Question 1
Stock Valuation at Ragan, Inc. Ragan, Inc., was founded nine years ago by brother and sister Carrington and Genevieve Ragan. The company manufactures and installs commercial heating, ventilation, and cooling (HVAC) units. Ragan, Inc., has experienced rapid growth because of a proprietary technology that increases the energy efficiency of its units. The company is equally owned by Carrington and Genevieve. The original partnership agreement between the siblings gave each 50,000 shares of stock. In the event either wished to sell stock, the shares first had to be offered to the other at a discounted price. Although neither sibling wants to sell, they have decided they should value their holdings in the company. To get started, they have gathered the following information about their main competitors: EPS DPS Stock$ ROE R Arctic Cooling Inc .79 .20 14.18 10% 10% Ntnl Heating/Cooling 1.38 .62 11.87 13 13 Expert HVAC Corp. -.48 .38 13.21 14 12 Industry Avg .56 .40 13.09 12.33 11.67 Expert HVAC Corporation's negative earnings per share were the result of an accounting write-off last year. Without the write-off, earnings per share for the company would have been $1.06. Last year, Ragan, Inc., had an EPS of $4.54 and paid a dividend to Carrington and Genevieve of $63,000 each. The company also had a return on equity of 25 percent. The siblings believe that 20 percent is an appropriate required return for the company. QUESTIONS 1.Assuming the company continues its current growth rate, what is the value per share of the company's stock? 2.To verify their calculations, Carrington and Genevieve have hired Josh Schlessman as a consultant. Josh was previously an equity analyst and covered the HVAC industry. Josh has examined the company's financial statements, as well as examining its competitors. Although Ragan, Inc., currently has a technological advantage, his research indicates that other companies are investigating methods to improve efficiency. Given this, Josh believes that the company's technological advantage will last only for the next five years. After that period, the company's growth will likely slow to the industry growth average. Additionally, Josh believes that the required return used by the company is too high. He believes the industry average required return is more appropriate. Under this growth rate assumption, what is your estimate of the stock price? 3.What is the industry average price?earnings ratio? What is the price?earnings ratio for Ragan, Inc.? Is this the relationship you would expect between the two ratios? Why? 4.Carrington and Genevieve are unsure how to interpret the price?earnings ratio. After some head scratching, they've come up with the following expression for the price?earnings ratio: P0/E1=1-b/R-(ROE x b) Beginning with the constant dividend growth model, verify this result. What does this expression imply about the relationship between the dividend payout ratio, the required return on the stock, and the company's ROE? 5.Assume the company's growth rate slows to the industry average in five years. What future return on equity does this imply, assuming a constant payout ratio? 6.After discussing the stock value with Josh, Carrington and Genevieve agree that they would like to increase the value of the company stock. Like many small business owners, they want to retain control of the company, but they do not want to sell stock to outside investors. They also feel that the company's debt is at a manageable level and do not want to borrow more money. How can they increase the price of the stock? Are there any conditions under which this strategy would not increase the stock price?",hello, Please provide clarification as to how you came up with the $8.18 and 56.6 in the answer for question 3. Thanks
Question 2
Your assignment is to research on the Internet the case involving the Ford Pinto. I think just by Googling that term "Ford Pinto" you will find a LOT of information. Here is what is expected: 1. A Preface "Overview" of the issues surrounding the Ford Pinto. This is often two or three paragraphs long, but may be longer depending upon the information provided. Be specific! Assume the persons reading your work have no idea about the case. What are the FACTS about the case (what can be proved based upon the information in the case) and what are the ASSUMPTIONS (things that you cannot prove as a solid fact, but believe to be important to the overall case). 2. Ask yourself three questions regarding the Ford Pinto case which will require research to answer. a. "Why did Ford's leadership make the decisions they made regarding the design flaw issues with the Pinto?" b. Now come up with 2 more thought provoking and far reaching questions. These questions need to be philosophical in nature such as question 1 above, not fact related such as how much would corrections have cost. Using this example, instead of asking "how much would it have cost to 'fix' the problems," ask "With the costs of fixing the problems being $xx per vehicle, why did Ford executives refuse to take this course of action?" 3. Answer each of the questions you have asked. What is expected in the responses are specifics. Were there legal cases? What were the accounting issues? What were the safety issues? These are just some ideas of things to research. a. Using the references you found, AND CITING THEM, write a minimum of two paragraphs for each question discussing your findings. b. Each answer should do just that, answer the question. If the answer poses more questions, then you should address them also. 4. Conclude your research with two or three paragraphs which summarizes the entire case and your questions. This will be very similar to the introduction preface to the case, but will add information pertaining to the information you provided in the case write-up.
