Question 1. Suppose you are an investment consultant. You have produced below analysis of the key financial ratios of 5 companies.

You are required:

Please advise your client which of these companies he/she needs to invest as the first choice choice. Which company he/she must not invest. Clearly explain your client the reasoning behind your advice. You must make use of analysis results presented in the above table to justify your andive. ( 25 marks)

Question 2.

You are a financial consultant. Your curious client, who started to learn finance, has asked you to explain why Zoom Video has a negative beta in the above table. Explain using fundamental factors that determine company beta.

Question 3. What does Jensen’s alpha tell you. If you were to select a company just based on Jensen’s alphs which company would you invest and which company would you avoid?

Question 4. Your friend has suggested you to invest $150,000 US Dollars into one of the below projects with future cash you can earn listed in the below table. Suppose that the discount rate 15% per year. Which investment project you will invest if you must select only one project (hint: use Net Present Value estimation method)

7.3 - Appendix

Bank Balance Sheet (Note: Use this information for all three problems)

Item                             Amount            Duration       Interest Rate       

Cash-type Securities       $50m                1.2 year             2.25%

Commercial Loans          $100m             2.4 years           4.50%

Mortgages                     $350m             8.0 years           6.50%

Core Deposits                $270m             1.0 year             2.00%

Notes Payable                $180m             2.0 years           4.50%

3. Off-Balance sheet futures hedge (Use balance sheet information above, 8 points)

T-Bond futures contracts for the delivery of $100,000 face value are trading at 102-16, and have a duration of 9.50 years.

a. What is the total dollar price of each futures contract (P_F)?

b. For this bank to achieve complete immunization, solve for F (total dollar value of futures contracts to immunize). Note: We don’t know the number of contracts yet or a specific interest rate change, so that information should not be used to solve for the dollar value F. Use only the information provided above to solve for F.

c. Using F from part b above, solve for the number of T-Bond futures contracts needed by this bank to hedge the interest rate risk (round to the nearest whole number of contracts).

d. Explain in a full essay what risk this bank faces, what position this bank would take on the T-Bond futures contracts to hedge against the interest rate risk it faces, why it would take that position, and graph that position in a fully-labeled futures payoff diagram.

Assume average interest rates rise from the original level of 6.0% to 7.50%.

e. Calculate the on-balance sheet change in the bank’s value (ΔE), and specify the sign (positive or negative)

f. Calculate the off-balance sheet change in the value of the futures contracts (ΔF), and specify if it’s a gain or loss.

g. Assume you are a financial analyst and risk management specialist for the bank above. Write a full, complete, and convincing essay (executive summary) of at least several complete paragraphs to your company’s CEO that summarizes the main conclusions from this third problem, and specifically refer to your numerical results from parts e and f.

P1. The following trial balance was taken from the books of Coyote Company as of December 31, 2019.

            Account                                                 Debit            Credit

Cash $60,000

Accounts receivable                                             50,000

Allowance for doubtful accounts                                               $ 1,000

Short-Term notes receivable                                 20,000

Inventory, January 1, 2019                                   70,000

Furniture and equipment                                      210,000

Accumulated depreciation of F & E                                           40,000

Patents                                                                100,000

Accounts payable                                                                        22,000

Bonds payable                                                                         20,000

L-T notes payable                                                                    15,000

Common stock                                                                          290,000

Retained earnings                                                                        87,000

Dividends                                                           20,000

Prior period adjustments                                     10,000

Sales                                                                                          700,000

Sales returns & allowance                                    40,000

Sales discount                                                      10,000

Rent revenues                                                                             60,000

Interest revenues                                                                        10,000

Purchase                                                           420,000

Purchase returns & allowance                                                     20,000

Selling expenses                                                 60,000

Advertising expense                                           30,000

Supplies expense                                                  6,000

Insurance expense                                              24,000

Wage and Salary expense                                    90,000

Rent expense                                                         60,000

Loss on sale of PS store before tax                     10,000

Operating income from PS store before tax                             25,000

Totals                                                               1,290,000        1,290,000

At the year end, the following items have not been recorded.

1. Insurance premium expired during the year, $14,000.
2. Estimated bad debts expense, 1.0% of net sales.
3. Inventory as of 12/31/2019 turned out to be $50,000.
4. Office supplies were purchased for $6,000 and charged to supplies expenses then. There are $2,000 of supplies remaining as of 12/31/2019
5. Six months’ rent of $60,000 was paid in advance on September 1, 2019 and charged to rent expense then.
6. Furniture and equipment have an average useful life of 5 years and salvage value of

$10,000. Coyote Company uses the straight-line method of depreciation.

7. Patents have been amortized by $10,000/year.
8. Utility bill of $2,000 for the month of December 2019 will be paid on its due date, January 10, 2020.
9. Salaries earned but not yet paid by December 31, 2019, $8,000.
10. Tax rate = 30%.

Instructions: prepare

1. Any necessary adjusting entries at the end of 2019.
2. Income Statement and statement of retained earnings, and balance sheet of the company for the year 2019 in good forms (i.e. multiple-steps statements)
3. Any necessary closing entries at the end of 2019.

