Question 1
Question 1: Bonds (5 marks total) Two outstanding government bond issues are identical except that one has 2 years to maturity and the other has 5 years to maturity. Each bond has a face value of $100, an AAA credit rating, fixed semi-annual coupons, a current price of $100 and a yield to maturity of 12% p.a. Based on this data, answer each of the following: (a) What is the annual coupon rate on each of these bonds? Explain. (0.5 marks) (b) The Reserve Bank of Australia announces a decrease in the cash rate and as a result interests rates fall market wide. If the required yield to maturity for the two government bonds falls to 10% p.a., what will be the price of each bond? (2 marks) (c) The Reserve Bank of Australia announces an increase in the cash rate and as a result interests rates rise market wide. If the required yield to maturity for the two government bonds rises to 14% p.a., what will be the price of each bond? (1 mark) (d) Explain, with reference to relevant bond valuation concepts, the relative changes in price of the two bonds in response to changing interest rates. (1.5 marks) Question 2: Woolworths Cost of Capital (8 marks) You are to estimate the cost of capital for Woolworths Ltd, an Australian listed company, at the end of its last financial year (24 June 2012). Before you can undertake this task, you will need to collect some actual finance data. The ?External Links? section of this unit?s MySCU web site contains links to Internet sources of information that you might find useful for this assignment. Amongst other sources, you should consider the Bulletin Statistical Tables F2 (daily) and F3 available through the RBA website. Note also that 24 June 2012 was a Sunday so some market data you will require is unavailable for that date. Use 22 June 2012 or June averages as appropriate. Woolworths Ltd uses a number of sources of debt and equity. You can make the following assumptions: ? Borrowings on the Woolworths Balance Sheet in their annual report reflect market value. ? All borrowings can be classified as debt. ? Woolworths aims to maintain its current A credit rating.1 An average yield on corporate bonds with an A rating can therefore be used in this analysis.2 ? The CAPM is used to estimate the cost of ordinary equity. ? The 10-year Australian Treasury bond rate is an appropriate proxy for the risk-free rate. ? The beta for Woolworths has not varied significantly in the past 5 years and is not expected to change in the near future. ? The market risk premium (also called equity risk premium) is 6%. ? Woolworths calculates its WACC assuming a classical tax system. ? The company?s tax rate is 30%. Ensure that you set out full workings in a clear and logical fashion. Label all input figures, state any assumptions necessary for their use and reference their source. Marks for this question will be awarded for: correct choice of input figures; correct choice and application of method; and referencing of data sources. Question 33: Capital Structure (7 marks total) Harry Real Estate Company was founded 25 years ago by the current CEO, Harry Lantern. The company purchases real estate, including land and buildings, and rents the property to tenants. The company has shown a profit every year for the past 18 years, and the shareholders are satisfied with the company?s management. Prior to founding Harry Real Estate, Harry was the founder and CEO of a failed alpaca farming operation. The resulting bankruptcy made him extremely averse to debt financing. As a result, Harry Real Estate is entirely equity financed, with 15 million ordinary shares outstanding. The shares currently trade at $35.20 each. Harry Real Estate is evaluating a plan to purchase a huge piece of land in Queensland for $110 million. The land will subsequently be leased to tenant farmers. This purchase is expected to increase Harry Real Estate?s annual pre-tax earnings by $27 million in perpetuity. You, the company?s new CFO, have been put in charge of the project. You have determined that the company?s cost of capital is 12.5%. You feel that the company would be more valuable if it included debt in its capital structure, so you are evaluating whether the company should issue debt to finance the project in its entirety. Based on some conversations with investment banks, you think that the company can issue bonds at par value with an 8% coupon rate. From your analysis, you also think that a capital structure around 70% equity and 30% debt would be optimal. The company has a 40% corporate tax rate. Based on this data, answer each of the following questions, assuming that the only market imperfections are corporate taxes and financial distress costs: (a) Construct Harry Real Estate?s market value balance sheet before it announces the investment project. (0.5 marks) (b) Suppose the company decides to issue equity to finance the project. (2.5 marks) i) Construct Harry Real Estate?s market value balance sheet after it announces the project to the market and says it will finance the land purchase by a new share