Question 1
P11-6 Contribution margin, break-even sales, cost-volume-profit chart, margin of safety, and operating leverage Organic Health Care Products Inc. expects to maintain the same inventories at the end of 2012 as at the beginning of the year. The total of all production costs for the year is therefore assumed to be equal to the cost of goods sold. With this in mind, the various department heads were asked to submit estimates of the costs for their departments during 2012. A summary report of these estimates is as follows: Estimated Fixed Cost Estimated Variable Cost (per unit sold) Production costs: Direct materials ? $ 8.00 Direct labor ? 3.00 Factory overhead $ 200,000 1.50 Selling expenses: Advertising 1,450,000 ? Sales salaries and commissions 93,000 1.85 Travel 340,000 ? Miscellaneous selling expense 2,000 0.10 Administrative expenses: Office and officers? salaries 300,000 ? Supplies 10,000 0.50 Miscellaneous administrative expense 5,000 0.05 __________________________________________________________________________________________________________________ Total $2,400,000 $15.00 On the attaches page, 1. Prepare an estimated income statement for 2012. 2. What is the expected contribution margin ratio? 3. Determine the break-even sales in units. 4. Construct a cost-volume-profit chart indicating the break-even sales. 5. What is the expected margin of safety in dollars and as a percentage of sales? 6. Determine the operating leverage
Question 2
Carow Corporation purchased, as a held-to-maturity investment, $62,900 of the 9%, 6-year bonds of Harrison, Inc. for $68,983, which provides a 7% return. The bonds pay interest semiannually. Prepare Carow?s journal entries for (a) the purchase of the investment, and (b) the receipt of semiannual interest and premium amortization. Assume effective-interest amortization is used. (Round answers to 0 decimal places, e.g. 2,500. Credit account titles are automatically indented when amount is entered. Do not indent manually.) No. Account Titles and Explanation Debit Credit (a) (b) Hendricks Corporation purchased trading investment bonds for $51,430 at par. At December 31, Hendricks received annual interest of $2,600, and the fair value of the bonds was $48,580. Prepare Hendricks? journal entries for (a) the purchase of the investment, (b) the interest received, and (c) the fair value adjustment. (Credit account titles are automatically indented when amount is entered. Do not indent manually.) No. Account Titles and Explanation Debit Credit (a) (b) (c) Cardinal Paz Corp. carries an account in its general ledger called Investments, which contained debits for investment purchases, and no credits, with the following descriptions. Feb. 1, 2012 Sharapova Company common stock, $104 par, 208 shares $44,600 April 1 U.S. government bonds, 10%, due April 1, 2022, interest payable April 1 and October 1, 115 bonds of $1,000 par each 115,000 July 1 McGrath Company 12% bonds, par $51,200, dated March 1, 2012, purchased at 104 plus accrued interest, interest payable annually on March 1, due March 1, 2032 55,296 (a) Prepare entries necessary to classify the amounts into proper accounts, assuming that all the securities are classified as available-for-sale. (Credit account titles are automatically indented when amount is entered. Do not indent manually.) Account Titles and Explanation Debit Credit (b) Prepare the entry to record the accrued interest and the amortization of premium on December 31, 2012, using the straight-line method. (Round answers to 0 decimal places, e.g. $2,500. Credit account titles are automatically indented when amount is entered. Do not indent manually.) Account Titles and Explanation Debit Credit (c) The fair values of the investments on December 31, 2012, were: Sharapova Company common stock $35,490 U.S. government bonds 146,820 McGrath Company bonds 66,010 What entry or entries, if any, would you recommend be made? (Round answers to 0 decimal places, e.g. $2,500. Credit account titles are automatically indented when amount is entered. Do not indent manually.) Account Titles and Explanation Debit Credit (d) The U.S. government bonds were sold on July 1, 2013, for $120,480 plus accrued interest. Give the proper entry. (Credit account titles are automatically indented when amount is entered. Do not indent manually.) Account Titles and Explanation Debit Credit
Question 3
"Complete and submit to your instructor Case 14.1: Alternative investment options 9 (pages 613-614) and Case 15.2: Hedging with Stock-index futures (pages 647-648). Instructions are as follows: The final cases should demonstrate understanding of the reading as well as the implications of new knowledge. The 15 to 20 page paper covering both cases should integrate readings and class discussions into work and life experiences. It may include explanation and examples from previous experiences as well as implications for future applications. The purpose of the Final Cases is for you to culminate the learning achieved in the course by describing your understanding and application of knowledge in the field of financial investment management. Use formulas to calculate the answers to mathematical sections and round to the nearest whole number. Clearly label the analysis. Case Problem 14.1 The Franciscos? Investment Options CASE 1 