Question 1
Question 1 (10 Points) Since diversification is desired by all investors, firms should try to diversify the products and services they produce and provide. False. True. Question 2 (10 points) The return on equity can never be greater than the return on assets of a firm. False. True. Question 3 (15 points) Your boss has requested that you analyze two projects for him and pick the one you would recommend for investment. Both projects have the same risk because they are in the same business, and their cash flows are: Project A (Year 0: -$100,000; Year 1: $30,000; Year 2: $40,000; Year 3: $50,000; Year 4: $100,410); Project B (Year 0: -$100,000; Year 1: $0; Year 2: $10,000; Year 3: $10,000; Year 4 $225,500). Which project would you recommend? Do not have enough information to make a decision. Project A. Either one. Project B. Question 4 (15 points) Vivian has just graduated from the University of Michigan with a BBA and must decide whether to start working now or to get an MBA. In either case, she intends to retire 20 years from today. An MBA requires an expenditure/tuition of $60,000 per year for each of the next two years, and Vivian will start working immediately after getting her MBA. Her discount rate for valuing cash flows is 7% per year. Assume that cash inflows occur at the end of the year, while the cash outflows (tuition payments) occur at the beginning of the year. If she goes to work now, she can expect a salary of $50,000 per year for each of the next 20 years. If she gets an MBA, her salary will be a constant $100,000 per year. What is the net present value (NPV) of her decision if Vivian decides to do an MBA? [Ignore taxes.] 529700 232824 762525 Question 5 (15 points) You have been living in the house you bought 10 years ago for $500,000. At that time, you took out a loan for 80% of the house at a fixed rate 30-year loan at an annual stated rate of 6%. You have just paid off the 120th monthly payment. Interest rates have meanwhile dropped steadily to 5.50% per year, and you think it is finally time to refinance the remaining balance. But there is a catch. The total fee to refinance your loan is $15,000, when you include all the various costs of refinancing. Should you refinance the remaining balance for the remaining 20 years? How much would you save/lose if you decided to refinance? (yes, 1110) (yes, 13891) (no, 1110) (no, 13891) Question 6 (15 points) XYZ?s revenues this past year were $250,000 and total costs were $150,000; and both costs and revenues have been expected to remain the same in perpetuity. XYZ is an all equity firm (i.e., it has no debt), with a return on assets of 10%, and has 100,000 shares outstanding. XYZ currently pays out all its earnings as dividends (100% payout) and has been expected to do so forever. The dividends on the basis of last year?s earnings have just been paid out. Unknown to the market, a team of researchers and the President of XYZ suddenly discover that the firm can introduce a range of new products and start expanding the market and increase earnings. However, this expansion will also increase costs and the company will be unable to pay out all the earnings as dividends. The President and her financial team have come up with two growth alternatives. (I) Grow earnings at an annual rate of 5% forever, but reduce the payout to 70% forever. No other financing will be necessary apart from this plowback (or reduction in payout). (II) Grow earnings at an annual rate of 8%, but with a reduction in payout to only 40%. Again no other financing will be necessary apart from this plowback. By how much will the price per share of the firm increase (in dollars) if it adopts the right strategy of growth? (Note that it takes time to implement any growth strategies. So the reinvestment starts at year end, or t = 1.) (Enter just the number without the $ sign or a comma.) Answer for Question 6 Question 7 (20 points) MyWorld, Inc. is an all-equity firm whose current business involves manufacturing and selling software. The company is blessed in that it operates in capital markets that are perfect, that is, there are no taxes or bankruptcy costs. The current weighted average cost of capital (WACC) of MyWorld, Inc. is 8.50%, and its equity beta is 0.90. MyWorld, Inc. is considering penetrating the wine industry, and would like its total value to consist of 70% software and 30% wine. The wine project requires a $800,000 investment at t = 0 and will yield $150,000 a year for the following 40 years, starting a year from today (at t = 1). The manager of the new project has found that the average return on equity is 20%, and the average debt-to-equity ratio is 1.00, in the wine industry. All the debt in this industry is viewed as default free by the market. The risk free rate is 4%, the market risk premium (the average difference between the return on the market and the risk-free rate) is 5%, and the wine project will be financed with $600,000 of debt. What is the NPV of this project?(Enter just the number without the $ sign or a comma.) Answer for Question 7
Question 2
