Suppose that you are the CEO of TrinketsNThings. Your sales operations manager has been experimenting with the price of a Trinket [x], in order to see how many Trinkets customers are willing to purchase in a week [y].

She gives you the following dataset:

Price of Trinket $3 $4 $5 $6

# of Trinkets Purchased (thousands) 19 15 12 8

*Calculate Cov(Price , # Purchased)

*Calculate Sx2

*What is the linear relationship between the price and quantity demanded of Trinkets? Calculate the relevant regression coefficient, then interpret this estimate in one or two sentences. For this answer, round to the nearest tenth.

LEADERSHIP IMPLICATIONS IN COMPLEX PROJECTS: THE BOEING DREAMLINER AND CEO JIM MCNERNEY In defense of criticism of Boeing’s 787 production delays, CEO Jim McNerney explained: We are trying to come up with the strongest set of partnerships we can with the people that supply our major systems and structures. In defense, we are trying to respond to the pressures of governments buying fewer things at lower prices, with less favorable contract terms. And that pressure cannot just stop at Boeing. We have to find willing partners to share the burden. And on the commercial side, low-cost carriers and a very flattish global economy leads you to the same conclusion. So the ‘no-fly list’ is people who don’t want to play ball, who only want to hide behind the contractual language of their current programs. We’re going to give those who do want to work with us more business—or we’ll move some things in-house. This is the reality we all face. The majority of suppliers are beginning to have productive discussions with us. We have some holdouts, people who take the position that the pressure should only be absorbed by Boeing, notwithstanding the fact that 65 percent of most of our airplanes are built by suppliers…we both have to demand lots of productivity improvements to offset price pressure. Those that work with us in that way will find more volume. We are the biggest player. My message is, ‘Don’t bet against us. The Boeing Dreamliner Boeing Corporation was one of the world's largest manufacturers of commercial aircraft, ranking 27th on the Fortune 500 list in 2016. When it announced the delivery of its first 787 Dreamliner transporter to its first customer, All Nippon Airways, in September, 2011, it was almost 40 months later than originally planned, after a long series of unexpected delays. The actual development cost of the project had been estimated at about US$40 billion but came in over twice the original estimate. One year later, a malfunction was discovered in one of the aircraft's lithium batteries, which caught fire after takeoff. These problems led to months of grounding, imposed by the FAA (Federal Aviation Administration), of the entire Dreamliner fleet already in service. The Dreamliner was designed to be a revolutionary project in terms of physical characteristics, technology, management style, financing, design and engineering management, quality assurance, and assembly processes. Many of these initiatives were intentionally taken on to benefit from new developments in aviation technology and to speed up design and development; however, they posed unexpected challenges for both the company and the project team. A New Organizational Paradigm: Boeing adopted a new organizational paradigm for the development of Dreamliner and decided to outsource an unprecedented portion of the design, engineering, manufacturing, and production to a global network of 700 local and foreign suppliers. With more than 70% foreign development content, this decision turned Boeing's traditional supply chain into a development chain. Tier-1 suppliers became responsible for the detailed design and manufacturing of 11 major subassemblies, while Boeing only did system integration and final assembly. Furthermore, Boeing came up with a new risk and revenue sharing contract with its suppliers, called the “build-to-performance” model (as differentiated from the more typical “build-to-spec” or “build-to print” models). According to the model, contract suppliers bore the non-recurring R&D cost up-front, owned the intellectual property of their design, and got paid a share of the revenues from future aircraft sales. Under this model, the suppliers’ roles were dramatically changed from mere subcontractors to strategic partners who had a long-term stake in the project. This model created some risks, which caused extensive integration problems and additional delays. Finally, Boeing employed a new assembly method. Subcontractors were required to integrate their own subsystems and send their preassembled subsystems to a single final assembly site. The goal was to reduce Boeing's integration effort by leveraging subcontractors to do more work compared with previous projects. However, many of these subcontractors were not able to meet their delivery schedules due to lack of experience in subsystem design and integration, as well as insufficient guidelines and training. As a consequence, parts and assemblies, which were sent to Boeing for integration, were missing the appropriate documentation, including instructions for final assembly. Unanticipated Consequences Supply chain and design delays increased, as did Boeing’s financial losses, including penalties for late delivery of the aircraft. CEO McNerney had to face some hard facts based on earlier decisions. He acknowledged that his new paradigm may have been flawed, “We got a little bit seduced that it would all come together seamlessly and the same design rules would be applied everywhere in the world and corners wouldn’t be cut and financial realities wouldn’t hit certain folks. McNerney’s approach to workers, suppliers, and labor resources was notably off-putting, according to many in Washington State, Boeing’s corporate home. Since 2011 when Boeing opened its non-unionized South Carolina assembly plant where salaries were approximately $10/hour less than those of the unionized workers in Washington State, worker relationships have been troubled. While admirers have touted his efficiency and ability to deliver profits, alienated professionals at every level, along with union members, have described McNerney as “cold-blooded.” One labor specialist stated, “A lot of employees feel top management doesn’t value them, treats them as expendable [creating an atmosphere of] lowered trust, anger and disgruntlement. According to Richard Aboulafia, noted aerospace specialist, “Management believes if it continues to squeeze suppliers and labor, the problem[s] will be solved. Again, the track record here is not great. Most of the manufacturing world tell a very different story. Whether it’s with cars, aircraft or turbines, productivity improvements often come from the shop floor. That means convincing the people who build things to identify ways to reduce scrap, improve work flow and eliminate defects. To promote the kind of process improvements that happen in the factory, a work force needs incentives such as profit-sharing or other compensation. At the very least, machinists and engineers need to believe their work is valued. Taking away pensions at a time of record sales is simply a bad way to motivate workers to go the extra mile. Boeing right now embodies a strange combination of very good and very bad. McNerney’s management style created its own problems. He vacillated between maintaining his dispassionate, hands-off general management style with multiple-times per day meetings with executives during the Dreamliner grounding crisis. His revolving door policy for managers in charge of the 787 project (four in as many years) generated a sense of uncertainty at all levels in the company and increased pressure to meet goals quickly. This focus on urgency caused him to reflect, after having resolved the major problems in the Dreamliner, that the plane could have been completed sooner had Boeing listened more to the customer and less to innovative technology. He said, in a rare interview in 2014, “What I would like to have done is pursued 70 percent of the technology that still would have satisfied 95 percent of [customer desire]. It would have gotten to them quicker, and it would have cost us less…You get excited about these projects, and things creep into the design and you lose discipline sometimes. We just need to be reminded about that. As described by an anonymous former Boeing executive, “The sense I always got from him in meetings is that it could have been any business…If we’d been making cameras or autos or doing bond trading, it would have all been the same to him. The net effect is distancing from the people who come to work there every day, who bring their hearts and souls to it and want to make it more than a job.