issue. [Hint: First calculate the NPV of the project.] ii) What would be the new price per share after the announcement in (i)? iii) How many shares will Harry Real Estate need to issue to finance the land purchase? iv) Construct Harry Real Estate?s market value balance sheet after the equity issue but before the land purchase has been made. How many shares does the company now have outstanding and what is the price per share? v) Construct Harry Real Estate?s market value balance sheet after the land purchase has been made. (c) Suppose the company decides to issue bonds to finance the project. (1.5 marks) i) What will the market value of Harry Real Estate be if the land purchase is financed with bonds? ii) Construct Harry Real Estate?s market value balance sheet after both the bond issue and the land purchase. What is the price per share? (d) If Harry Real Estate Company aims to maximise firm value and share price, which method of financing the new project (bonds or shares) should be used? Explain. (0.75 marks) (e) If your estimate of the optimal capital structure is correct, what else should the company consider doing? (0.5 marks) (f) With reference to appropriate theory and assuming your estimate of the optimal capital structure is correct, explain what is likely to happen if the company changes to a capital structure with a debt to equity ratio of 1? (1.25 marks)
Question 2
" On July 1, 20X0, the beginning of its fiscal year, the trial balance of the General Fund of the City of St. Bea was as follows: Cash 20,000 Tax Receivable--Delinquent 120,000 Allowances for Uncollectible Delinquent Taxes 12,000 Interest and Penalties Receivable on Taxes 8,000 Allowance for Uncollectible Interest and Penalties 800 Due from Other Funds 28,000 Vouchers Payable 87,200 Fund Balance Reserved for Encumbrances 16,000 Fund Balance--Unreserved, Undesignated 60,000 176,000 176,000 Required: Prepare journal entries that would be made in the General Fund for the following events. Omit explanations. a. The budget shows estimated General Fund revenues of $450,000 and estimated expenditures (including amount encumbered in the prior year) of $392,000. b. Late in June 20X0, an order was placed and an encumbrance recorded for $16,000. Later in July, the item was received at an invoice cost of $16,400. A voucher is prepared. c. Property taxes amounting to $300,000 were levied, with 4% estimated to be uncollectible. d. Cash collections during the year were as follows: Current taxes $270,000 Delinquent taxes (in full settlement) 104,000 Interest and penalties on last year's taxes (in full settlement) 7,600 Due from other funds 28,000 $409,600 The controller wishes variations in estimates to be recorded in the appropriate revenue or expenditure account. e. Purchase orders totaling $276,000 were placed. Later, invoices for $260,000 were received and vouchered; supplies inventory purchases were $16,000 of the total. f. Payrolls of $50,000 were paid. (Ignore payroll taxes and other deductions.) In addition, vouchers totaling $280,000 were paid. (Supplies Inventory purchases were $16,000 of the total.) g. An automobile was purchased for the fire department. It cost $16,000 and was not previously encumbered. The invoice is vouchered. h. At year end, $6,000 in supplies were on hand. There were no supplies on hand a year ago. The city wishes to show the inventory and to establish a proper reserve.
Question 3
1.Hans, a citizen and resident of Argentina, is a retired bank executive. Hans does not hold a green card. At the start of Year 1, Hans paid $2.5 million for a 20-unit apartment complex located in the suburbs of Washington, D.C. Hans does not actively manage the building, but rather leases it to an unrelated property management company that subleases the building to the tenants. During Year 1, Hans had rental income of $300,000 and operating expenses (depreciation, interest, insurance, etc.) of $220,000. On the advice of his accountant, Hans made a Code Sec. 871(d) election in Year 1. At the start of Year 2, Hans sold the building for $350,000. Hans? adjusted basis in the building at that time was $290,000. What are the U.S. tax consequences of Hans? U.S. activities? 2.USAco, a domestic corporation, is a wholly-owned subsidiary of FORco, a foreign corporation. USAco?s only assets are cash of $200,000, accounts receivable of $200,000 and its U.S. manufacturing plant worth $500,000. USAco has no liabilities. FORco sells USAco to an independent U.S. buyer. Is FORco?s sale of USAco subject to withholding under FIRPTA? Explain. Would your answer change if USAco had a liability of $300,000 in the form of a mortgage on the U.S. manufacturing plant? 