented at the next board of directors meeting. To get you started, Uram has supplied you with the following list of questions:

Solution

a.What is a multinational corporation? Why do firms expand into other countries?

b.What are the six major factors that distinguish multinational financial management from financial management as practiced by a purely domestic firm?

c.Consider the following illustrative exchange rates.

(1)What is a direct quotation? What is the direct quote for euros?

(2)What is an indirect quotation? What is the indirect quotation for kronor (the plural of krona is kronor)?

(3)The euro and British pound usually are quoted as direct quotes. Most other currencies are quoted as indirect quotes. How would you calculate the indirect quote for a euro? How would you calculate the direct quote for a krona?

(4)What is a cross rate? Calculate the two cross rates between euros and kronor.

(5)Assume Possum Products can produce a package of jerky and ship it to France for $1.75. If the firm wants a 50% markup on the product, what should the jerky sell for in France?

(6)Now assume that Possum Products begins producing the same package of jerky in France. The product costs 2 euros to produce and ship to Sweden, where it can be sold for 20 kronor. What is the dollar profit on the sale?

(7)What is exchange rate risk?

d.Briefly describe the current international monetary system. How does the current system differ from the system that was in place prior to August 1971?

e.What is a convertible currency? What problems arise when a multinational company operates in a country whose currency is not convertible?

f.What is the difference between spot rates and forward rates? When is the forward rate at a premium to the spot rate? At a discount?

g.What is interest rate parity? Currently, you can exchange 1 euro for 1.25 dollars in the 180-day forward market, and the risk-free rate on 180-day securities is 6% in the United States and 4% in France. Does interest rate parity hold? If not, which securities offer the highest expected return?

h. What is purchasing power parity? If a package of jerky costs $2 in the United States and purchasing power parity holds, what should be the price of the jerky package in France?

i.What effect does relative inflation have on interest rates and exchange rates?

j. Briefly discuss the international capital markets.

k.To what extent do average capital structures vary across different countries?

l.Briefly describe special problems that occur in multinational capital budgeting, and describe the process for evaluating a foreign project. Now consider the following project: A U.S. company has the opportunity to lease a manufacturing facility in Japan for 2 years. The company must spend ¥1 billion initially to refurbish the plant. The expected net cash flows from the plant for the next 2 years, in millions, are CF1 ¥500 and CF2 ¥800. A similar project in the United States would have a risk-adjusted cost of capital of 10%. In the United States, a 1-year government bond pays 2% interest and a 2-year bond pays 2.8%. In Japan, a 1-year bond pays 0.05% and a 2-year bond pays 0.26%. What is the project’s NPV?

m.Briefly discuss special factors associated with the following areas of multinational working capital management:

(1) Cash management

(2) Credit management

(3) Inventory management

A television CEO believes viewership of the evening news does not depend on age. She collects a random sample of 2000 television viewers across four different age groups and asks whether or not they watch the evening news. The results are as follows:

Watch              | 18 years old             19 to 35                36 to 54            55 years old

Evening News | or less                       years old              years old             or more

_____________________________________________________________________

Yes                  |           70                        96                          112                  146

                        |

No                   |           430                      404                         388                  354

                        |

_____________________________________________________________________

Test to see whether watching the evening news and age grouping are independent at the 0.05 level using the Chi-Square test. Conduct this test by hand and using the Chi-Square table.

Your client, Jeffrey Smith, President and CEO of Malico Corporation of, took accounting a number of years ago and was unaware of comprehensive income reporting. He is not convinced that any accounting standards exist for comprehensive income.

You may need to log in to http://aahq.org/asclogin.cfm

student user ID: AAA53276

Password: 33jdSVZ

Write a formal business letter to your client in good form. Provide the following information to Mr. Smith:

a. What authoritative literature addresses comprehensive income? When was it issued?

b. Provide the definition of comprehensive income.

c. Define classifications within net income; give examples

d. Define classifications within other comprehensive income; give examples.

e. What are reclassification adjustments?

1. A television CEO believes viewership of the evening news does not depend on age. She collects a random sample of 2000 television viewers across four different age groups and asks whether or not they watch the evening news. The results are as follows:

Watch              | 18 years old             19 to 35             36 to 54            55 years old

Evening News | or less                       years old            years old             or more

___________________________________________________________

Yes                  |           74                        96                                112 146

No                   |           426                      404                              388                  354

Test to see whether watching the evening news and age grouping are independent at the 0.05 level using the Chi-Square test. Conduct this test by hand and using the Chi-Square table instead of using Excel.

Question 1 - 1,500 words

The CEO has forwarded to you an interesting article and requires you to provide her with a deeper theoretical understanding of the issues discussed so that she can fully engage in the lively discourse at an upcoming conference.