Question 3
FIN 500: Case Study 1 Assignment Notes Your first case assignment deals with the concepts of risk and return. Please read the case questions through and give some thought to your answers before you commence. Answer all parts of the ten (10) questions presented below. Your report should be well-organized, type-written/word processed, and independently prepared. Each student's report must be his/her own original work and the write-up must also be individually prepared. 1. Buxton Corporation is planning to invest in a security that has several potential rates of return. Using the following probability distribution of returns during different states of the economy, what is the expected rate of return on this investment? In addition, compute the standard deviation of the returns (?). Finally, briefly explain what these numbers represent. Probability Expected Return 0.10 -10% 0.20 5% 0.30 10% 0.40 25% 2. Using the capital asset pricing model (CAPM), estimate the appropriate required rate of return for the following three stocks, assuming that the risk-free rate (rRF) is 5 percent and the expected return for the market (rM) is 17 percent. Stock Beta (?) A 0.75 B 0.90 C 1.40 3. Based on the following table of actual (or ex post) returns for both Inquiry Corporation and the market from 2007 through 2010, calculate the average return and the standard deviation for both Inquiry and the market (keep in mind that this data is historical and not based on a probability distribution, so be sure to use the correct formulas). Year Inquiry Corporation Market 2007 4% 2% 2008 6% 3% 2009 0% 1% 2010 2% -1% 4. (a) Derive the expected return (rP) and beta (?P) for a portfolio based on the following information: Stock Percentage of Portfolio Beta (?) Expected Return 1 40% 1.00 12% 2 25% 0.75 11% 3 35% 1.30 15% (b) Given the information in the table above, present the equation for the security market line and explain where the return for this specific portfolio would lie (plot) relative to the SML (i.e., below or above the line). Assume that the risk-free rate (rRF) is 8 percent and that the expected return on the market portfolio (rM) is 12 percent. 5. Reliable Printing is evaluating a security. One-year Treasury bills (rRF) are currently paying 3.1 percent. Calculate the following investment?s expected return and its standard deviation (?). Should Reliable Printing invest in this security? Briefly explain. Probability Expected Return 0.15 -1% 0.30 2% 0.40 3% 0.15 8% 6. You have researched the common stock of two companies (A and B) and have compiled the following information: COMPANY A COMPANY B Probability Return Probability Return 0.20 -2% 0.10 4% 0.50 18% 0.30 6% 0.30 27% 0.40 10% 0.20 15% Calculate the expected return, standard deviation (?), and the coefficient of variation (CV) for each stock and, based on the CV, which stock should you invest in? Briefly explain. 7. Assume you own a portfolio consisting of the following stocks: Stock Percentage of Portfolio Beta (?) Expected Return 1 20% 1.00 16% 2 30% 0.85 14% 3 15% 1.20 20% 4 25% 0.60 12% 5 10% 1.60 24% (a) Determine the expected return on your portfolio. (b) Determine the portfolio beta (?P). (c) Given the portfolio beta and the assumptions that the risk-free rate (rRF) is 7 percent and the expected return on the market portfolio (rMKT) is 15.5 percent, present the equation for the security market line (SML). (d) Based on your equation for the SML and the expected returns from the data in the table, which stocks appear to be winners (i.e., underpriced) and which stocks appear to be losers (i.e., overpriced)? 8. The common stock for a particular company is known to have a beta (?) of 1.20. The expected return on the market (rM) is 9 percent and the risk-free rate (rRF) is 5 percent. (a) Compute a fair rate of return based on this information. (b) What would be a fair rate of return if the beta were 0.85? (c) What would be a fair rate of return if the expected return on the market increased to 12 percent and the beta remained at 0.85? 9. The expected return for the general market (rMKT) is 12.8 percent, and the market risk premium (i.e., RPM) is 4.3 percent. Moe, Larry, and Curley have betas of 0.82, 0.57, and 0.68, respectively. What are the required rates of return for the three securities? 10. Hickory Stick?s common stock has a beta (?) of 0.95. The expected return for the market (rM) is 7 percent and the risk-free rate (rRF) is 4 percent. (a) What is the required rate of return based on this information? (b) What would be the required rate of return if the beta were 1.25? 11. An exhaustive financial analysis has produced the following returns on two investments under three different scenarios: Expected Returns Scenario Probability Stock X Stock Y S1 0.3 10% 8% S2 0.4 16% 15% S3 0.3 12% 20% (a) Calculate the expected return on each investment. (b) Calculate the standard deviations (?) for both X and Y. (c) Calculate the coefficient of variation (CV) for both X and Y. (d) If you were to create a portfolio consisting of 67% of Stock X and 33% of Stock Y, what will be the expected return (rP) and the standard deviation (?P) for your portfolio?