3.Cholati is a foreign corporation that produces fi ne chocolates for sale worldwide. Cholati markets it chocolates in the United States through a branch sales office located in New York City. During the current year, Cholati?s effectively connected earnings and profits are $3 million, and its U.S. net equity is $6 million at the beginning of the year, and $4 million at the end of the year. In addition, a review of Cholati?s interest expense account indicates that it paid $440,000 of portfolio interest to an unrelated foreign corporation, $200,000 of interest to a foreign corporation which owns 15% of the combined voting power of Cholati?s stock, and $160,000 of interest to a domestic corporation. Compute Cholati?s branch profi ts tax, and determine its branch interest withholding tax obligations. Assume that Cholati does not reside in a treaty country. 4.Wheelco, a foreign corporation, manufactures motorcycles for sale worldwide. Wheelco markets its motorcycles in the United States through Wheely, a wholly-owned U.S. marketing subsidiary that derives all of its income from U.S. business operations. Wheelco also has a creditor interest in Wheely, such that Wheely?s debt to equity ratio is 3 to 1, and Wheely makes annual interest payments of $60 million to Wheelco. The results from Wheely?s first year of operations are as follows: Sales $180 million Interest income $6 million Interest expense (paid to Wheelco) ($60 million) Depreciation expense ($30 million) Other operating expenses ($81 million) Pre-tax income $15 million Assume the U.S. corporate tax rate is 35%, and that the applicable tax treaty exempts Wheelco?s interest income from U.S. withholding tax. Compute Wheely?s interest expense deduction. 5.USAco, a domestic corporation, is the wholly-owned U.S. subsidiary of FORco, a foreign corporation. The U.S.-Country F tax treaty exempts interest payments from withholding taxes. USAco?s fi nancial statements appear as follows: BALANCE SHEET Assets Liabilities & Owners? Equity Cash $100 Receivables $500 Notes Payable $400 Owner?s Equity $200 INCOME STATEMENT Gross Income $500 Administrative Expenses $350 Interest Expense $100 The interest expense of $100 arises from a notes payable from USAco to FORco. What is the maximum amount of interest USAco may deduct on its U.S. return?
Question 4
1. A tax haven is a country whose laws, regulations, traditions, and treaty arrangements make it possible for a person to reduce his overall tax burden. Secrecy is basically supplied by way of: A. The Bank Secrecy Act B. Domestic bank secrecy laws C. Blocking statues D. Both B. & C. 2. What entity maintains a list of ?non-cooperative? countries ? those countries that have detrimental rules and practices which obstruct international efforts to curtail money laundering? A. Federal Bureau of Investigation B. Central Intelligence Agency C. Financial Action Task Force D. Internal Revenue Service 3. There are four categories of tax havens: ?no tax,? ?no tax on foreign income,? ?low tax,? and _______. A. High tax B. Special tax C. No tax on domestic income D. None of the above 4. U.S. authorities do not have to obtain a court order in the Caymans to look at banking or corporate records, they need only show that the information being sought is for a criminal investigation. A. True B. False 5. The United Kingdom offers opportunities for asset hiders. A. True B. False 6. Which of the following is an advantage for people wishing to hide assets in the United Kingdom? A. The United Kingdom does not currently have an equivalent of the Currency Transaction Report B. British bankers will not ask for a Social Security number C. Taxes are not withheld on the interest they pay on non-residential accounts D. All of the above 7. Obtaining a Swiss bank account is still the best way to hide assets. A. True B. False 8. Under Luxembourg law, a depositor cannot waive banking secrecy even if he wants to. A. True B. False 9. Which of the following is a step in locating off-shore assets? A. Determine if subject traveled overseas B. Locate the subject?s travel agency C. Identify the means employed to move cash off-shore D. All of the above E. None of the above 10. Which of the following is NOT a method used to move funds off-shore? A. Wire transfers B. Professional intermediaries C. Personal checks D. All of the above 11. Of the many different methods used to smuggle currency, which of the following is the most preferred by asset hiders? A. By air B. By land C. By water D. By mail 12. Smuggling currency by water is not a preferred method because it may require the use of third parties AND the currency is not easy to conceal. A. True B. False 13. Which of the following are specialized bank accounts, in connection with wire transfer services, that invite misuse by sophisticated and professional money launderers? A. Basic checking accounts B. Threshold accounts C. Cupo accounts D. Both B. & C. E. None of the above 14. Even though a paper trail is left, hiders occasionally deposit personal checks made out to themselves in overseas accounts. A. True B. False 15. Which of the following methods are used to bring money back into the U.S. after it has been successfully laundered? A. Physical transportation B. Fictitious loans C. Fictitious fees D. Cashier?s checks and wire transfers E. All of the above 1. Criminal forfeiture is allowed if the property in question has been used in the commission of a crime. If the property was used