Required

Explain the Project Risk Analysis and Management (PRAM) process and relate it to the case.

Note : Answers should be in word version format written and in details and in your own words

1. Read Lawrence Mishel and Jessica Schieder, “CEO Compensation Surged in 2017” and “The Undeserving Rich” in Real World Micro (chapter 8.6). What has happened to the income of the richest Americans compared to the income of the rest? Does rising inequality reflect greater productivity for CEOs and other rich people? Do Mishel and Schieder believe that rising compensation is due to rising productivity for CEOs? What evidence do they advance to support their argument? Do you agree? Why?

2. How does your response in question two bear on Okun’s argument about the benefits of inequality and the costs of redistributive programs?

Maureen McIlvoy, owner and CEO of a mail order business for wind surfing equipment and supplies, is reviewing the order filling operations at her warehouses. Her goal is 100% of orders shipped within 24 hours. In previous years, neither warehouse has achieved the goal, but the East Coast Warehouse has consistently out-performed the West Coast Warehouse. Her staff randomly selected 200 orders from the West Coast Warehouse (population 1) and 400 orders from the East Coast Warehouse (population 2), and reports that 190 of the West Coast Orders were shipped within 24 hours, and the East Coast Warehouse shipped 372 orders within 24 hours. Assuming α = 0.05, the observed z value is ___________________.

2.-

Exhibit 10-11
An insurance company selected samples of clients under 18 years of age and over 18 and recorded the number of accidents they had in the previous year. The results are shown below.

We are interested in determining if the accident proportions differ between the two age groups.

Refer to Exhibit 10-11. The test statistic is

3.-

Testing the difference in two population proportions is useful whenever the researcher is interested in comparing the proportion of one population that has certain characteristic with the proportion of the second population that has the same characteristic.

True

False

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?