Quality Textiles International Customer Complaint Investigation & Recommendations Scenario: As Quality Engineer for Quality Textiles International you have been asked by the executive management team to analyze recent customer complaints by investigating the production processes, and to identify solutions based on your analysis. You need to answer the question: Is the process in control? Resources: University of Phoenix Material: Quality Textiles International; WK 4 Individual Assignment HELP SHEET in the CMF WK 4 Grading Rubric in the CMF Memo template in the CMF Video of textile manufacturing operation: http://www.youtube.com/watch?v=YYWlevX7Kw0 Writing a business memo: http://owl.english.purdue.edu/owl/resource/590/01/ Familiarize with function of the Quality Engineer - ?Quality Professionals: Quality Engineer ?at www.asq.org Review the University of Phoenix Material: Quality Textiles International document, located on the WK 4 student website. Calculate the mean and standard deviation of the NEW/provided data using Microsoft? Excel? program [descriptive statistics]. This represents your analysis of the current process. Use the provided X-bar [run or line] to determine if the process is in control. Remember that if any portion of a process? product is out of control, the entire process is considered out of control. Prepare a one page [max] memo that summarizes your analysis of the customer complaint, includes descriptive statistics for before and after the complaint, the supporting control chart, and provides specific problem solutions. By the time you are writing the memo you should have determined the root cause and taken corrective actions. This memo is to report the results of your investigation and any steps taken to upper management. Submit the one page [max]memo as a WORD doc at the Assignments Link and post a separate individual Certificate of Originality. No title page is needed.,Hi Rachel The attachment explains everything.. Sorry about this.,Hi Rachel Is there a possibility you can get this done before the deadline you requested. I will also increase the amount to $70 Please Advise,Thank You
Question 3
Wal-Mart Case Valuing Wal-Mart Stock Questions: 1. Assess the financial health of Wal-Mart based on an analysis of the financial statements. 2. Based on any additional available information (including annual reports and 10-K filings) assess the economic conditions (as of the time of the case), the industry key success factors and competitive situation, and Wal-Mart?s strengths and weaknesses. 3. Develop a pro forma income statement and balance sheet for Wal-Mart for the fiscal year ending January 31, 2006. Assume the following (in addition to information in the case): selling, general and administrative expenses at 17.3 percent of anticipated net sales; interest on debt at an average rate of four percent; similar number of shares outstanding as of January 31, 2005: similar prepaids, other assets, accrued liabilities, deferred taxes and minority interest as in 2005. State any other key assumptions. How profitable do you anticipate Wal-Mart will be? Will Wal-Mart need to increase its reliance on external borrowing? 4. Determine the intrinsic value of Wal-Mart (on a per share basis) using the dividend discount model (DDM). Assess the value based on three forms of the DDM: the constant growth version, an assessment based on three years of projected dividends and a projected future stock price, and the three-stage DDM. Clearly state any assumptions including an estimation of Wal-Mart investor required returns. 5. Determine the intrinsic value of Wal-Mart (on a per share basis) using the price-earnings (P/E) approach. As part of your analysis you will need to determine an appropriate forward-looking P/E multiple. Clearly state any assumptions. 6. Based on your analysis, as Rachel Martin, what recommendation would you make? Justify your recommendation and reconcile any differences in your valuation assessments (based on different methods).
Question 4
CA5-6 (Cash Flow Analysis) The partner in charge of the Kappeler Corporation audit comes by your desk and leaves a letter he has started to the CEO and a copy of the cash flow statement for the yearended December 31, 2010. Because he must leave on an emergency, he asks you to finish the letter byexplaining: (1) the disparity between net income and cash flow; (2) the importance of operating cash flow;(3) the renewable source(s) of cash flow; and (4) possible suggestions to improve the cash position. Kappeler Corporation Statement of Cash Flows For the Year Ended December 31, 21010 Cash flows from operating activities Net income 100,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense 10,000 Amortization expense 1,000 Loss on Sale of fixed assets 5,000 Increase in accounts receivable (net) (40,000) Increase in inventory (35,000) Decrease in accounts payable (41,000) (100,000) - Net cash provided by operating activities Cash flows from investing activities Sales of plant assets 25,000 Purchase of equipment (100,000) Purchase of Land (200,000) (275,000) Net cash used by investing activities Cash flows from financing activities Payment of dividends (10,000) Redemption of bonds (100,000) Net Cash used by financing activities (110,000) Net decrease in cash (385,000) Cash balance, January 1, 2010 400,000 Cash balance, December 31, 2010 15,000 Dear Mr. Kappeler: I have good news and bad news about the financial statements for the year ended December 31, 2010. The good news is that the net income of $100,000 is close to what we predicted in the strategic plan last year, indicating strong performance this year. The bad news is that the cash balance is seriously low. Enclosed is the Statement of Cash Flows, which best illustrates how both of these situations occurred simultaneously?. Instructions: Complete the letter to the CEO, including the four components requested by your boss.