to violate a civil law, then civil forfeiture would be the applicable remedy. A. True B. False 2. In order for property to be considered ?to facilitate? a violation, it has to: A. Contribute to the concealment of illegal activity B. Contribute to the possession of illegal goods C. Contribute to the receipt of illegal goods D. Any of the above 3. Under what doctrine does the government have the right to seize the proceeds of an illegal activity even though it interferes with the owner?s constitutional right of ownership? A. English law B. Relation back C. Common law D. Both B. & C. 4. Title 18, U.S. code ?982 renders property forfeitable if it is involved in which of the following crimes: A. Money laundering B. Wire fraud C. Computer fraud D. Major fraud against the United States E. All of the above 5. The government may NOT seize property before judgment in a civil forfeiture case. A. True B. False 6. The government can seize property under the following methods EXCEPT? A. Initiating a forfeiture procedure under the Federal Rules of Criminal Procedure B. Beginning a summary or administrative procedure under federal customs laws C. Seizing the property if it is in the possession of a known felon D. None of the above 7. Which law passed in 2001 expands the government?s ability to seize assets related to money laundering crimes? A. Gramm-Leach-Bliley Act B. Bank Secrecy act C. USA PATRIOT Act D. None of the above 8. Which of the following questions is the fraud examiner LEAST likely to be asked regarding a forfeiture case he or she wants prosecuted? A. What evidence makes this property forfeitable? B. How should the property be seized? C. How much of the property would you like from the settlement? D. What is the value of the property, and where is it now? 9. Generally, property that is subject to forfeiture falls into one of three general categories. Which of the following is NOT one of those categories? A. It is contraband B. It is derived from the proceeds of certain illegal activity C. It is owned by the convicted defendant 10 Which of the following is NOT a method that may be used to prevent the disposable of property prior to judgment? A. Insurance B. Pre-judgment Attachment C. Sequestration D. Notice of Lis Pendens
Question 5
3.0 Marketing Strategy - Introduce your marketing strategies; What IMC approach are you planning? What marketing strategies will you use? What advertising strategies will you use? What types of media? Why did you choose these strategies? 3.1 Mission - What is the mission of your e-business? Your organization exists to accomplish something. Who is your customer? What is of value to the customer? 3.2 Marketing Objectives - Meeting these marketing objectives should lead to sales; Objectives should be clear, be measurable, and have a stated time frame for achievement 3.3 Financial Objectives - the ultimate goal of your Marketing plan is the effect it will have on the bottom line; example: customer sales by volume and growth percentage or growth percentage by market segments 3.4 Target Markets - What general strategy will be used to reach your target market? Needs/Benefits sought by the market; Product usage; Product positioning; Consumer/Business purchasing process (decision-making); Market size estimates; This section should include extensive research, for example: Data on your product/service industry, Demographics/Psychographic profile: gender, age, occupation, education, life style geographic region, attitudes, purchasing characteristics, etc. 3.5 Positioning - What opinions does your audience already have about this type of product? Is there a gap in the consumers? needs that this product can fill? Is there a specific application that your product fits very well? Can you base the position on the uniqueness of the product, the product quality, or the pricing strategies? Is it possible to position your product based upon opportunities you found after research? 3.6 Strategies - Explain how your marketing programs will support your company's strategic plan - company uniqueness, competitive advantage, adjusting to market conditions, trends and changes. 3.7 Marketing Mix Product: brand name, features/attributes, quality, warranty, labeling, packaging, etc; Promotion: advertising, types of media, sales promotion, personal selling, public MKTG522 Marketing Plan Guide relations, your methods, message/theme, timing, budget, projected results, etc.; Place / Distribution: types of distribution channels, direct, retail, distributors, intermediaries, locations, logistics, motivating the channel partners, level of market coverage, channel distribution challenges, etc.; Price: type of strategy, list price, discounts, bundling, market segment, channels, geography, payment terms and financing options, leasing options, supply/demand, economic/legal considerations, etc. 3.8 Marketing Research - Research methods to be used; Data requirements - information needed, projected results; Research responsibility - Internal, outside agency, purchased data, etc.; Limitations and challenges.
