The Drosselmeier Corporation, located in Munich, makes Christmas nutcrackers

The Drosselmeier Corporation, located in Munich, makes Christmas nutcrackers and has an annual plant capacity of 2,400 product units. Suppose its predicted operating results (in euros) for the year are as follows:

Production and sales of 2,000 units, total sales … €180,000
Manufacturing costs
Fixed (total) ………………………………………. 70,000
Variable (per unit) …………………………………….. 25
Selling and administrative expenses
Fixed (total) ……………………………………… 30,000
Variable (per unit) ……………………………………. 10

Compute the following, ignoring income taxes:

1. If the company accepts a special order for 300 units at a selling price of €40 each, how would the total predicted net income for the year be affected, assuming no effect on regular sales at regular prices?
2. Without decreasing its total net income, what is the lowest unit price for which the Drosselmeier Corporation could sell an additional 100 units not subject to any variable selling and administrative expenses, assuming no effect on regular sales at regular prices?
3. List the numbers given in the problem that are irrelevant (not relevant) in solving number 2.
4. Compute the expected annual net income (with no special orders) if plant capacity can be doubled by adding additional facilities at a cost of €500,000. Assume that these facilities have an estimated life of 4 years with no residual scrap value, and that the current unit selling price can be maintained for all sales. Total sales are expected to equal the new total plant capacity each year. No changes are expected in variable costs per unit or in total fixed costs except for depreciation.

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Dell Case. Published income statements use the absorption-costing basis

Dell Case. Published income statements use the absorption-costing basis—after all, that is the method that is acceptable for use under GAAP. But the absorption-costing statement might not really provide the information that management needs to make future decisions because it does not separate fixed from variable costs. This exercise focuses on extracting contribution information from published absorption-costing financial statements of Dell Computer. As a manufacturer of computers, Dell has become a well-known, household name.

1. Go to the home page for Dell at www.dell.com . Take a look at one of the computers for home being offered. Once you’ve arrived at the product page, what type of information do you find about the computer? What information is available about prices? Is it possible that the model could have more than one price? Why or why not?
2. Look at the most recent 10-K report for Dell by following links to Investor Relations, Financial Reporting, and 10-K filings. Go to the section, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” What was the total revenue for Dell? What is the change in the average selling price for desktop PCs? Why do you think this change occurred?
3. Look at the most recent Consolidated Statement of Operations. What were the cost of goods sold and the selling, administrative, and engineering expenses for the current year? Refer to the cash flow statement for the current year. How much was the depreciation and amortization for the current year? Assume that $3 billion of operating expense in addition to the depreciation and amortization are all the fixed expenses. Compute the average variable cost of goods sold percentage. Compute the average contribution margin percentage. What would be the break-even sales dollars under this scenario? Does this seem reasonable, given the current operating income reported by the firm?

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On January 1, 2014, Alter Company had Accounts Receivable $154,000

On January 1, 2014, Alter Company had Accounts Receivable $154,000, Notes Receivable of $12,000; and Allowance for Doubtful Accounts of $13,200.  The note receivable is from Hartwig Company.  It is a 4-month, 9% note dated December 31, 2013.  Alter Company prepares financial statements annually.  During the year, the following selected transactions occurred.
Jan.      5        sold $10,000 of merchandise to Flynn Company, terms n/15.
20       Accepted Flynn Company’s $10,000, 3-month, and 6% note for balance due.

Feb.     18        Sold $4,000 of merchandise to Mink Company and accepted Mink’s
$4,000, 6-month, 8% note for the amount due.
Apr.     20        Collected Flynn Company note in full.
30        Received payment in full from Hartwig Company on the amount due.
May     25        Accepted Creech Inc.’s $9,000, 6-month, 4% note in settlement of a past-
Due balance on account.

Aug.    18        Received payment in full from Mink Company on note due.
Sept.     1        sold $5,000 of merchandise to Glazer Company and accepted a $5,000, 6-
Month, 6% note for the amount due.

