Investing

As you've read in your text, the overall percentage of U.S. citizens participating in a stock market either through individual holdings or through financial intermediaries such as mutual funds has declined since the 2008 recession. Prior to 2008, a greater percentage of Americans held stock market investments than do in 2018. This is an interesting characteristic, given the following factors:

1. Investing in the market through savings plans, 401k or 403b accounts, individual IRAs, or similar retirement plans has never been easier given the amount of information available to any individual. Individuals can invest small amounts such as $20 and benefit from dollar-cost averaging through automatic deposits and electronic transactions such as payroll deductions.
2. While a vast majority of Americans will be dependent on Social Security as their primary source for retirement income, the message that relying solely on SS for retirement continues to be broadcast by media outlets such as the AARP.
3. Since 2008, the markets have rebounded significantly from their 2008 lows.
4. Basic principles of investing are easily located on the internet, from a variety of sources. For example, see the "Index Card" resource posted in Week 5, which is a short list of fundamental investing principles.

For this discussion post, you are to state a position and present an argument related to the above state of investing by U.S. citizens today. Why has the overall percentage of Americans invested in the market decreased in the last decade? And, subsequently, what can be done about this? In your argument, which is to be supported by both textbook and outside research, delve into one or more of the primary concepts presented in this week's readings. These include the various stock market indexes, international markets, the role of the mutual fund industry, active versus passive investing, in addition to multiple other concepts.  

1. How does your estimate of beta compare with the beta estimate provided (1.07)? Why might your estimate differ from estimated beta of 1.07?

2. How much of the variability of your security’s return is “explained” by the variability of returns in the “market”? (Note: In your case, the market is represented by the S&P 500 Index.) Do you think that a different market index might be a better representation of the market for your particular security? Why/Why not?

3. What is the correlation of returns for your security with the market for the selected time period? Might this relationship change over time, and if so, how and why?

4. Does the relationship between your security and the market appear to be statistically significantly different than zero? What evidence from the regression supports your conclusion?

5. Review the standardized residuals and comment about the importance of individual data points (if any) that may have influenced your estimation of beta. (observation 2 is the only skewed one)

Assume there are three companies that in the past year paid exactly the same annual dividend of ​$2.88 a share. In​ addition, the future annual rate of growth in dividends for each of the three companies has been estimated as​ follows:

(Click on the icon located on the​ top-right corner of the data table below in order to copy its contents into a​ spreadsheet.)

Assume also that as the result of a strange set of​ circumstances, these three companies all have the same required rate of return (r=14%).

a. Use the appropriate DVM to value each of these companies.

b. Comment briefly on the comparative values of these three companies. What is the major cause of the differences among these three​ valuations?

a. For​ Buggies-Are-Us, the value of the​ company's common shares is $___. (Round to the nearest​ cent.)

For Steady​ Freddie, Inc., the value of the​ company's common shares is $__. (Round to the nearest​ cent.)

For Gang Buster​ Group, the value of the​ company's common shares is $___. (Round to the nearest​ cent.)

b. Comment briefly on the comparative values of these three companies. What is the major cause of the differences among these three​ valuations?​(Select the best choice​ below.)

A.The value of​ Buggies-Are-Us is $20.57 compared to $62.80 for Steady​ Freddie, Inc., and $70.45 for Gang Busters Group. The difference in values is caused by the difference in dividend growth rates. The​ Buggies-Are-Us dividends do not​ grow, resulting in the lowest value. The dividends of Steady​ Freddie, Inc., grow at a constant rate of 9​% forever, whereas Gang Busters​ Group's dividends grow at approximately​ 12% for the first four years and 14​% from year five to the foreseeable future. The higher growth in dividends in the earlier years causes the stock of Gang Busters Group to be worth more than Steady​ Freddie, Inc., stock.