Question 5
"TRUE/FALSE ____ 1. The First-in, First-out (FIFO) inventory method results in an ending inventory valued at the most recent cost. ____ 2. The specific identification method of inventory valuation is desirable when a company sells a large number of low-unit cost items. ____ 3. If a company changes its inventory valuation method, the effect of the change on net income should be disclosed in the financial statements. ____ 4. Under the lower of cost or market basis, market is defined as current replacement cost. ____ 5. If inventories are valued using the LIFO cost assumption, they should not be classified as a current asset on the balance sheet. ____ 6. If a company uses the FIFO cost assumption, the cost of goods sold for the period will be the same under a perpetual or periodic inventory system. ____ 7. The cost of ending inventory is added to the cost of goods available for sale to determine cost of goods sold. ____ 8. In a period of falling prices, the LIFO method results in a lower cost of goods sold than the FIFO method. ____ 9. The lower of cost or market basis is an example of the accounting concept of conservatism. ____ 10. Inventories are reported in the current assets section of the balance sheet immediately below receivables. ____ 11. Land improvements are generally charged to the Land account. ____ 12. In calculating depreciation, both plant asset cost and useful life are based on estimates. ____ 13. Using the units-of-activity method of depreciating factory equipment will generally result in more depreciation expense being recorded over the life of the asset than if the straight-line method had been used. -2- ____ 14. Under the double-declining-balance method, the depreciation rate used each year remains constant. ____ 15. The IRS does not require the taxpayer to use the same depreciation method on the tax return that is used in preparing financial statements. ____ 16. If the proceeds from the sale of a plant asset exceed its book value, a gain on disposal occurs. ____ 17. The book value of a plant asset is the amount originally paid for the asset less anticipated salvage value. ____ 18. A plant asset must be fully depreciated before it can be removed from the books. ____ 19. If similar assets are exchanged, any gain on disposal should be deferred but any loss on disposal should be recognized. ____ 20. A loss on the exchange of plant assets occurs when the fair market value of the old asset is less than its book value. MULTIPLE CHOICE ____ 23. If goods in transit are shipped FOB destination a. the seller has legal title to the goods until they are delivered. b. the buyer has legal title to the goods until they are delivered. c. the transportation company has legal title to the goods while the goods are in transit. d. no one has legal title to the goods until they are delivered. -3- ____ 24. An auto manufacturer would classify vehicles in various stages of production as a. finished goods. b. merchandise inventory. c. raw materials. d. work in process. ____ 38. All of the following factors in computing depreciation are estimates except a. cost. b. residual value. c. salvage value. d. useful life. ____ 39. The balance in the Accumulated Depreciation account represents the a. cash fund to be used to replace plant assets. b. amount to be deducted from the cost of the plant asset to arrive at its fair market value. c. amount charged to expense in the current period. d. amount charged to expense since the acquisition of the plant asset. -6- ____ 40. The book value of an asset is equal to the a. asset?s market value less its historical cost. b. blue book value relied on by secondary markets. c. replacement cost of the asset. d. asset?s cost less accumulated depreciation. ____ 41. Depreciation is a process of a. asset devaluation. b. cost accumulation. c. cost allocation. d. asset valuation. ____ 42. Recording depreciation each period is necessary in accordance with the a. going concern principle. b. cost principle. c. matching principle. d. asset valuation principle. ____ 43. In computing depreciation, salvage value is a. the fair market value of a plant asset on the date of acquisition. b. subtracted from accumulated depreciation to determine the plan asset?s depreciable cost. c. an estimate of a plant asset?s value at the end of its useful life. d. ignored in all the depreciation methods. ____ 45. A truck was purchased for $90,000 and it was estimated to have an $18,000 salvage value at the end of its useful life. Monthly depreciation expense of $1,500 was recorded using the straight-line method. The annual depreciation rate is a. 20% b. 2% c. 8% d. 25% ____ 47. If a plant asset is retired before it is fully depreciated and no salvage value is received, a. a gain on disposal occurs. b. a loss on disposal occurs. c. either a gain or a loss can occur. d. neither a gain nor a loss occurs. ____ 48. The book value of a plant asset is the difference between the a. replacement cost of the asset and its historical cost. b. cost of the asset and the amount of depreciation expense for the year. c. cost of the asset and the accumulated depreciation to date. d. proceeds received from the sale of the asset and it original cost. ____ 49. If disposal of a plant asset occurs during the year, depreciation is a. not recorded for the year. b. recorded for the whole year. c. recorded for the fraction of the year to the date of the disposal. d. not recorded if the asset is scrapped. ____ 50. If similar assets are exchanged, any difference between the fair market value and the book value of the old plant asset is a. recorded as a gain or loss. b. recorded if a gain but is deferred if a loss. c. recorded if a loss but is deferred if a gain. d. deferred if either a gain or loss. "