Instructions 
Journalize the transactions. (Omit cost of goods sold entries)

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At December 31, 2013, Dustin Company reported this information on its balance sheet

At December 31, 2013, Dustin Company reported this information on its balance sheet.
Account receivable                                          $960,000
Less:  Allowance for doubtful accounts              78,000
During 2014, the company had the following transactions related to receivables.
1)    Sales on account                                                                      $3,600,000
2)    Sales returns and allowances                                                    150,000
3)    Collections of accounts receivable                                            3,100,000
4)    Write-offs of accounts receivable deemed uncollectible                92,000
5)    Recovery of bad debts previously written off as uncollectible     28,000

Instructions
(a)   Prepare the journal entries to record each of these five transactions.  Assume that no cash discounts were taken on the collections of accounts receivable.  (Omit cost of goods sold entries)
(b)  Enter the January 1, 2014, balances in Accounts Receivable and Allowance for Doubtful Accounts, post the entries to the two accounts (use T-accounts), and determine the balances.
(c)   Prepare the journal entry to record bad debt expense for 2014, assuming that aging the accounts receivable indicates that expected bad debts are $140,000.
(d)  Compute the accounts receivable turnover and average collection period.

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Tax 655 Final Project (100% Correct Solution)

TAX 655 Final Project Guidelines and Rubric

Overview
The final project for this course is the creation of a memorandum with an appendix of supporting IRS forms and schedules.
Working as an accounting associate in a financial organization requires the ability to apply accounting knowledge in unique ways. Being able to identify issues and communicate them effectively with members of your team and clients is essential for any financial career working in a privately held enterprise or working with privately held clients.
In the final project, you will demonstrate your ability to communicate your tax efficient investment and business strategy recommendations to a client. Your proposed strategy could save the client and his family millions of dollars over time, so it is imperative that you utilize your tax research skills and maintain compliance with all governing rules and regulations.
The project is divided into four milestones, which will be submitted at various points throughout the course to scaffold learning and ensure quality final submissions. These milestones will be submitted in Modules Two, Four, Five, and Seven. The comprehensive memorandum with appendix will be submitted in Module Nine.
The project will address the following course outcomes:
• Recommend appropriate taxable entities, based on comprehensive tax research, for new businesses resulting in optimum solutions that meet clients’ desired economic outcomes
• Evaluate tax consequences between liquidating and non-liquidating corporate distributions for identifying their impact on clients’ tax returns consistent with governing rules and regulations
• Apply best practices in accounting and moral reasoning for liquidating a business resulting in the best economic solution for the owner
• Illustrate solutions for addressing tax consequences resulting from gifts and inheritances, while maintaining compliance with governing rules and regulations
• Prepare appropriate tax returns as they apply to various business entities that result in the best economic solution for clients

Prompt
You are working as an accountant at a mid-size CPA firm. One of your clients is Bob Jones. Bob’s personal information is as follows:
DOB: October 10, 1952
SSN: 444-00-4444
Marital Status: Single
Home Address: 5100 Lakeshore Drive, Pensacola, FL 32502
Bob has a very successful used car business located at 210 Ocean View Drive in Pensacola, Florida. Last year, you filed a Schedule C for Bob that had $1,200,000 in taxable income. The business will have an income growth rate of 10% per year over the next several years. Bob’s personal wealth, including investments in land, stocks, and bonds, is about $14,000,000.
Last year, he reported interest income of $20,000 and dividend income of $6,000. The $14,000,000 includes land worth $9,000,000 that Bob bought in 1966 for $450,000. The stocks and bonds have a tax basis of $1,200,000 and they are currently worth $5,000,000. All of the investments have been owned for more than a year. In addition to his investments, Bob paid $140,000 for his home in 1972 and it is now worth $600,000.
The used car business is currently valued at $53,000,000 including the land and building, which are worth $41,000,000. Bob’s tax basis in the land and building is $2,000,000 and $400,000, respectively. The inventory is worth $12,000,000, with a cost basis of $5,000,000; the remaining assets, which include office furniture and equipment, make up the remainder of the business’s total value. The office furniture and equipment are fully depreciated.
Bob wants your professional advice regarding whether he should continue to operate as a sole proprietor or convert the business to a partnership, an S corporation, or a C corporation. Based on one of the business entities selected, Bob wants to include Mandy—his daughter—in the business as an owner and manager with a possibility of 40% interest. One of his concerns is what would happen to his business after he passes away.
Mandy’s personal tax information is as follows:
Mandy Jones
DOB: June 30, 1990
SSN: 999-99-9999
Marital Status: Single
Home Address: 5990 Langley Road, Pensacola, FL 35203
You will need to describe the tax and limited liability effects on a chosen business entity should Bob decide to reduce the amount of tax paid per year, as well as the protection of personal assets should there be a possible claim against the company’s assets.
Prepare a memorandum to the client, recommending a type of business entity, including an appendix of supporting IRS tax schedules and forms.
Specifically, the following critical elements must be addressed:
I. Memorandum
A. Use logical reasoning based on your tax research to explain why the client should choose your recommended business entity. Consider referencing appropriate tax code and regulations.
B. Defend your business entity recommendation by describing the accounting method. Consider the advantages and disadvantages of the business entity based on the following:
1. Cash basis vs. accrual
2. The cost to prep the returns
3. The tax benefits
4. The limited liability protection
5. Employee benefits
C. Interpret the tax law pertaining to the type of business recommended and justify your recommendation using details consistent with tax law, code, and regulations.
D. Explain the tax effect based on providing $180,000 per year for the client’s salary and $70,000 per year for his daughter’s salary if they withdraw cash from the business or pay dividends as appropriate.
E. Justify the percentage of ownership the client’s daughter should have in the business based on the type of business entity recommended. Consider the tax law in reference to the recommendation and how the decision will affect the daughter’s tax return.
F. Create a detailed tax planning proposal explaining how the client’s family can experience tax savings should the client pass away. Cite relevant governing rules and regulations.
G. Illustrate a strategic plan that addresses the need for a will in handling the estate. Detail what happens to the business, land, and investments consistent with tax codes and regulations. Consider extending the plan to address the client’s estate tax, trust, and charitable contributions while minimizing estate tax.
H. Recommend estate planning strategies consistent with tax codes and regulations for the purpose of reducing the taxable estate. Be sure to include gifting property to heirs in your response.
I. Illustrate the best course of action if the client decides to leave the business in three years. Provide some advice to him should he decide to gift the business to his daughter or transfer the assets or common stock to her, depending on the business entity you have selected.
J. Illustrate the best course of action if the client wishes to sell the business. Consider the tax consequences with regard to capital gains and losses, ordinary income issues, and selling an existing operating business.