You are required to find a newspaper article or web page report of an item of accounting news, i.e. it refers to a current event, consideration, comment or decision that has been published after the 1st of June 2018. Your article could also come from one of the professional journals. The article should not come from an academic journal. Academic journals generally do not contain news articles or articles of less than one page and are usually only published 2 or 4 times a year. Your article should also relate to a different issue to what you will be investigating in Question 2 (in other words, don't use an article about the exposure draft you will be using in question 2). If you are having a problem ensuring that your article is from an appropriate source contact your subject coordinator.

You then need to explain the article that you have found in your own words and clearly relate the concepts, ideas and facts within the article to one or more of the theories or topics that you have studied this session. Support your analysis of the assumptions and implications of the topic or theory as appropriate with reference to sources in APA 6 style. For example, this article from the Sydney Morning Herald in April 2016 could be linked to the topics of accounting regulation and measurement (and perhaps others). You must provide a copy of the article or web page, with details of the source, date and page number with your answer.

Central Adventures

Fatima Hopkins, the CEO of Central Adventures, is having difficulties with all three of her top management level employees. With one manager making questionable decisions, another threatening to leave, and the third likely ‘in the red’, Fatima is hoping there is a simple answer to all her difficulties. She is asking you (her accountant) for some advice on how to proceed.

Central Adventures owns and operates three amusement parks in Michigan: Funland, Waterworld, and Treetops. Central Adventures has a decentralized organizational structure, where each park is run as an investment center. Park managers meet with the CEO at least once annually to review their performance, where each park manager’s performance is measured by their park’s return on investment (ROI). The park manager then receives a bonus equal to 10% of their base salary for every ROI percentage point above the cost of capital.

Fatima’s first difficulty is with the Funland park. Funland is an outdoor theme park, with twelve roller coaster rides and several other attractions. This park has first opened 1965, and most of the rides have been in operation for 20+ years. Attendance at this park has been relatively stable over the past ten years. The park manager of Funland, Janet Lieberman, recently shared with Fatima a proposal to replace one of their older rides with a new roller coaster, a hybrid steel and wood roller coaster with a 90 degree, 200 foot drop and three inversions. The proposal indicated that the ride would cost $8,000,000 with an estimated life of 20 years. In addition, this new style of coaster would require additional maintenance and insurance, costing $125,000 each year. However, it projected that this new attraction would boost attendance, earning the park an additional $1,190,000 per year in revenues. Janet ultimately decided not to invest in this new attraction. Fatima (doing a quick mental calculation) saw that the investment had a payback period of eight years—much shorter than the life of the roller coaster—and is perplexed at Janet’s decision.

The second dilemma concerns the Waterworld park. Waterworld is an indoor water park, operating year-round. Run by park manager David Copperfield, Waterworld was built in 2016 and has increased attendance by 20% every year since. David recently sent you an email complaining that, based on the current bonus payout schedule, Janet Lieberman’s bonus last year was significantly higher than his. He points to the increasing attendance, and says that his park is being punished for having opened so recently (his park assets are much more recent than the roller coasters at Funland). He currently has an employment offer from another company at the same base pay rate, which he says he will accept if his performance is not appropriately acknowledged. Fatima needs to look at the relative performance across parks to determine how to proceed with David.

Central Treetops includes a high ropes course and has a series of ziplines that criss-cross over the Chippewa River. For many years, it was a popular venue for corporate team-building activities, so it is equipped with a main indoor facility with cafeteria and overnight guest rooms. This park has lost popularity in recent years, and has been ‘in the red’ for the past two years. If the park is not profitable this year, you will need to decide whether to close it - permanently. Included in the ‘Fixed COGS’ for Treetops is a $86,000 mortgage payment on the land and 9,351,510closed. Incidentally, you recently had a conversation with the regional head of the YMCA, who would like to open a summer camp in the central Michigan region. If you decided to close Treetops, you are fairly certain that you could lease that land to the YMCA for $250,000 annually.

A partial report of this year’s financial results for Central Adventures shows the following:

The ‘Selling and administrative costs’ are all incurred directly by each park, and are determined at the beginning of each year (that is, they do not change with the number of tickets sold). In addition to the information above, there are $2,542,920 in corporate costs, which are currently allocated evenly between the three parks. These costs are primarily due to employee benefits costs, which are billed at the corporate level. If the Treetops park is closed, the allocated corporate costs would decrease by $12,000. Central Adventures has a cost of capital of 12 percent (and Fatima uses the cost of capital as their required rate of return) and are subject to 18% income taxes.

Fatima needs to evaluate this year’s performance results before she can make any decisions. Is David’s complaint about the performance evaluation metrics valid? Is that also affecting management decisions in the form of Janet’s rejection of the proposed new rollercoaster? And is the company better off without Treetops? She sets off to the company accountant’s office to help get some answers.