Hector Francisco is a successful businessman in Atlanta. The box-manufacturing firm he and his wife, Judy, founded several years ago has prospered. Because he is self-employed, Hector is building his own retirement fund. So far, he has accumulated a substantial sum in his investment account, mostly by following an aggressive investment posture. He does this because, as he puts it, ?In this business, you never know when the bottom?s gonna fall out.? Hector has been following the stock of Rembrandt Paper Products (RPP), and after conducting extensive analysis, he feels the stock is about ready to move. Specifically, he believes that within the next 6 months, RPP could go to about $80 per share, from its current level of $57.50. The stock pays annual dividends of $2.40 per share. Hector figures he would receive two quarterly dividend payments over his 6-month investment horizon. In studying RPP, Hector has learned that the company has 6-month call options (with $50 and $60 strike prices) listed on the CBOE. The CBOE calls are quoted at $8 for the options with $50 strike prices and at $5 for the $60 options. Questions a. How many alternative investment vehicles does Hector have if he wants to invest in RPP for no more than 6 months? What if he has a 2-year investment horizon? b. Using a 6-month holding period and assuming the stock does indeed rise to $80 over this time frame: 1. Find the value of both calls, given that at the end of the holding period neither contains any investment premium. 2. Determine the holding period return for each of the 3 investment alternatives open to Hector Francisco. c. Which course of action would you recommend if Hector simply wants to maximize profit? Would your answer change if other factors (e.g., comparative risk exposure) were considered along with return? Explain. CASE 2 Case Problem 15.2 Jim and Polly Pernelli Try Hedging with Stock-Index Futures Jim Pernelli and his wife, Polly, live in Augusta, Georgia. Like many young couples, the Pernellis are a 2-income family. Jim and Polly are both college graduates and hold high-paying jobs. Jim has been an avid investor in the stock market for a number of years and over time has built up a portfolio that is currently worth nearly $375,000. The Pernellis? portfolio is well diversified, although it is heavily weighted in high-quality, mid-cap growth stocks. The Pernellis reinvest all dividends and regularly add investment capital to their portfolio. Up to now, they have avoided short selling and do only a modest amount of margin trading. Their portfolio has undergone a substantial amount of capital appreciation in the last 18 months or so, and Jim is eager to protect the profit they have earned. And that?s the problem: Jim feels the market has pretty much run its course and is about to enter a period of decline. He has studied the market and economic news very carefully and does not believe the retreat will cover an especially long period of time. He feels fairly certain, however, that most, if not all, of the stocks in his portfolio will be adversely affected by these market conditions?though some will drop more in price than others. Jim has been following stock-index futures for some time and believes he knows the ins and outs of these securities pretty well. After careful deliberation, Jim and Polly decide to use stock-index futures?in particular, the S&P MidCap 400 futures contract?as a way to protect (hedge) their portfolio of common stocks. Questions a. Explain why the Pernellis would want to use stock-index futures to hedge their stock portfolio, and how they would go about setting up such a hedge. Be specific. 1. What alternatives do Jim and Polly have to protect the capital value of their portfolio? 2. What are the benefits and risks of using stock-index futures as hedging vehicles? b. Assume that S&P MidCap 400 futures contracts are currently being quoted at 769.40. How many contracts would the Pernellis have to buy (or sell) to set up the hedge? 1. Say the value of the Pernelli portfolio dropped 12% over the course of the market retreat. To what price must the stock-index futures contract move in order to cover that loss? 2. Given that a $16,875 margin deposit is required to buy or sell a single S&P 400 futures contract, what would be the Pernellis? return on invested capital if the price of the futures contract changed by the amount computed in part b1, above? c. Assume that the value of the Pernelli portfolio declined by $52,000, while the price of an S&P 400 futures contract moved from 769.40 to 691.40. (Assume that Jim and Polly short sold one futures contract to set up the hedge.) 1. Add the profit from the hedge transaction to the new (depreciated) value of the stock portfolio. How does this amount compare to the $375,000 portfolio that existed just before the market started its retreat? 