You work at the equity research department of a large investment bank and your task is to determine the value of the company Example.com using the WACC method. You have the following estimates for Example.com’s yearly financials for the year 2018.

a. Net Income is £300 million.

b. The corporate tax rate is 25%.

c. The interest expense is £100 million. d. Depreciation is £150 million.

e. Capital expenditure is £200 million.

f.    Net working capital in December 2017 is equal to £350 million and net working capital in December

2018 is equal to £400 million.

g. Total unlevered free cash flows are expected to grow at a rate of 30% per year until December 2020, and then the growth rate will drop to 4% per year forever.

As Example.com is not public yet, you have to estimate its cost of capital using a comparable firm

Model.com. You have the following information for the comparable:

–    The debt-to-equity ratio (D/E) of Model.com is expected to remain constant at 0.5 and its debt beta is zero.

–    The equity beta of Model.com is 1.2.

Assume the CAPM relation holds for equity capital (not necessarily for debt), the risk-free rate is 4%, and the expected market risk premium is 6%.

The debt-to-equity ratio (D/E) of Example.com is expected to remain constant at 1, its debt beta is zero, and its (pre-tax) cost of debt is 4.8%.

a. Forecast the unlevered free cash flows of Example.com in 2019 and 2020.

b. Estimate the after-tax weighted average cost of capital (WACC) for Example.com. c. What is the enterprise value of Example.com at the beginning of 2019? You may

assume that all cash flows occur at the end of each year.

You work at the equity research department of a large investment bank and your task is to determine the value of the company Example.com using the WACC method. You have the following estimates for Example.com’s yearly financials for the year 2018.

a. Net Income is £300 million.

b. The corporate tax rate is 25%.

c. The interest expense is £100 million. d. Depreciation is £150 million.

e. Capital expenditure is £200 million.

f.    Net working capital in December 2017 is equal to £350 million and net working capital in December

2018 is equal to £400 million.

g. Total unlevered free cash flows are expected to grow at a rate of 30% per year until December 2020, and then the growth rate will drop to 4% per year forever.

As Example.com is not public yet, you have to estimate its cost of capital using a comparable firm

Model.com. You have the following information for the comparable:

–    The debt-to-equity ratio (D/E) of Model.com is expected to remain constant at 0.5 and its debt beta is zero.

–    The equity beta of Model.com is 1.2.

Assume the CAPM relation holds for equity capital (not necessarily for debt), the risk-free rate is 4%, and the expected market risk premium is 6%.

The debt-to-equity ratio (D/E) of Example.com is expected to remain constant at 1, its debt beta is zero, and its (pre-tax) cost of debt is 4.8%.

a. Forecast the unlevered free cash flows of Example.com in 2019 and 2020.

b. Estimate the after-tax weighted average cost of capital (WACC) for Example.com. c. What is the enterprise value of Example.com at the beginning of 2019? You may

assume that all cash flows occur at the end of each year.

Zappa is a mining company listed in Australia with a number of subsidiaries. Extracts from the consolidated statement of profit or loss and other comprehensive income of Zappa for the year ended 30 June 2020 appear below: Attributable to Zappa Non-controlling interest Total $’000 $’000 $’000 Profit for the year 39,000 3,000 42,000 Other comprehensive income Total comprehensive income 5,000 ––––––– 44,000 ––––––– Nil –––––– 3,000 –––––– 5,000 ––––––– 47,000 ––––––– Additional information of Zappa comprises: i. 200 000 000 ordinary shares in issue at the beginning of financial year - 1/7/2019. On 1 April 2020, Zappa issued further 50 000 000 new ordinary shares at full market value. ii. 80 000 000 preference shares. These shares were in issue for the whole of financial year ended 30 June 2020. The dividend on these preference shares is discretionary. iii. $180 000 000 in convertible debentures issued on 1 July 2018 and repayable on 30 June 2023. Interest is payable annually in arrears and the interest rate is 10%. These debentures could be converted to 100 000 000 ordinary shares at the option of the debenture holders. In the year ended 30 June 2020, Zappa declared an ordinary share dividend of 10 cents per share and a dividend of 5 cents per share on the preference shares. The corporation tax for Zappa and its subsidiaries is 30%. All transactions have been correctly accounted for in the financial statements of Zappa for the year ended 30 June 2020. Required: a) Explain the meaning of the term ‘potential ordinary shares’ and provide TWO examples of potential ordinary shares OTHER THAN convertible loans. b) Explain how the diluted earnings per share is calculated and when it needs to be disclosed. c) Compute the basic and diluted earnings per share amounts for Zappa for the year ended 30 June 2020 which will be presented in its consolidated financial statement