II. Conclusion
A. Compare and contrast the advantages and disadvantages of the sole proprietorship, the partnership, the S corporation, and the C corporation as a tax vehicle that could meet the client’s need for accounting information about the business. Consider providing justification for why the client would not necessarily choose the other business entities.
B. Summarize the alternative involving the possibility of liquidating the business using rationale based on tax research, codes, and regulations.
C. Summarize the alternative of transferring the business activity, providing justification based on tax research, codes, and regulations.

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Sydco is in the bowling ball industry and you are interviewing for a position as chief accountant

Sydco is in the bowling ball industry and you are interviewing for a position as chief accountant in their Dallas office. In order to assure the management staff that you are qualified for the job, one of the tasks they have asked you to do is an evaluation of useful data into a form that can be used by all of management. You have been given the following information:

Sydo Summary

Gross Income  $         36
Depreciation Expense  $         81
Tax Rate

40%

Current Assets  $       196
After Tax Cost of Capital

9%

Operating Income  $         30
Interest Expense  $           8
Current Assets  $       196
Net Plant and Equipment  $       126
Current Liabilities  $         87
   

Your task is to answer all of the questions below.

Questions: Address all of the following questions in a brief but thorough manner.

  • What was net income for the period?
  • What was the company’s net operating profit after tax?
  • What was the company’s operating cash flows?
  • What was the company’s net cash flow?
  • How would you assess the firm’s financial condition, assuming these numbers are accurate?

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ToolsCorp Corporation is a fictitious company that does exist anywhere (ANSWER KEY)

ToolsCorp Corporation is a fictitious company that does exist anywhere. For the purpose of this course, it is located it in Tennessee. As members of the senior management team of ToolsCorp Corporation, your group has been asked to prepare a neat and organized report for the Strategic Officers Steering Committee (SOS-C) of ToolsCorp Corporation. The purpose of this paper is to obtain permission from them to go forward with the next step (developing a full-blown business plan) for ToolsCorp’s strategic initiative to break into the global marketplace

A full mission statement containing the nine components and presented in a well written paragraph

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BUS 335 Midterm Exam (100% Correct Solution)

BUS 335 Mid Term Exam

Multiple Choice Questions (25*2=50 and the last one is bonus question)

1.    Money markets are markets for

a.    Common stocks.
b.    Long-term bonds.
c.    Short-term debt securities such as Treasury bills and commercial paper.

2.    Which of the following statements is CORRECT?

a.    Hedge funds have more in common with investment banks than with any other type of financial institution.
b.    Hedge funds have more in common with commercial banks than with any other type of financial institution.
c.    Hedge funds are not as highly regulated as most other types of financial institutions.  The justification for this light regulation is that only “sophisticated investors” (i.e., those with high net worths and high incomes) are permitted to invest in these funds, and these investors supposedly can do any necessary “due diligence” on their own rather than have it done by the SEC or some other regulator.