B. The value of​ Buggies-Are-Us is $20.57 compared to $62.80 for Steady​ Freddie, Inc., and $70.45 for Gang Busters Group. The difference in values is caused by the difference in dividend growth rates. The​ Buggies-Are-Us dividends do not​ grow, resulting in the lowest value. The dividends of Steady​ Freddie, Inc., grow at a constant rate of 9​% forever; whereas Gang Busters​ Group's dividends grow at approximately​ 12% for the first four years and 9​% from year five to the foreseeable future. The higher growth in dividends in the earlier years causes the stock of Gang Busters Group to be worth more than the Steady​ Freddie, Inc., stock.

Introducing Students to the FASB Codification System 163 The Accounting Educators’ Journal, 2011 Case 3 Sublease You are an audit partner in Slick & Co. CPAs. Mann Co. has been an audit client for ten years. Mann Company is owned by Lisa Mann who is a very astute businesswoman but she is not at all knowledgeable about GAAP. In fact over the years she has complained about the “stupid GAAP rules”. Lisa has built Mann into a $100 million in sales company that went public several years ago. You ran into her waiting in line at a restaurant and she indicated that she had a problem you need to address for her. She said: “ I know you remember all of the equipment we leased about three years ago. Remember, we had disagreements on how the lease should be handled. You made us treat it as a purchase and record a related liability of about $5 million, as I recall. The lease was an eight-year lease and we have been depreciating the asset over the lease term. As you know, our business has been expanding rapidly and the leased equipment is no longer adequate for our needs. We have decided to buy or lease new high output equipment. The lease on the original equipment allows us to sub-lease the equipment, which is our plan since the lease has another four to five years to go. My question to you is, if we sublease the equipment can we take it and the related liability off our books? We really need to get that debt off our books. Perhaps you could tell me how we should structure the deal so that we can get the liability off the books.” At this point Lisa was told that her table was ready so she needed to rejoin her party. She said “Would you please write a letter giving your advice and please give me specific references to GAAP so that my controller can review the materials with me. Thanks so much for your help on this. I really need to join my friends….. Try the Veal Marsala…it is great here!” Write a memo to Lisa Mann providing the information she requested.

A sales manager for a company is concerned about possible differences in the popularity of his product in Western and Eastern Canada. In order to develop a marketing strategy, a survey of possible customers was conducted in each of these regions.

West (x) Sample Size 600, Number who prefer the product 283

East (y) Sample Size 550, Number who prefer the product 218

1. (a) Is the product's popularity different for these two regions? Test at a = 0.05.

2. (b) Estimate the difference in the proportion of people in western and eastern Canada who

   prefer the product using a 95% confidence interval.

Suppose Congress (in an attempt to stimulate the economy in both the short and long run) passes an investment-tax credit designed to increase domestic investment.

How will this policy affect (comparing the state of the economy prior to the enactment of the Investment Tax Credit): [Explain how you worked out your answers in each case.]

1) national saving?

2) domestic investment?

3) net capital outflow?

4) the real interest rate?

5) the exchange rate?

6) the trade balance?

Hints:

1) An investment-tax credit provides businesses with a "credit" on their federal income-tax obligation that is proportional to the dollars spent on qualifying capital goods purchases during a given tax year. A 10% tax credit might work as follows. Consider the purchase of a new computer system for your company which costs $100,000. This investment would translate into a $10,000 credit (reduction) in taxes owed by the company at the end of the year. Thus a policy enacting an investment tax credit is expected to increase the demand for investment goods at every interest rate. You should think about what happens to the demand for loanable funds if there is an increase in the domestic demand for investment goods at every real interest rate.