2. Why did the stock-index futures hedge fail to give complete protection to the Pernelli portfolio? Is it possible to obtain perfect (dollar-for-dollar) protection from these types of hedges? Explain. d. What if, instead of hedging with futures contracts, the Pernellis decide to set up the hedge by using futures options? Fortunately, such options are available on the S&P MidCap 400 Index. These futures options, like their underlying futures contracts, are also valued/priced at $500 times the underlying S&P 400 Index. Now, suppose a put on the S&P MidCap 400 futures contract (with a strike price of 769) is currently quoted at 5.80, and a comparable call is quoted at 2.35. Use the same portfolio and futures price conditions as set out in part c to determine how well the portfolio would be protected if these futures options were used as the hedge vehicle. (Hint: Add the net profit from the hedge to the new depreciated value of the stock portfolio.) What are the advantages and disadvantages of using futures options, rather than the stock-index futures contract itself, to hedge a stock portfolio? Must be 15- to 20- double-spaced pages in length and formatted according to APA style as outlined in the approved APA style guide. Must include a cover page that includes: Student?s name Course name and number Title of paper Instructor?s name Date submitted Must include an introductory paragraph with a succinct thesis statement. Must address the topic of the paper with critical thought. Must conclude with a restatement of the thesis and a conclusion paragraph. Must use at least five professional resources, including a minimum of two from ProQuest. Must use APA style as outlined in the approved APA style guide to document all sources. Must include, on the final page, a Reference Page that is completed according to APA style as outlined in the approved APA style guide. ",Both cases are provided
Question 4
2011 Broward County Comprehensive Annual Financial Report (CAFR) General Instructions For this assignment, you will be reading portions of the 2011 Comprehensive Annual Financial Report (CAFR) issued by Broward County. You will be asked selected questions from the CAFR and provide interpretation/comment. Specific Requirements 1. From the Statement of Net Assets and related information, please answer the following questions: a. What assets are included in Governmental Activities- Not-depreciable Capital Assets? Provide a breakdown by type of asset and amount. b. What is the largest asset included in the Business-type Activities Depreciable Capital Assets? Identify the particular asset and the amount included for that asset. c. What percentage of Governmental Activities Net Assets are unrestricted? What percentage of Business Activities Net Assets are unrestricted? What can you learn from these percentages? d. From the Management, Discussion and Analysis, pick 3 accounts that from the Statement of Net Assets that have changed significantly from 2010 to 2011. Identify the changes, significance (% change, etc.), and discuss contributing factors identified in the report. Hint: use MD&A plus notes. e. Explain what is and why there is separate reporting for the component unit. 2. From the Statement of Activities, please answer the following questions: a. Based on Net Expense, which three Governmental Activities had the highest net expense? Identify the activities and the amounts. b. Which Business-type Activities had Net Expense (i.e., Expenses higher than Program Revenues)? Identify the activities and the amounts. c. What were the five largest General Revenues? Identify the revenue items and the amounts. d. What was the amount of the Change in Net Assets for Governmental Activities? e. From the Management, Discussion and Analysis, pick 3 accounts that from the Statement of Activities that have changed significantly from 2010 to 2011. Identify the changes, significance (% change, etc.), and discuss contributing factors identified in the report. Hint: use MD&A plus notes. 3. Review the information reported in the Governmental Funds Balance Sheet and answer the following questions: a. What are the names of the major government funds? b. What is accounted for in each of the major governmental funds c. Identify the purposes for which the General Fund fund balance is reserved and the amounts that are reserved for each purpose. 4. Review the information reported in the Reconciliation schedule and answer the following questions: a. What is being reconciled in this schedule and why is this reconciliation needed? Hint: to answer this question adequately, you need to discuss how the Governmental Funds Balance Sheet differs from the Statement of Net Assets. b. In your own words, explain the two largest reconciling items (differences) on the Reconciliation. 5) Describe the nature and impact of the prior period adjustment? 6) Review the information reported in the Governmental Funds Statement of Revenue, Expenditures, and Changes in Fund Balances , and answer the following questions: a. What are the three largest sources of revenues in the General Fund, and how much was reported for each source? b. How much did the County expend during the year ended September 30, 2011 for Debt Service? What was the breakdown for these expenditures (e.g., how much for principal)? 7. Revenue the comparison of budgeted and actual revenue, expenditures, and changes in fund balance for the General Fund, and answer the following questions: a. Was actual revenue higher or lower than budgeted? What were the two largest variances (positive or negative), and what was the amount of each variance? b. Were actual expenditures higher or lower than budgeted? What were the two largest variances (positive or negative), and what were the amounts of the variances?
