Question 1
""Tires for You" Case Study Refer to your reading for this Unit in the Coyle text for this assignment. Read the Tires for You, Inc. Case Study, on p. 265. In a 12 page paper (excluding Title and Reference pages), answer Questions 1, 2 & 6 and attach your Tires4U Case worksheet with detailed calculations. Note that the Tables starting on pg 237 (Chapter 7) will come in very handy in completing the assignment. Tires for You, Inc. Tires for You, Inc. (TFY), founded in 1987, is an automotive repair shop specializing in replacement tires. Located in Altoona, Pennsylvania, TFY has grown successfully over the past few years because of the addition of a new general manager, Katie McMullen. Since tire replacement is a major portion of TFYs business (it also performs oil changes, small mechanical repairs, etc.), Katie was surprised at the lack of forecasts for tire consumption for the company. Her senior mechanic, Skip Grenoble, told her that they usually stocked for this year what they sold last year. He readily admitted that several times throughout the season stock outs occurred and customers had to go elsewhere for tires. Although many tire replacements were for defective or destroyed tires, most tires were installed on cars whose original tires had worn out. Most often, four tires were installed at the same time. Katie was determined to get a better idea of how many tires to hold in stock during the various months of the year. Listed below is a summary of last years individual tire sales by month: MonthTires Used January510 February383 March1,403 April1,913 May1,148 June893 July829 August638 September2,168 October1,530 November701 December636 Total12,752 Case Questions: Katie has hired you to determine the best technique for forecasting TFY demand based on the given data. 1. Calculate a forecast using a simple three-month moving average.,I will send question individually.
Question 2
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Question 3
Question 1 (Multiple Choice Worth 5 points) Tulip Products Industries paid a dividend of $2.05 yesterday. If the firm?s growth in dividends is expected to remain at a flat 1.5 percent forever, what is the cost of equity capital for Tulip if the price of its common shares is currently $24.48? 8.37% 8.5% 9.87% 10.00% Question 2 (True/False Worth 5 points) The pretax operating cash flow (EBITDA) break-even point is determined by how many units will have to be sold for pretax operating cash flow to equal $0 True False Question 3 (Multiple Choice Worth 5 points) Level Co. has a preferred share issue outstanding with a current price of $52.00. The issue paid a dividend of $4.16 yesterday. What is the firm?s cost of preferred equity? 7.00% 7.5% 8.00% 8.50% Question 4 (Multiple Choice Worth 5 points) Natural Footware has total fixed costs of $30,000 per month, which includes $3,000 per month of depreciation expense. It sells natural sole shoes for $29 a pair, and the variable cost of each pair of shoes is $20. What is the accounting operating profit (EBIT) break-even point for Natural Footware? 931 pairs of shoes 3.000 pairs of shoes 3,333 pairs of shoes 3,667 pairs of shoes Question 5 (Multiple Choice Worth 5 points) Life Balance, Inc. has found that its cost of common equity capital is 15 percent and its cost of debt capital is 9 percent. If the firm is financed with $6 million of common shares (market value) and $4 million of debt, what is the after tax weighted average cost of capital (WACC) for the company if it is subject to a 30 percent marginal tax rate? 9.7% 10.65% 11.16% 11.52% Question 6 (True/False Worth 5 points) The constant-growth dividend model should not be used if the dividends are expected to be zero into the identifiable future. True False Question 7 (Multiple Choice Worth 5 points) Moonshine Drinks has discovered that the extent of the demand for its high octane drink is 4 million bottles per year. If the fixed costs for the new product are $8 million and the sales price per bottle is $25, then what is the maximum variable cost per bottle that the firm needs to break even on a pretax operating cash flow basis? $2 $22 $23 None of the above. Question 8 (True/False Worth 5 points) One interpretation of depreciation and amortization is that it is a fixed cost of the firm. True False Question 9 (Multiple Choice Worth 5 points) Accounting operating profits are also knows as EBIT EBITDA Net income None of the above. Question 10 (True/False Worth 5 points) The appropriate risk-free rate of return to use in the CAPM is the 3-month Treasury rate. True False Question 11 (Multiple Choice Worth 5 points) Secret Energy Supplies has common shares with a price of $15.44 per share. The firm is expected to pay a dividend of $1.25 one year from today, and dividends are expected to grow at 15 percent for two years after that ant then at 2 percent thereafter. What is the implied cost of common equity capital for Secret Energy? 