3.        Which of the following statements is CORRECT?

a.    While the distinctions are becoming blurred, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise capital from other parties.
b.    The NYSE operates as an auction market, whereas Nasdaq is an example of a dealer market.
c.    Money markets are markets for long-term debt and common stocks.

4.    Which of the following statements is NOT CORRECT?

a.    When a corporation’s shares are owned by a few individuals, we say that the firm is “closely, or privately, held.”
b.    The stock of publicly owned companies do not need to register with a regulatory agency such as the SEC.
c.    When stock in a closely held corporation is offered to the public for the first time, the transaction is called “going public, or an IPO,” and the market for such stock is called the new issue or IPO market.

5.    A share of common stock is not a derivative, but an option to buy the stock is a derivative because the value of the option is derived from the value of the stock.

a.    True
b.    False

6.    Hedge funds are somewhat similar to mutual funds.  The primary differences are that hedge funds are less highly regulated, have more flexibility regarding what they can buy, and restrict their investors to wealthy, sophisticated individuals and institutions.

a.    True
b.    False

7.    Austin Financial recently announced that its net income increased sharply from the previous year, yet its net cash provided from operations declined.  Which of the following could explain this performance?

a.    The company’s dividend payment to common stockholders declined.
b.    The company’s cost of goods sold increased.
c.    The company’s depreciation expense declined.

8.    Which of the following statements is CORRECT?

a.    The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm’s future earnings and dividends, and the riskiness of those cash flows.
b.    The annual report is an internal document prepared by a firm’s managers solely for the use of its creditors/lenders.
c.    Prior to the Enron scandal in the early 2000s, companies would put verbal information in their annual reports, along with the financial statements.  That verbal information was often misleading, so today annual reports can  contain only quantitative information–audited financial statements.

9.    Analysts who follow Howe Industries recently noted that, relative to the previous year, the company’s net cash provided from operations increased, yet cash as reported on the balance sheet decreased.  Which of the following factors could explain this situation?

a.    The company cut its dividend.
b.    The company made large investments in fixed assets.
c.    The company issued new common stock.

10.    Austin Financial recently announced that its net income increased sharply from the previous year, yet its net cash provided from operations declined.  Which of the following could explain this performance?

a.    The company’s dividend payment to common stockholders declined.
b.    The company’s cost of goods sold increased.
c.    The company’s depreciation expense declined.

11.    Assume that inflation is expected to decline steadily in the future, but that the real risk-free rate, r*, will remain constant.  Which of the following statements is CORRECT, other things held constant?

a.    If the pure expectations theory holds, the Treasury yield curve must be downward sloping.
b.    If the pure expectations theory holds, the corporate yield curve must be downward sloping.
c.    If there is a positive maturity risk premium, the Treasury yield curve must be upward sloping.

12.    Assume that interest rates on 20-year Treasury and corporate bonds are as follows:

T-bond = 7.72%    AAA = 8.72%    A = 9.64%    BBB = 10.18%

The differences in these rates were probably caused primarily by:

a.    Default and liquidity risk differences.
b.    Maturity risk differences.
c.    Inflation differences.

13.    In the foreseeable future, the real risk-free rate of interest, r*, is expected to remain at 3%, inflation is expected to steadily increase, and the maturity risk premium is expected to be 0.1(t − 1)%, where t is the number of years until the bond matures.  Given this information, which of the following statements is CORRECT?

a.    The yield on 2-year Treasury securities must exceed the yield on 5 year Treasury securities.
b.    The yield on 5-year corporate bonds must exceed the yield on 8-year Treasury bonds.
c.    The yield curve must be upward sloping.

14.    If the Treasury yield curve is downward sloping, how should the yield to maturity on a 10-year Treasury coupon bond compare to that on a 1-year T-bill?

a.    The yield on a 10-year bond would be less than that on a 1-year bill.
b.    The yield on a 10-year bond would have to be higher than that on a 1 year bill because of the maturity risk premium.
c.    It is impossible to tell without knowing the coupon rates of the bonds.

15.    A bond trader observes the following information:

•    The Treasury yield curve is downward sloping.
•    Empirical data indicate that a positive maturity risk premium applies to both Treasury and corporate bonds.
•    Empirical data also indicate that there is no liquidity premium for Treasury securities but that a positive liquidity premium is built into corporate bond yields.

On the basis of this information, which of the following statements is most CORRECT?

a.    A 10-year corporate bond must have a higher yield than a 5-year Treasury bond.
b.    A 10-year Treasury bond must have a higher yield than a 10-year corporate bond.
c.    A 5-year corporate bond must have a higher yield than a 10-year Treasury bond.