Zappa is a mining company listed in Australia with a number of subsidiaries. Extracts from the consolidated statement of profit or loss and other comprehensive income of Zappa for the year ended 30 June 2020 appear below: Attributable to Zappa Non-controlling interest Total $’000 $’000 $’000 Profit for the year 39,000 3,000 42,000 Other comprehensive income Total comprehensive income 5,000 ––––––– 44,000 ––––––– Nil –––––– 3,000 –––––– 5,000 ––––––– 47,000 ––––––– Additional information of Zappa comprises: i. 200 000 000 ordinary shares in issue at the beginning of financial year - 1/7/2019. On 1 April 2020, Zappa issued further 50 000 000 new ordinary shares at full market value. ii. 80 000 000 preference shares. These shares were in issue for the whole of financial year ended 30 June 2020. The dividend on these preference shares is discretionary. iii. $180 000 000 in convertible debentures issued on 1 July 2018 and repayable on 30 June 2023. Interest is payable annually in arrears and the interest rate is 10%. These debentures could be converted to 100 000 000 ordinary shares at the option of the debenture holders. In the year ended 30 June 2020, Zappa declared an ordinary share dividend of 10 cents per share and a dividend of 5 cents per share on the preference shares. The corporation tax for Zappa and its subsidiaries is 30%. All transactions have been correctly accounted for in the financial statements of Zappa for the year ended 30 June 2020. Required: a) Explain the meaning of the term ‘potential ordinary shares’ and provide TWO examples of potential ordinary shares OTHER THAN convertible loans. b) Explain how the diluted earnings per share is calculated and when it needs to be disclosed. c) Compute the basic and diluted earnings per share amounts for Zappa for the year ended 30 June 2020 which will be presented in its consolidated financial statement

1. What factor is important in classifying an investment at fair value through profit or loss?

a. Whether the instrument has a set maturity date.

b.What is the business model within which the investments are held?

c.Whether the instrument is a debt, equity or derivative instrument.

ACE Inc has the following investments at December 31, 2020:

4..If ACE classifies its investment in DEF at fair value through profit or loss, what amount will be reported in income for the three months ended December 31, 2020 pertaining to this investment?

d.Whether the instrument generates dividends.

2. What should an investment in a debt investment be classified as when management has not specifically identified the classification? That is to say, in the absence of an election, what is the default category?

3. Fisher Corporation has the following investments at September 30, 2020:

What method of accounting can Fisher not use to account for its investment in Cookstown?

Upstream Intercompany Merchandise Transactions

Jimmitz Inc. is a subsidiary of Krocker Gear. Jimmitz sells shoe accessories to Krocker at a 25% markup on cost. Information on these intercompany merchandise transactions is below:

Required

a. Prepare the working paper eliminating entries related to these intercompany transactions at December 31, 2020.

b. Krocker sold shoes containing Jimmitz’s shoe accessories during 2020.

What amount did Krocker and Jimmitz record as cost of goods sold for the shoe accessories in 2020?

$Answer

What amount should appear in consolidated cost of goods sold for these shoe accessories?

$Answer

Show how the eliminating entries in part a adjust Krocker’s cost of goods sold balance to the correct consolidated balance.

Shamrock Corporation is preparing the comparative financial statements for the annual report to its shareholders for fiscal years ended May 31, 2020, and May 31, 2021. The income from operations for the fiscal year ended May 31, 2020, was $1,818,000 and income from continuing operations for the fiscal year ended May 31, 2021, was $2,424,000. In both years, the company incurred a 10% interest expense on $2,424,000 of debt, an obligation that requires interest-only payments for 5 years. The company experienced a loss from discontinued operations of $575,000 on February 2021. The company uses a 20% effective tax rate for income taxes. The capital structure of Shamrock Corporation on June 1, 2019, consisted of 1,037,000 shares of common stock outstanding and 19,100 shares of $50 par value, 6%, cumulative preferred stock. There were no preferred dividends in arrears, and the company had not issued any convertible securities, options, or warrants. On October 1, 2019, Shamrock sold an additional 511,000 shares of the common stock at $20 per share. Shamrock distributed a 20% stock dividend on the common shares outstanding on January 1, 2020. On December 1, 2020, Shamrock was able to sell an additional 785,000 shares of the common stock at $22 per share. These were the only common stock transactions that occurred during the two fiscal years.