The following data gives the creatinine clearance Y (in $1000’s) of a sample of 33 male subjects along with their creatinine concentration (X1), age (X2) and the weight (X3). The data are:

1. Plot a scatter plot of Y against each predictor variable. What do the plots tell you about the nature of the relationship between y and each of the independent variables?
2. Obtain the correlation matrix of the X variables. Does the matrix indicate potential problems with multicollinearity?
3. Fit a regression model containing the independent variables as first order terms.
4. Obtain variance inflation factors for the model in (. Is multicollinearity a problem? Explain
5. Obtain residual plots as well as partial residual plots. Do these plots indicate that the regression model should be modified?
6. Theoretical considerations .suggest the model

E(ln(Y)) = b₀+ b₁ln(X₁)+ b₂ln(140-X₂)+b₃ln(X₃).

Fit the theoretical model and examine all the relevant model diagnostics. Do any of the problems encountered with the model in (d) (if there were any problem encountered) seem to have been resolved?

In this assignment, you will use a simple version of a portfolio where your money is distributed across three categories: stocks, bonds, and cash. Refer to this module’s readings to review historical return values.

Your portfolio will be diversified across these three different types of investments. The amount that you decide to put into each will greatly depend upon what stage of life you are in. If you are young and just starting out in your career, you may want to have a high-risk portfolio with the hope of high returns in the distant future. However, if you are near the end of your career, you may want to choose a less risky portfolio.

Create your own portfolio that addresses the following:

After retirement, how much will you like to have annually in order to maintain the standard of living that you expect to have?

How much annually do you plan to set aside for your retirement plan?

How much of this annual contribution will you want to invest in each of the investment categories?

How many years will you work from now until you retire?

Click here to download the retirement Excel spreadsheet you will need for this assignment.

Put the values that you decided on above into the retirement spreadsheet.

Respond to the following

What is your retirement goal? Can you realistically reach the goal that you have set? How long will it take to achieve this retirement goal?

How much money will you need to save in order to achieve your retirement goal?

This assignment assumes that the interest rates will remain constant for the entire life of the retirement plan. Is this a realistic situation?

Are you planning to have a high-risk or a low-risk portfolio? Explain.

What other factors related to contributing to the typical retirement plan must you consider when managing your portfolio?

What impact will inflation have on your calculations?

Subway, the fast food restaurant franchise, announced in early 2018 it planned to bring back the “$5 Footlong” promotion. Hundreds of Subway franchise owners protested the promotion saying that they cannot afford to sell the footlong sub sandwiches for $5. You'll want to review the Subway webpage featured in the Chapter 8 module.

Assume that the costs related to a Subway footlong and a Subway franchise include the following

NOTE: Assume all subs are paid for with a credit card

Discussion Questions:

Question #1:  Bob owns a subway franchise and he is furious at the thought of offering $5.00 footlongs. His comment was “they cost us $5.41 each so we will be upside down on each sub sold. I’ll lose my shirt!”. Do you agree or disagree with Bob that this idea should be immediately rejected without any further analysis? If you don’t agree with Bob, why do you think further analysis is required?  

Question #2: What are the relevant and irrelevant costs in this pricing decision? (hint: there are 6 relevant costs)

Question #3: Can you think of any other reasons/factors besides the costs listed above that might be relevant to the pricing decision to offer the $5.00 footlongs? Use your imagination

"Wonderful! Not only did our salespeople do a good job in meeting the sales budget this year, but our production people did a good job in controlling costs as well,” said Kim Clark, president of Martell Company. “Our $26,050 overall manufacturing cost variance is only 1.0% of the $2,605,000 standard cost of products made during the year. That's well within the 3% parameter set by management for acceptable variances. It looks like everyone will be in line for a bonus this year."

The company produces and sells a single product. The standard cost card for the product follows:

The following additional information is available for the year just completed:

1. The company manufactured 30,000 units of product during the year.
2. A total of 133,000 feet of material was purchased during the year at a cost of $3.95 per foot. All of this material was used to manufacture the 30,000 units produced. There were no beginning or ending inventories for the year.
3. The company worked 70,000 direct labor-hours during the year at a direct labor cost of $12.70 per hour.
4. Overhead is applied to products on the basis of standard direct labor-hours. Data relating to manufacturing overhead costs follow:

Required:

1. Compute the materials price and quantity variances for the year.

2. Compute the labor rate and efficiency variances for the year.

3. For manufacturing overhead compute:

a. The variable overhead rate and efficiency variances for the year.

b. The fixed overhead budget and volume variances for the year.

(For all requirements, indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

Marine, Inc., manufactures a product that is available in both a flexible and a rigid model. The company has made the rigid model for years; the flexible model was introduced several years ago to tap a new segment of the market. Since introduction of the flexible model, the company’s profits have steadily declined, and management has become concerned about the accuracy of its costing system. Sales of the flexible model have been increasing rapidly.

Overhead is applied to products on the basis of direct labor-hours. At the beginning of the current year, management estimated that $600,000 in overhead costs would be incurred and the company would produce and sell 1,000 units of the flexible model and 10,000 units of the regular model. The flexible model requires 2.0 hours of direct labor time per unit, and the regular model requires 1.0 hours. Direct materials and labor costs per unit are given below:

Required:   

1-a. Compute the predetermined overhead rate using direct labor-hours as the basis for allocating overhead costs to products.

1-b. Compute the unit product cost for one unit of each model.

2. An intern suggested that the company use activity-based costing to cost its products. A team was formed to investigate this idea. It came back with the recommendation that four activity cost pools be used. These cost pools and their associated activities are listed as follows:

Compute the activity rate for each of the activity cost pools.     

3-a. Using activity-based costing, determine the total amount of overhead that would be assigned to each model for the year.

3-b. Using activity-based costing, compute the unit product cost for one unit of each model.

How would you interpret the below financials?