Required:

Write your response in the form of a 1-2 page memo to Fatima Hopkins, from the perspective of the company accountant. Be sure to include all your financial analyses, clearly showing your calculations, to support your conclusions. Be sure to include the following points in your memo, and provide the appropriate financial analysis(es) to support your conclusions.

a.     Create a segmented income statement for Central Adventures.

b.     Calculate the current annual ROI, residual income and EVA for the three parks.

c.     Evaluate Janet Lieberman’s (the Funland park manager) decision. Explain why it was/was not in Central Adventure’s overall best interest for Funland to reject the new rollercoaster.

Was Robert Eaton a Good Coach?

Robert Eaton was CEO and chairman of Chrysler from 1993 to

1998, replacing Lee Iacocca who retired after serving in this

capacity since 1978. Eaton then served as cochairman of the

newly merged DaimlerChrysler organization from 1998 to 2000.

With 362,100 employees, DaimlerChrysler achieved revenues

of EUR 136.4 billion in 2003. DaimlerChrysler’s passenger car

brands include Maybach, Mercedes-Benz, Chrysler, Jeep,

Dodge, and Smart. Commercial vehicle brands include

Mercedes-Benz, Freightliner, Sterling, Western Star, and Setra.

From the beginning of his tenure as CEO, Eaton communicated

with the people under him. He immediately shared

his plans for the future with his top four executives and then

took the advice of his colleague, Bob Lutz, to look around the

company before making any hasty decisions concerning the

state of affairs at Chrysler. Eaton and Lutz ascertained that

Chrysler was employing the right staff and that they did not

need to hire new people; they just had to lead them in a different

manner, that is, in a more participative style.

Eaton listened to everyone in the organization, including

executives, suppliers, and assembly-line workers, to

determine how to help the company succeed. Eaton also

encouraged the employees at Chrysler to talk with one

another. The atmosphere of collaboration and open-door

communication between Eaton and Lutz (the two men sat

across the hall from one another and never closed their doors)

permeated the entire organization. Eaton and Lutz’s walkaround

management style indicated to employees that they

were committed to and engaged in the organization.

Furthermore, Eaton and Lutz held meetings with their executive

team on a regular basis to exchange ideas and information

from all areas of the organization.

Eaton even reorganized the manner in which Chrysler

designed cars based on a study, previously disregarded by

Iacocca, that indicated that Chrysler needed to be more

flexible and its executives needed to be in constant communication

with the product design team. One employee was

quoted as saying, “Bob Eaton does not shoot the messenger

when he hears something he doesn’t like or understand. He

knows that not every idea is right. But Bob is off-the-wall

himself. . . . He’ll say something, and we’ll tell him that it’s a

crazy idea. . . . He may not change his mind in the end, but

he’ll spend the time explaining to you what is behind

his thought processes. Do you know what kind of confidence

that inspires?” This type of open communication at the top

proved extremely successful, as summed up by one

designer: “It’s a system that recognizes talent early and

rewards it, and that creates a sense of enthusiasm for your

work, and a sense of mission.”

Another program that Eaton describes as empowering

employees at Chrysler includes requiring all employees,

including executives, to participate in the process of building

a new vehicle. Eaton explains that this shows all of the employees

in the plant that executives are concerned about the

proper functioning of new cars, and it gives executives the

opportunity to understand and solve problems at the factory

level. Eaton states, “When we’re done with our discussions,

these guys know where we want to go and how we want to

get there, and they go back and put the action plans together

to do that. This goes for every single thing we do.” He concludes,

“Clearly at a company there has to be a shared

vision, but we try to teach people to be a leader in their own

area, to know where the company wants to go, to know how

that affects their area, to benchmark the best in the world,

and then set goals and programs to go after it. We also

encourage people not only to go after the business plan

objectives but to have stretch goals. And a stretch goal by

definition is a fifty-percent increase . . . . If we go after fifty

percent, something dramatic has to happen. You have to go

outside of the box.”

Based on the above description, please evaluate Bob

Eaton’s coaching skills using the accompanying table. If a

certain coaching behavior or function is missing, please

provide recommendations about what he could have done

more effectively.

Based on Case Study 9-1: Was Robert Eaton a Good Coach on pages 256-257 in the textbook and the Major Functions and Key Behaviors tables on page 257, evaluate Eaton’s coaching skills. In your response address the following elements:

What major functions were missing?

What key behaviors were missing?

Based on your evaluation, provide specific recommendations on how he could have been a more effective coach.

the text book is Performance Management (3rd Edition) - Herman Aguinis and the case study is as mentioned above