11.00% 12.00% 13.00% 14.00% Question 12 (Multiple Choice Worth 5 points) Delescio Produce had a degree of accounting operating leverage equal to 1.875 during the most recent period. If the firm?s EBITDA was $50,000 and fixed cash expenses equal to $25,000, then what was Delescio?s depreciation and amortization during the same period? $1,000 $3,667 $10,000 $100,000 Question 13 (True/False Worth 5 points) The higher a firm?s unit variable costs, the greater the degree of operating leverage that the firm is utilizing. True False Question 14 (Multiple Choice Worth 5 points) Marigold Products is expected to pay a dividend of $1.98 one year from today. If the firm?s growth in dividends is expected to remain at a flat 4 percent forever, what is the cost of equity capital for Marigold if the price of its common shares is currently $33.00? 6.00% 6.24% 10.00% 10.24% Question 15 (True/False Worth 5 points) In order to use a multistage-growth dividend model to estimate the cost of equity for a firm, the analyst must estimate multiple growth rates in dividends as well as the amount of time that each growth rate will apply. True False Question 16 (True/False Worth 5 points) The CAPM can be used to estimate the cost of preferred equity for a firm. True False Question 17 (True/False Worth 5 points) Break-even analysis tells us how many units must be sold in order for a project to break even on a cash flow or an accounting profit basis. True False Question 18 (True/False Worth 5 points) We can accurately calculate the market risk premium by direct observation. True False Question 19 (True/False Worth 5 points) Earnings before interest and taxes (EBIT) does not include depreciation and amortization expenses. True False Question 20 (Multiple Choice Worth 5 points) ______________ provides an estimate of the expected cash flows as well as information on the distribution of the cash flows that the project is likely to produce. Simulation analysis Sensitivity analysis Scenario analysis None of the above
Question 4
Analyze the following audit report AUDIT REPORT To the Audit Committee of Master Reconstruction, Inc. We have examined the consolidated balance sheets of Master Reconstruction Inc. and subsidiaries as of May 31, 2011 and 2010, and the related consolidated statements of income, retained earnings, and cash flows for the years then ended. These financial statements are the responsibility of the Company?s management. Our responsibility is to express an opinion on these financial statements based on our audits. Our audits were made in accordance with auditing standards generally accepted in the United States of America as we considered necessary in the circumstances. Other auditors audited the financial statements of certain subsidiaries and have furnished us with reports thereon containing no exceptions. Our opinion expressed herein, insofar as it relates to the amounts included for those subsidiaries, is based solely upon the reports of the other auditors. As fully discussed in Note 7 to the financial statements, in 2011, the company extended the use of the last- in, first- out (LIFO) method of accounting to include all inventories. In examining inventories, we engaged Dr. Bernard Rodgers (Engineer of the Year 2008) to test check the technical requirements and specifications of certain projects completed by the company. In our opinion, the financial statements referred to above present fairly the financial position of Master Reconstruction, Inc. as of December 31, 2011, and the results of operations for the years then ended, in conformity with accounting principles generally accepted in the United States of America. To be signed by Montero & Respress, CPAs July 1, 2011 Required: 1. Identify deficiencies in the staff accountant?s tentative report that constitute departures from the generally accepted standards of reporting. 2. Prepare a written report to the staff accountant addressing your findings and requesting him to correct and resubmit the report.
Question 5
"Responsibility for sales volume variance Holbrook Company expected to sell 400,000 of its pagers during 2006. It set the standard sales price for the pager at $30 each. During June, it became obvious that the company would be unable to attain the expected volume of sales. Holbrook?s chief competitor, Coker, Inc., had lowered prices and was pulling market share from Holbrook. To be competitive, Holbrook matched Coker?s price, lowering its sales price to $28 per pager. Coker responded by lowering its price even further to $24 per pager. In an emergency meeting of key personnel, Holbrook?s accountant, Vickie Dees, stated, ?Our cost structure simply won?t support a sales price in the $24 range.? The production manager, Jean Volker, said,?I don?t understand why I?m here. The only unfavorable variance on my report is a fixed cost volume variance and that one is not my fault. We can?t be making the product if the marketing department isn?t selling it.? Required a. Describe a scenario in which the production manager is responsible for the fixed cost volume variance. b. Describe a scenario in which the marketing manager is responsible for the fixed cost volume variance. c. Explain how a decline in sales volume would affect Holbrook?s ability to lower its sales price.