Question 5
I have this case study to do and I have done my spreadsheet but I am not sure if it is done correctly. Can you complete the spreadsheet attached based on the Biotech Services, Inc. case that is written out below? Also the instructions for the case are written below, so in order to complete the spread sheet, read the case first and then the case instructions (there are some changes to the numbers in the case that are stated in the instructions that need to be used in order to complete the spreadsheet). Also can you answer questions 1-9 that are at the end of the case (below)?? Case 3 Biotech Services, Inc. Lease Versus Buy Decision Case Instructions Due Date: Thursday, October 25, 8:00 am. The case write up can be found in the course notes (starting on the Notes&Cases.pdf file page 192). It consists of a description of the situation, followed by nine questions. You are to complete the following: 1. Build an Excel 2007 or 2010 worksheet to analyze the quantitative aspects of the case. Begin by opening the BiotechStarter.xlsx worksheet and then modify it as necessary to do the analysis. Use the conventions and style of the other worksheets used in the course. Incorporate the ACRS depreciation rates (described in question #2 on page 178 at the end of the case) into your worksheet calculations. Note that on your worksheet the end of year four is the same as the beginning of year five in the case; hence the book value at the end of year four on the worksheet is what the case states it should be at the beginning of year five. Remember to: ? Complete the first 61 rows of the worksheet using formulas similar to those used in class and the Lease Example worksheet. Show the calculation for the cost of owning using both the loan amortization table (A27:E39) and the alternate calculation (M24:N39). The loan amount is $200,000. ? Assume that the market value of the equipment (if purchased) at the end of year four is estimated to be $25,000, not the amount implied by the case write-up. Also note that there are a total of five lease payments for the lease option. ? Be sure to read the comments attached to all cells with a red flag! ? Assume that if the equipment is purchased that it will be depreciated for tax purposes using the ACRS rates given in the spreadsheet. ? In completing the spreadsheet, use equations to link output variable cells with input parameter cells. Note that cells with ?XXXXXX? need to be replaced with either formulas or blank/empty cell entries; the spreadsheet is meant to accommodate a generic lease-buy analysis with up to ten years of cash flows so you may leave cells in rows beyond the life of this project blank. ? Perform the tasks and answer the questions listed on the spreadsheet in the space provided. ? There are nine questions at the end of the case write-up. You will not turn in the written answers to these questions, but you should be prepared to answer questions 1-7 if asked on the in-class case quiz. Lease versus Purchase Biotech Services, Inc. Over the past few years, Florida state officials have become increasingly aware of an extremely serious problem-the potential pollution of groundwater by toxic chemicals, improperly disposed wastes, and malfunctioning septic systems. There are no signs that the main water source underlying the state, the Floridian aquifer, has yet been contaminated. However, there are many indications that agricultural chemicals used in citrus groves, abandoned underground gasoline tanks, and unregulated landfills have caused extensive but localized contamination of wells that tap shallower water-bearing strata. To combat this growing problem, strict environmental regulations have been enacted and are being implemented throughout Florida. As a result of the new laws, soil and water testing demands have put a strain on laboratories' ability to provide prompt test results for a broad spectrum of possible pollutants. Biotech Services, Inc., has profited from the surge in demand for water testing. but the capabilities of its laboratory are strained to the limit. Hence, a significant amount of business has been turned away because of an inability to perform the tests and provide analyses on a timely basis. Elizabeth Jensen, Biotech's founder and president, believed that the acquisition of some new, specialized testing equipment would give the company the analytical capability to service a larger share of the emerging market. Given Biotech's reputation as a leader in the field of environmental monitoring and testing. she was confident that the company could capture a major share of the market if it had the ability to provide the rapid results that would be possible with the new equipment. In the formal capital budgeting analysis of the proposed acquisition, the internal rate of return (IRR) of the project was found to be 26 percent versus a required return of 11 percent. Biotech uses an