Determine the weighted-average number of shares that Shamrock Corporation would use in calculating earnings per share for the fiscal year ended:

Prepare, in good form, a comparative income statement, beginning with income from operations, for Shamrock Corporation for the fiscal years ended May 31, 2020, and May 31, 2021. This statement will be included in Shamrock’s annual report and should display the appropriate earnings per share presentations. (Round earnings per share to 2 decimal places, e.g. $1.55.)

Mars Dump is a multinational company that is caught by the Emissions Trading Scheme (ETS).

Details of ETS are as follows:

It is a cap and trade scheme in which permits are traded in an active market. Its annual compliance period is from 1 July of the current period to 30 June of the following year.

Each participating company receives an allocation of free permits each year based on their reporting carbon emissions from the previous period. In the case of Mars Dump Ltd, permits to emit 36 000 tonnes of carbon dioxide equivalents have been issued on the first day of the current period (i.e. 1 July 2019) when the market price of a permit was $25 per tonne of carbon dioxide equivalents.

During the 2019/2020 financial year, Mars Dump emitted 37 000 tonnes of carbon dioxide equivalents, which exceeded its permitted emissions of 36 000 tones. This occurred despite the managers of Mars Dump estimating that it had emitted 19 000 tonnes of carbon dioxide equivalents by 31 March 2020 and was therefore on target to emit 36 000 tonnes by 30 June 2020. The market price of a permit is $27 on 31 March 2020. As a result of exceeding allowed emission levels, on 30 June 2020, Mars Dump purchased 1 000 permits at a market price of $33 per tonne. Mars Dump uses the cost model in accordance with AASB 138, and amortises any deferred income arising from the permits using the proportion of actual emissions to estimated total emissions.

Required

1. How can stakeholder theory be used to explain companies voluntarily undertaking corporate social responsibility reporting? Discuss.                                                                            
2. “There is no mandatory reporting of corporate social responsibility in Australia.” What is your understanding of this phrase? Explain.                                                          
3. Account for above events in the books of Mars Dump Ltd for the period 1 July 2019 to 30 June 2020 in accordance with the requirements of Interpretation 3 and AASB138.                                                                                                                                                                     

Corporate Social Responsibility (CSR)

Mars Dump is a multinational company that is caught by the Emissions Trading Scheme (ETS).

Details of ETS are as follows:

It is a cap and trade scheme in which permits are traded in an active market. Its annual compliance period is from 1 July of the current period to 30 June of the following year.

Each participating company receives an allocation of free permits each year based on their reporting carbon emissions from the previous period. In the case of Mars Dump Ltd, permits to emit 36 000 tonnes of carbon dioxide equivalents have been issued on the first day of the current period (i.e. 1 July 2019) when the market price of a permit was $25 per tonne of carbon dioxide equivalents.

During the 2019/2020 financial year, Mars Dump emitted 37 000 tonnes of carbon dioxide equivalents, which exceeded its permitted emissions of 36 000 tones. This occurred despite the managers of Mars Dump estimating that it had emitted 19 000 tonnes of carbon dioxide equivalents by 31 March 2020 and was therefore on target to emit 36 000 tonnes by 30 June 2020. The market price of a permit is $27 on 31 March 2020. As a result of exceeding allowed emission levels, on 30 June 2020, Mars Dump purchased 1 000 permits at a market price of $33 per tonne. Mars Dump uses the cost model in accordance with AASB 138, and amortises any deferred income arising from the permits using the proportion of actual emissions to estimated total emissions.

Required

1. How can stakeholder theory be used to explain companies voluntarily undertaking corporate social responsibility reporting? Discuss.                                                                            
2. “There is no mandatory reporting of corporate social responsibility in Australia.” What is your understanding of this phrase? Explain.                                                          

Account for above events in the books of Mars Dump Ltd for the period 1 July 2019 to 30 June 2020 in accordance with the requirements of Interpretation 3 and AASB138.