16.    Which of the following statements is CORRECT?

a.    The yield on a 3-year Treasury bond cannot exceed the yield on a 10 year Treasury bond.
b.    The yield on a 2-year corporate bond should always exceed the yield on a 2-year Treasury bond.
c.    The yield on a 3-year corporate bond should always exceed the yield on a 2-year corporate bond.

17.    Assume that the rate on a 1-year bond is now 6%, but all investors expect 1-year rates to be 7% one year from now and then to rise to 8% two years from now.  Assume also that the pure expectations theory holds, hence the maturity risk premium equals zero.  Which of the following statements is CORRECT?

a.    The interest rate today on a 2-year bond should be approximately 7%.
b.    The interest rate today on a 3-year bond should be approximately 7%.
c.    The interest rate today on a 3-year bond should be approximately 8%.

18.    Assuming the pure expectations theory is correct, which of the following statements is CORRECT?

a.    If 2-year Treasury bond rates exceed 1-year rates, then the market must expect interest rates to rise.
b.    If both 2-year and 3-year Treasury rates are 7%, then 5-year rates must also be 7%.
c.    If 1-year rates are 6% and 2-year rates are 7%, then the market expects 1-year rates to be 6.5% in one year.

19.    Which of the following events would make it more likely that a company would call its outstanding callable bonds?

a.    The company’s bonds are downgraded.
b.    Market interest rates rise sharply.
c.    Market interest rates decline sharply.

20.    A 10-year corporate bond has an annual coupon of 9%.  The bond is currently selling at par ($1,000).  Which of the following statements is CORRECT?

a.    The bond’s expected capital gains yield is zero.
b.    The bond’s yield to maturity is above 9%.
c.    The bond’s current yield is above 9%.

21.    A 15-year bond with a face value of $1,000 currently sells for $850.  Which of the following statements is CORRECT?

a.    The bond’s coupon rate exceeds its current yield.
b.    The bond’s current yield exceeds its yield to maturity.
c.    The bond’s yield to maturity is greater than its coupon rate.

22.    Three $1,000 face value, 10-year, noncallable, bonds have the same amount of risk, hence their YTMs are equal.  Bond 8 has an 8% annual coupon, Bond 10 has a 10% annual coupon, and Bond 12 has a 12% annual coupon.  Bond 10 sells at par.  Assuming that interest rates remain constant for the next 10 years, which of the following statements is CORRECT?

a.    Since the bonds have the same YTM, they should all have the same price, and since interest rates are not expected to change, their prices should all remain at their current levels until maturity.
b.    Bond 12 sells at a premium (its price is greater than par), and its price is expected to increase over the next year.
c.    Bond 8 sells at a discount (its price is less than par), and its price is expected to increase over the next year.

A 10-year bond pays an annual coupon, its YTM is 8%, and it currently trades at a premium. Which of the following statements is CORRECT?

a.    The bond’s current yield is less than 8%.
b.    If the yield to maturity remains at 8%, then the bond’s price will decline over the next year.
c.    If the yield to maturity increases, then the bond’s price will increase.

24.    Which of the following bonds would have the greatest percentage increase in value if all interest rates in the economy fall by 1%?

a.    20-year, 10% coupon bond.
b.    1-year, 10% coupon bond.
c.    20-year, zero coupon bond.

25.    Which of the following statements is CORRECT?

a.    If a coupon bond is selling at par, its current yield equals its yield to maturity.
b.    If a coupon bond is selling at a discount, its price will continue to decline until it reaches its par value at maturity.
c.    If a bond’s yield to maturity exceeds its annual coupon, then the bond will trade at a premium.

26.    Which of the following statements is CORRECT? (bonus question)

a.    Bonds are generally regarded as being riskier than common stocks, and therefore bonds have higher required returns.
b.    Bonds issued by larger companies always have lower yields to maturity (due to less risk) than bonds issued by smaller companies.
c.    The market price of a bond will always approach its par value as its maturity date approaches, provided the bond’s required return remains constant.