2) Using the 3-graph model developed in chapter 14 (see Figures 3 through 7 on pages 301 - 309), consider first the impact on the demand for loanable funds. If businesses respond as expected to the investment-tax credit, consider what will happen to the demand for loanable funds. Given this, consider what, if any, change there will be in interest rates. If interest rates change, then consider what the expected impact will be on net capital outflow (net foreign investment). [Pay close attention to Figure 3 (page 301). A rise in the real interest rate causes net capital outflow (aka net foreign investment) to move in a negative direction. Think about this in the following way. As real interest rates in the US rise (relative to real rates in the rest of the world) the foreign demand for US assets rises. At the same time the US demand for foreign assets will fall because of the higher return available in the US. Both effects cause net foreign investment to move in a negative direction.]

Mr. Bestall, CFO of the Best Finance Inc., was satisfied with its income statement report. He decided to have a meeting with the analysts following the Best Finance Inc. before filing its financial statements with the SEC. The following conversation was in the meeting. CFO: The year ended on September 30 should be our most profitable in history and as a consequence, the board of directors has just awarded the officers generous bonuses. Analysts: I thought profits were down this year in the industry, mainly because of the pandemic COVID 19. Your latest interim report showed losses too. CFO: Well, they were down, but ten days before closing the accounting period we closed a deal that will give us a substantial increase for the year. Analysts: Oh, what was it? CFO: Well, you remember a few years ago our former president bought stock in Jubilee Enterprises because he had an inorganic growth plan. For six years, we have not been able to sell this stock, which cost us $3,000,000 and has not paid any dividends at all. We sold this stock to Rich & Rich Inc. for $4,000,000. So we had a gain of $700,000 ($1,000,000 before tax) which increased our net income for the year to $4,000,000. Last year's net income was $3,700,000. As far as I know, we will be the only company in the industry to register an increase in net income this year. That should help the market value of the stock! Analysts: When do you expect to receive the $4,000,000 in cash? CFO: They give us a $4,000,000 zero-interest bearing note with payments of $400,000 per year for the next ten years. The first payment is due on September 30 next year. Rich & Rich Inc. is an excellent company. They are a little tight for cash because of their rapid growth. Analysts: Why is the note zero-interest bearing? CFO: Because that's what everybody agreed to. Since we don't have any interest-bearing debt, the funds invested in the note do not cost us anything and besides, we were not getting any dividends on the Jubilee Enterprises stock.

Do you agree with the way the CFO has accounted for the transaction?

Explain your reasoning.

CORPORATE LAW

OK Sdn Bhd had appointed Razif to audit the company's account. While doing the audit, Razif discovered several invoices that showed signs of having been altered. He also found that some files were missing from the file cabinets in the accounts office. He enquired about it and the company's managing director, Tuan Suhaimi, told him that the company's office was broken into a few weeks before and some files had been stolen. Tuan Suhaimi also informed Razif that the altered invoices were due to some clerical mistakes.

Razif accepted the explanation and without investigating it further, he then prepared a report which was tabled at the company's annual general meeting. It turned out that Tuan Suhaimi had siphoned nearly RM 1.4 million from the company and transferred them to his personal account. Tuan Suhaimi had since migrated to Australia taking the money with him. Mona, who relied on Razif account report has subsequently subscribed and paid for the shares in the company and she suffered losses.

The company and Mona now wish to take action against Razif. Advise Razif.

prepare general journal entries on Dec 31 to record the following unrelated year end adjustments.

a. On October 1, the company received 4 months rent in advance from a tenant whose rent is $650 per month. The $2,000 was credited to the Unearned Rent account.

b.) The prepaid insurance account has a $5,200 debit balance before adjustment. An examination of insurance policies shows $800 of unexpired insurance.

c.) The company collects rent revenue monthly from its tenants. One tenant whose rent is $825 per month has not paid his rent for November and December.

d.) The prepaid Insurance account has a $3,700 debit balance before adjustment. An examination of insurance policies shows $1,050 of insurance expired.

e.) Estimated depreciation on a copy machine for the office for the year is $1,500.

f.) The company has four office employees who each earn $150 per day for a five day work week that ends on Friday. The employees were paid on Friday, Dec 27, and have worked full days on Monday and Tuesday, December 30 and 31