after-tax cost of capital of 11 percent for relatively low-risk projects and 15 percent for projects with above average risk, so this normal-risk project passed with flying colors. Also, a discounted payback of slightly more than two years indicated that the project was a good investment. The test equipment has an invoice price of $200,000, including delivery and installation charges. Biotech calculates depreciation as specified by the accelerated cost recovery system (ACRS) for a five-year asset, and its effective tax rate is 40 percent. The manufacturer of the equipment will provide a contract for maintenance and service for $15,000 per year, payable in advance for the coming year, if Biotech decides to buy the equipment. Currently the company has sufficient capital in the form of temporary investments in marketable securities to pay cash for the equipment. Jensen does not want to go to the bank for a loan at this time because interest rates are not particularly attractive. She estimates that the interest rate on a fully secured loan for $215,000 would be 12 percent. Hence, she has decided to draw down the securities portfolio and pay cash for the equipment if it is purchased. The maker of the equipment, Spectronics Engineering, has offered to lease the equipment to Biotech Services for $40,000 upon delivery and installation plus four additional lease payments of $40,000 at the end of each of the next four years. This price includes a service contract under which the equipment will be maintained in good. working order. Actually, the expected life of the testing equipment is eight years, at which time it should have a zero market value. At the end of the fourth year, though, the resale value should be substantially in excess of zero. Jensen generally assumes a salvage value equal to the equipment's book value at any point in time, but she is concerned that the difference between the eight-year economic life and the five-year ACRS life might invalidate this assumption. Regardless of whether the equipment is purchased or leased, Jensen does not intend to use it for more than four years. In four years, Biotech's current lease will expire. Land has already been acquired on which to construct a larger facility, which should be ready for occupancy at the expiration of the present lease. The new laboratory will be designed to enable Biotech to use several new analytical processes that are currently unavailable to it, including one that will duplicate all tests of the equipment now being considered. Hence, this project is viewed as a "bridge" to serve only until the permanent equipment can become operational in the new laboratory four years from now. Elizabeth Jensen has always made the final decisions on all lease versus purchase considerations. The actual calculation of the relevant data, however, is the task of Biotech's treasurer, Beverly Brennon. Traditionally, Jensen's method of evaluating such a decision has been to calculate the present value cost of lease payments versus the present value of total charges if the equipment is purchased. However, in a recent decision concerning a matter similar to the one presently being considered, Jensen and Brennon got into a heated discussion about the appropriate discount rate to use in determining the present value costs of leasing and of purchasing. The following points of view were expressed: 1. Jensen argued that the discount rate should be the firm's weighted average cost of capital. A lease versus purchase decision is, in effect, a capital budgeting decision, and, as such, it should be evaluated at the company's cost of capital. In other words, one method or the other will provide a cash saving in any year. The dollars saved using the most advantageous method will be invested to yield the firm's cost of capital. Therefore, the average cost of capital is the appropriate opportunity rate to use in evaluating leasing versus purchasing decisions. 2. Brennan, on the other hand, believed that the cash flows generated in a lease versus purchase situation are more certain than are the cash flows generated by the firm's average projects. Consequently, these cash flows should be discounted at a lower rate because of their lower risk. At the present time the firm's cost of secured debt reflects the lowest risk rate to Biotech Services. Therefore, 12 percent should be used as the discount rate in the lease versus purchase decision. To settle the debate over the previous decision, Jensen and Brennon asked their accountants to review the situation and to advise them on which discount rate was appropriate. This led to an even more confused situation as their accountants, Marion and Shirley Boynton, could not agree among themselves as to the appropriate discount rate. Marion, on the one hand, agreed with Jensen that the discount rate should be the average cost of capital, but on the grounds that leasing is simply