Mid Term Exam Part II – Calculation

Multiple Choice (17*2.5=42.5) plus three bonus questions

1.    Morin Company’s bonds mature in 8 years, have a par value of $1,000, and make an annual coupon interest payment of $65.  The market requires an interest rate of 8.2% on these bonds.  What is the bond’s price?

a.    $903.04
b.    $925.62
c.    $948.76
d.    $972.48
e.    $996.79

2.    Adams Enterprises’ noncallable bonds currently sell for $1,120.  They have a 15-year maturity, an annual coupon of $85, and a par value of $1,000.  What is their yield to maturity? 

a.    5.84%
b.    6.15%
c.    6.47%
d.    6.81%
e.    7.17%

3.    Sadik Inc.’s bonds currently sell for $1,180 and have a par value of $1,000.  They pay a $105 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,100.  What is their yield to call (YTC)?

a.    6.63%
b.    6.98%
c.    7.35%
d.    7.74%
e.    8.12%

4.    Malko Enterprises’ bonds currently sell for $1,050.  They have a 6-year maturity, an annual coupon of $75, and a par value of $1,000.  What is their current yield?

a.    7.14%
b.    7.50%
c.    7.88%
d.    8.27%
e.    8.68%

5.    McCue Inc.’s bonds currently sell for $1,250.  They pay a $90 annual coupon, have a 25-year maturity, and a $1,000 par value, but they can be called in 5 years at $1,050.  Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future.  What is the difference between this bond’s YTM and its YTC?  (Subtract the YTC from the YTM; it is possible to get a negative answer.)

a.    2.62%
b.    2.88%
c.    3.17%
d.    3.48%
e.    3.83%

6.    Assume that you are considering the purchase of a 20-year, noncallable bond with an annual coupon rate of 9.5%.  The bond has a face value of $1,000, and it makes semiannual interest payments.  If you require an 8.4% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?

a.    $1,105.69
b.    $1,133.34
c.    $1,161.67
d.    $1,190.71
e.    $1,220.48

7.    Suppose the real risk-free rate is 3.00%, the average expected future inflation rate is 2.25%, and a maturity risk premium of 0.10% per year to maturity applies, i.e., MRP = 0.10%(t), where t is the years to maturity.  What rate of return would you expect on a 1-year Treasury security, assuming the pure expectations theory is NOT valid?  Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average.

a.    5.08%
b.    5.35%
c.    5.62%
d.    5.90%
e.    6.19%

8.    Suppose 10-year T-bonds have a yield of 5.30% and 10-year corporate bonds yield 6.75%.  Also, corporate bonds have a 0.25% liquidity premium versus a zero liquidity premium for T-bonds, and the maturity risk premium on both Treasury and corporate 10-year bonds is 1.15%.  What is the default risk premium on corporate bonds?

a.    1.08%
b.    1.20%
c.    1.32%
d.    1.45%
e.    1.60%

9.    If 10-year T-bonds have a yield of 6.2%, 10-year corporate bonds yield 8.5%, the maturity risk premium on all 10-year bonds is 1.3%, and corporate bonds have a 0.4% liquidity premium versus a zero liquidity premium for T-bonds, what is the default risk premium on the corporate bond?

a.    1.90%
b.    2.09%
c.    2.30%
d.    2.53%
e.    2.78%

10.    Kelly Inc’s 5-year bonds yield 7.50% and 5-year T-bonds yield 4.90%.  The real risk-free rate is r* = 2.5%, the default risk premium for Kelly’s bonds is DRP = 0.40%, the liquidity premium on Kelly’s bonds is LP = 2.2% versus zero on T-bonds, and the inflation premium (IP) is 1.5%.  What is the maturity risk premium (MRP) on all 5-year bonds? (hint: just look at 5 year t-bond).

a.    0.73%
b.    0.81%
c.    0.90%
d.    0.99%
e.    1.09%

11.    Suppose the interest rate on a 1-year T-bond is 5.0% and that on a 2 year T-bond is 7.0%.  Assuming the pure expectations theory is correct, what is the market’s forecast for 1-year rates 1 year from now?

a.    7.00%
b.    5.00%
c.    8.00%
d.    6.00%
e.    9.00%

12.    Suppose the real risk-free rate is 3.25%, the average future inflation rate is 4.35%, and a maturity risk premium of 0.07% per year to maturity applies to both corporate and T-bonds, i.e., MRP = 0.07%(t), where t is the years to maturity.  Suppose also that a liquidity premium of 0.50% and a default risk premium of 0.90% apply to A-rated corporate bonds but not to T-bonds.  How much higher would the rate of return be on a 10-year A-rated corporate bond than on a 5-year Treasury bond?  Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average. (bonus question)

a.    1.75%
b.    1.84%
c.    1.93%
d.    2.03%
e.    2.13%

13.    Suppose a State of California bond will pay $1,000 eight years from now.  If the going interest rate on these 8-year bonds is 5.5%, how much is the bond worth today?