Question 4
3-30 (Objectives 3-4, 3-5, 3-6, 3-7, 3-8) The following are independent situations for which you will recommend an appropriate audit report: 1. Subsequent to the date of the financial statements as part of his post-balance sheet date audit procedures, a CPA learned that a recent fire caused heavy damage to one of a client?s two plants; the loss will not be reimbursed by insurance. The newspapers described the event in detail. The financial statements and appended notes as prepared by the client did not disclose the loss caused by the fire. 2. E-Lotions.com, Inc. is an online retailer of body lotions and other bath and body supplies. The company records revenues at the time customer orders are placed on the Web site, rather than when the goods are shipped, which is usually 2 days after the order is placed. The auditor determined that the amount of orders placed but not shipped as of the balance sheet date is not material. 3. For the past 5 years a CPA has audited the financial statements of a manufacturing company. During this period, the audit scope was limited by the client as to the observation of the annual physical inventory. Because the CPA considered the inventories to be material and he was not able to satisfy himself by other auditing procedures, he was unable to express an unqualified opinion on the financial statements in each of the 5 years.The CPA was allowed to observe physical inventories for the current year ended December 31, 2009, because the client?s banker would no longer accept the audit reports. However, to minimize audit fees, the client requested that the CPA not extend his audit procedures to the inventory as of the beginning of the year, January 1, 2009. 4. During the course of his audit of the financial statements of a corporation for the purpose of expressing an opinion on the statements, a CPA is refused permission to inspect the minute books containing the significant decisions from the board of directors meetings. The corporation secretary instead offers to give the CPA a certified copy of all resolutions and actions involving accounting matters. 5. A CPA is engaged in the audit of the financial statements of a large manufacturing company with branch offices in many widely separated cities. The CPA was not able to count the substantial undeposited cash receipts at the close of business on the last day of the fiscal year at all branch offices. As an alternative to this auditing procedure used to verify the accurate cutoff of cash receipts, the CPA observed that deposits in transit as shown on the year-end bank reconciliation appeared as credits on the bank statement on the first business day of the new year. He was satisfied as to the cutoff of cash receipts by the use of the alternative procedure.6. On January 2, 2010, the Retail Auto Parts Company received a notice from its primary supplier that effective immediately, all wholesale prices will be increased 10%. On the basis of the notice, Retail Auto Parts revalued its December 31, 2009, inventory to reflect the higher costs. The inventory constituted a material proportion of total assets; however, the effect of the revaluation was material to current assets but not to total assets or net income. The increase in valuation is adequately disclosed in the footnotes. 7. A CPA has completed her audit of the financial statements of a bus company for the year ended December 31, 2009. Prior to 2009, the company depreciated its buses over a 10-year period. During 2009, the company determined that a more realistic estimated life for its buses was 12 years and computed the 2009 depreciation on the basis of the revised estimate. The CPA has satisfied herself that the 12-year life is reasonable. The company has adequately disclosed the change in estimated useful lives of its buses and the effect of the change on 2009 income in a note to the financial statements. For each situation, do the following: a. Identify which of the conditions requiring a deviation from or modification of an unqualified standard report is applicable. b. State the level of materiality as immaterial, material, or highly material. If you cannot decide the level of materiality, state the additional information needed to make a decision. c. Given your answers in parts a and b, state the appropriate audit report from the following alternatives (if you have not decided on one level of materiality in part b, state the appropriate report for each alternative materiality level): (1) Unqualified?standard wording (2) Unqualified?explanatory paragraph (3) Unqualified?modified wording (4) Qualified opinion only (5) Qualified scope and opinion (6) Disclaimer (7) Adverse*
Question 5
1. Using the following information, compute the cost of direct materials used. Raw materials inventory, January 1 $ 30,000 Raw materials inventory, December 31 60,000 Work in process, January 1 27,000 Work in process, December 31 18,000 Finished goods, January 1 60,000 Finished goods, December 31 48,000 Raw materials purchases 1,300,000 Direct labor 690,000 Factory utilities 225,000 Indirect labor 75,000 Factory depreciation 500,000 Operating expenses 630,000 A) $1,390,000. B) $1,330,000. C) $1,300,000. D) $1,270,000. 2. Assuming the cost of direct materials used is $1,300,000, compute the total manufacturing costs using the information below. Raw materials inventory, January 1 $ 30,000 Raw materials inventory, December 31 60,000 Work in process, January 1 27,000 Work in process, December 31 18,000 Finished goods, January 1 60,000 Finished goods, December 31 48,000 Raw materials purchases 1,300,000 Direct labor 690,000 Factory utilities 225,000 Indirect labor 75,000 Factory depreciation 500,000 Operating expenses 630,000 A) $2,790,000. B) $2,781,000. C) $2,490,000. D) $3,420,000. Assuming that the total manufacturing costs are $2,700,000, compute the cost of goods manufactured using the information below. Raw materials inventory, January 1 $ 30,000 Raw materials inventory, December 31 60,000 Work in process, January 1 27,000 Work in process, December 31 18,000 Finished goods, January 1 60,000 Finished goods, December 31 48,000 Raw materials purchases 1,300,000 Direct labor 690,000 Factory utilities 225,000 Indirect labor 75,000 Factory depreciation 500,000 Operating expenses 630,000 A) $2,688,000. B) $2,691,000. C) $2,709,000. D) $2,712,000. 3.Assuming that the cost of goods manufactured is $2,760,000 compute the cost of goods sold using the following information. Raw materials inventory, January 1 $ 30,000 Raw materials inventory, December 31 60,000 Work in process, January 1 27,000 Work in process, December 31 18,000 Finished goods, January 1 60,000 Finished goods, December 31 48,000 Raw materials purchases 1,300,000 Direct labor 690,000 Factory utilities 225,000 Indirect labor 75,000 Factory depreciation 500,000 Operating expenses 630,000 A) $2,769,000. B) $2,712,000. C) $2,748,000. D) $2,772,000.