an alternative to other means of financing. Since leasing is a substitute for "financing," which is a mix of debt and equity, leasing saves the cost of other financing; this cost is the firm's weighted average cost of capital. Shirley, on the other hand, felt that none of the discount rates mentioned so far adequately accounted for the tax effects inherent in any capital budgeting decision, and she suggested the use of an after-tax cost of secured debt. In the last lease versus purchase decision, the average cost of capital (11 percent) was used, but now Jensen is uncertain about the validity of this procedure. She is inclined toward Shirley Boynton's alternative, but she wonders if it would be appropriate to use a low-risk discount rate for evaluating all cash flows in the analysis. Jensen is particularly concerned about the risk of the differential cash flows on the lease versus purchase decision, as compared to the risk of the expected salvage value. While the company is almost certain of the flows required under the lease or the tax shelters received under the purchase, the salvage value at -the end of the fourth year is relatively uncertain, having a distribution of possible out- comes that makes its risk comparable to that of the average risk project undertaken by the firm. She is also concerned that using a discount rate based on the after-tax cost of a secured loan might be inappropriate when the funds used to purchase the equipment would come from internal corporate sources. Perhaps the cost of equity capital also deserves consideration, because the funds could be paid to the stockholders and invested by them to earn the cost of equity. Questions: 1. The conventional format for analyzing lease versus purchase decisions assumes that money to buy the equipment will be obtained by borrowing. In this case, though, Biotech has sufficient internally generated capital, held in the form of marketable securities, to buy the equipment outright. Does this situation cause any difficulties in structuring the analysis? 2. Set up a worksheet and calculate the comparative cost of leasing versus buying the new testing equipment. (Note: the equipment must be depreciated over six years by the ACRS provisions. The following depreciation rates are specified by the IRS: Year I, 20 percent; Year 2, 32 percent; Year 3, 19 percent; Year 4, 12 percent; Year 5, 11 percent; Year 6,6 percent. Also, assume that if the decision is made to purchase the machine, it will be sold for its book value at the start of Year 5 rather than at the end of Year 4. Otherwise, the Year 4 depreciation could not be taken.) 3. Justify the discount rate or rates that you use in the calculation process. 4. Can you suggest any other way to find a salvage value for the equipment at the end of Year 4 that might be more realistic than merely assuming that it equals the book value? (Hint: See the discussion of "Discounted Service Potential in case 17.) What would happen to the decision indicated by your analysis in Question 2 if you were to use this revised value for the salvage value? 5. Based on the information given in the case, would you classify this lease as a financial lease or as an operating lease? Why? If Biotech Services leased the equipment, and you were told that its value ( $200,000) is a substantial sum of money in relation to Biotech's total assets, would you expect the transaction to cause problems for out- side financial analysts? If it would cause problems, how might analysts overcome them? 6. Should Biotech Services, Inc. lease or purchase the equipment? 7. Now assume that Biotech will definitely use the equipment for its full eight-year life (there is a long-term contract with the Florida Department of Environmental Regulation covering the whole period). However, the equipment manufacturer is only willing to lease it for four years with an option to buy it for its fair market value at the end of the fourth year. This value at Year 4 could turn out to be close to zero, or it could be exceptionally high, but your "best guess" is still the book value. How would this modification of the problem change your analysis of the lease versus purchase decision? Clearly, this modification has introduced more uncertainty into the problem. Has it also increased--or has it decreased-the risk associated with the project? 8. In some instances, a leasing company might offer a contract involving a cost less than the debt cost the firm would incur if it were to attempt to finance the purchase with a loan. If the equipment represented a significant addition to the firm's assets, could this affect its overall cost of capital? 9. Suppose Biotech Services had been operating at a loss and therefore had tax loss carry-forwards that caused the company to project that its income tax rate would be zero for the next few years. How would this change alter the analysis and your recommendation?