a.    $651.60
b.    $684.18
c.    $718.39
d.    $754.31
e.    $792.02

14.    Suppose the U.S. Treasury offers to sell you a bond for $747.25.  No payments will be made until the bond matures 5 years from now, at which time it will be redeemed for $1,000.  What interest rate would you earn if you bought this bond at the offer price? 

a.    4.37%
b.    4.86%
c.    5.40%
d.    6.00%
e.    6.60%

= rate(5, 0, -747.25, 1000)=6%

15.    You want to buy a new sports car 3 years from now, and you plan to save $4,200 per year, beginning one year from today.  You will deposit your savings in an account that pays 5.2% interest.  How much will you have just after you make the 3rd deposit, 3 years from now?

a.    $11,973
b.    $12,603
c.    $13,267
d.    $13,930
e.    $14,626

16.    What is the present value of the following cash flow stream at a rate of 6.25%?

Years:    0    1    2    3    4
|    |    |    |    |
CFs:    $0    $75    $225    $0    $300

a.    $411.57
b.    $433.23
c.    $456.03
d.    $480.03
e.    $505.30

17.    Steve and Ed are cousins who were both born on the same day, and both turned 25 today.  Their grandfather began putting $2,500 per year into a trust fund for Steve on his 20th birthday, and he just made a 6th payment into the fund.  The grandfather (or his estate’s trustee) will make 40 more $2,500 payments until a 46th and final payment is made on Steve’s 65th birthday.  The grandfather set things up this way because he wants Steve to work, not be a “trust fund baby,” but he also wants to ensure that Steve is provided for in his old age.
Until now, the grandfather has been disappointed with Ed, hence has not given him anything.  However, they recently reconciled, and the grandfather decided to make an equivalent provision for Ed.  He will make the first payment to a trust for Ed today, and he has instructed his trustee to make 40 additional equal annual payments until Ed turns 65, when the 41st and final payment will be made.  If both trusts earn an annual return of 8%, how much must the grandfather put into Ed’s trust today and each subsequent year to enable him to have the same retirement nest egg as Steve after the last payment is made on their 65th birthday? (bonus question)

a.    $3,726
b.    $3,912
c.    $4,107
d.    $4,313
e.    $4,528

18.    Vasudevan Inc. recently reported operating income of $2.75 million, depreciation of $1.20 million, and had a tax rate of 40%.  The firm’s expenditures on fixed assets and net operating working capital totaled $0.6 million.  How much was its free cash flow, in millions? 

a.    $1.93
b.    $2.03
c.    $2.14
d.    $2.25
e.    $2.36

19.    Hartzell Inc. had the following data for 2011, in millions:  Net income = $600; after-tax operating income [EBIT(1 - T)] = $700; and Total assets = $2,000.  Information for 2012 is as follows:  Net income = $825; after-tax operating income [EBIT(1 - T)] = $925; and Total assets = $2,500.  How much free cash flow did the firm generate during 2012?

a.    $383
b.    $425
c.    $468
d.    $514
e.    $566

20.    Last year, Stewart-Stern Inc. reported $11,250 of sales, $4,500 of operating costs other than depreciation, and $1,250 of depreciation.  The company had $3,500 of bonds outstanding that carry a 6.5% interest rate, and its federal-plus-state income tax rate was 35%.  During last year, the firm had expenditures on fixed assets and net operating working capital that totaled $2,000.  These expenditures were necessary for it to sustain operations and generate future sales and cash flows.  This year’s data are expected to remain unchanged except for one item, depreciation, which is expected to increase by $725.  By how much will the depreciation change cause (1) the firm’s net income and (2) its free cash flow to change?  Note that the company uses the same depreciation for tax and stockholder reporting purposes (bonus question)

a.    -$383.84; $206.68
b.    -$404.04; $217.56
c.    -$425.30; $229.01
d.    -$447.69; $241.06
e.    -$471.25; $253.75

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BUSN319 Quiz (100% Correct Solution)

1. (TCO 4) Three commonly used methods of evaluating marketing programs are (Points : 5)
sales analysis, marginal analysis, and cost analysis.
sales analysis, profitability analysis, and marketing audits.
marketing ROI, metrics, and dashboards.
sales audits, cost audits, and marketing audits.
internal audits, external audits, and marketing control boards.

2. (TCO 1) Marketing plans must enable results to be compared with planned targets which allows __________, the flexibility to update original plans. (Points : 5)
replanning
contingency planning
downsizing
dynamic planning
proactive change

3. (TCO 3) Which marketing strategy focuses on a single market segment but adds additional product lines? (Points : 5)
full coverage
market specialization
product specialization
selective specialization
market-product concentration

4. (TCO 1) Based on relative competitive scope (broad target to narrow target) and source of competitive advantage (lower cost to differentiation), Porter’s four generic business strategies are differentiation, cost focus, differentiation focus, and (Points : 5)
exclusivity
electronic-focus.
quality focus.
cost leadership.
service leadership.

5. (TCO 2) Which of the following pieces of information is used in the implementation phase of the strategic marketing process? (Points : 5)
corporate return on investment
Gantt charts
revenues associated with each point of market share
trends in past and current revenues for industry and competitors in total and by segment
possible cannibalization effects on other products in the line

6. (TCO 6) Which of the following pieces of information is used in a SWOT analysis, the first step of the planning phase of the strategic marketing process? (Points : 5)
corporate return on investment
market share for the product
revenues associated with each point of market share
trends in past and current revenues for industry and competitors
possible cannibalization effects on other products in the line

7. (TCO 3) The first decision in developing an advertising program is to (Points : 5)
set the budget.
state the mission of the advertising program.
identify the target audience.
select the appeal.
select the media.

8. (TCO 2) The proper blend of elements in the promotional mix depends on the type of product.  The three specific characteristics to be considered are complexity, __________, and ancillary services. (Points : 5)
Risk
Size
Durability
Accessibility
Acceptability

9. (TCO 4) At which stage in the product life cycle would your promotional objective be to persuade the consumer to buy the product rather than substitutes? (Points : 5)
introduction
growth
incubation
decline
maturity

10. (TCO 2) The __________ includes advertising, personal selling, sales promotion, public relations and direct marketing. (Points : 5)
promotion channel
communication chain
marketing matrix
promotional mix
media mix

11. (TCO 8) Which of the following statements about the terms used for marketing intermediaries is true? (Points : 5)
The least precise terms used to describe marketing intermediaries are dealer and distributor.
A retailer sells to business markets.
An agent has no legal authority to act on behalf of a manufacturer.
A wholesaler is an intermediary who sells to consumers.
A broker is a synonym for a dealer.

12. (TCO 7) Price fixing is (Points : 5)
an arrangement a manufacturer makes with a reseller to handle only its products and not those of a competitor.
the practice of charging a very low price for a product with the intent of driving competitors out of business.
the practice of charging different prices to different buyers for goods of like grade and quality.
a conspiracy among firms to set prices for a product.
a seller’s requirement that the purchaser of one product also buy another product in the line.

13. (TCO 2) Which of the following is NOT one of the six major pricing objectives? (Points : 5)
profit
unit volume
break-even
survival
market share

14. (TCO 3) The ratio of perceived benefits to __________ is called value. (Points : 5)
price
prestige value
value-added pricing
value analysis
perceived costs

15. (TCO 6) Market segmentation involves aggregating prospective buyers into groups that have common needs and will (Points : 5)
pay attention to marketing messages.
respond similarly to a marketing action.
be responsive to marketing research.
use the same payment methods.
go shopping on a regular basis.

16. (TCO 5) The process of continually acquiring information on events occurring outside the organization to identify and interpret potential trends is called (Points : 5)
environmental trending.
organizational scanning.
environmental scanning.
a SWOT analysis.
acquisition scanning.

17. (TCO 1) A key role of the marketing department is to (Points : 5)
allocate financial resources across business units.
set the overall mission of the company.
provide talent management services.
look outward.
assess global political situations.

18. (TCO 1) Which of the following acts as a barrier to the development of relationship marketing? (Points : 5)
the large number of one-to-one relationships customers are asked to sustain
the large number of products on the market
the increasing number of retail stores that are closing
the changing regulatory environment
diluted cultural diversity

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Assume that a division of Bose makes an electronic

Assume that a division of Bose makes an electronic component for its speakers. Its manufacturing process for the component is a highly automated part of a just-in-time production system. All labor is considered to be an overhead cost, and all overhead is regarded as fixed with respect to output volume. Production costs for 100,000 units of the component are as follows:

 

.:.

A small, local company has offered to supply the components at a price of $4.20 each. If the division discontinued its production of the component, it would save two-thirds of the supplies cost and $30,000 of indirect-labor cost. All other overhead costs would continue.

The division manager recently attended a seminar on cost behavior and learned about fixed and variable costs. He wants to continue to make the component because the variable cost of $4.00 is below the $4.20 bid.

1. Compute the relevant cost of (a) making and (b) purchasing the component. Which alternative is less costly and by how much?

2. What qualitative factors might influence the decision about whether to make or to buy the component?

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