Question & Answer

Tiffany and Carlos decided to liquidate their jointly owned corporation, Royal Oak Furniture (ROF).  After liquidating its remaining inventory and paying off its remaining liabilities, ROF had the following tax accounting balance sheet.     FMV         Tax BasisAppreciation (Depreciation) Cash$  200,000$     200,000 Building      50,000         10,000       40,000 Land    150,000       200,000      (50,000) Total$  400,000$     410,000$    (10,000)

One of the more closely watched ratios by investors is the price/earnings (P/E) ratio. By dividing price per share by earnings per share, analysts get insight into the value the market attaches to a company’s earnings. More specifically, a high P/E ratio (in comparison to companies in the same industry) may suggest the stock is overpriced. Also, there is some evidence that companies with low P/E ratios are underpriced and tend to outperform the market. However, the ratio can be misleading. P/E ratios are sometimes misleading because the E (earnings) is subject to a number of assumptions and estimates that could result in overstated earnings and a lower P/E. Some analysts conduct “revenue analysis” to evaluate the quality of an earnings number. Revenues are less subject to management estimates and all earnings must begin with revenues. These analysts also compute the price-to-sales ratio (PSR 5 price per share 4 sales per share) to assess whether a company is performing well compared to similar companies. If a company has a price-to-sales ratio significantly higher than its competitors, investors may be betting on a stock that has yet to prove itself. [Source: Janice Revell, “Beyond P/E,” Fortune (May 28, 2001), p. 174.] Instructions (a) Identify some of the estimates or assumptions that could result in overstated earnings. (b) Compute the P/E ratio and the PSR for Tootsie Roll and Hershey for 2011. (c) Use these data to compare the quality of each company’s earnings.

On November 3, 2014, Sprinkle Co. invested $200,000 in 4,000 shares of the common stock of Pratt Co. Sprinkle classified this investment as available-for-sale. Sprinkle Co. is considering making a more significant investment in Pratt Co. at some point in the future but has decided to wait and see how the stock does over the next several quarters. Date Market Price of Pratt Shares Time Value of Put Option December 31, 2014 $50 per share $375 March 31, 2015 45 per share 175 June 30, 2015 43 per share 40 Instructions (a) Prepare the journal entries for Sprinkle Co. for the following dates. (1) November 3, 2014—Investment in Pratt stock and the put option on Pratt shares. (2) December 31, 2014—Sprinkle Co. prepares financial statements. (3) March 31, 2015—Sprinkle prepares financial statements. (4) June 30, 2015—Sprinkle prepares financial statements. (5) July 1, 2015—Sprinkle settles the put option and sells the Pratt shares for $43 per share. (b) Indicate the amount(s) reported on the balance sheet and income statement related to the Pratt investment and the put option on December 31, 2014. (c) Indicate the amount(s) reported on the balance sheet and income statement related to the Pratt investment and the put option on June 30, 2015.

What will be the effects on the domestic economy under free-floating exchange rates if there is a rapid expansion in world economic activity? What will determine the size of these effects?

Maple Corp., a calendar-year corporation, was formed three years ago by its sole shareholder, Jian, who immediately elected S corporation status.  On December 31 of the current year, Maple distributed $30,000 cash to Jian.  What are the amount and character of gain Jian must recognize on the distribution in each of the following alternative scenarios?

Would you expect a bank to charge a higher rate on a term loan or a highly leveraged transaction (HLT) loan? Why? (LO3)

How would you attempt to assess whether a particular period of inflation was the result of cost-push or demand-pull pressures?

Alcide Mining Company purchased land on February 1, 2014, at a cost of $1,190,000. It estimated that a total of 60,000 tons of mineral was available for mining. After it has removed all the natural resources, the company will be required to restore the property to its previous state because of strict environmental protection laws. It estimates the fair value of this restoration obligation at $90,000. It believes it will be able to sell the property afterwards for $100,000. It incurred developmental costs of $200,000 before it was able to do any mining. In 2014, resources removed totaled 30,000 tons. The company sold 22,000 tons. Instructions Compute the following information for 2014. (a) Per unit material cost. (b) Total material cost of December 31, 2014, inventory. (c) Total material cost in cost of goods sold at December 31, 2014.

Many financial institutions borrow heavily in the money markets using mortgages and mortgage-backed securities as collateral. Write a short essay about the lessons of the credit crisis to the deficit units and the surplus units that participate in the money markets. Should money markets be regulated to a greater degree to ensure proper collateral in money markets?

Explain how the downgrading of bonds for a particular corporation affects the prices of those bonds, the return to investors who currently hold these bonds, and the potential return to other investors who may invest in the bonds in the near future. (LO2)

: Summarize the impact of people of color, immigrants, and women on the creation of new businesses.

Bull and Finch Company wants a fixed-for-floating swap. It expects interest rates to rise far above the fixed rate that it would pay and remain very high until the swap maturity date. Should it consider negotiating for a rate-capped swap with the cap set at 2 percentage points above the fixed rate? Explain. (LO6)

Explain the importance of contingency planning, scenario building, stretch goals, and crisis planning for managers today.

(Looking at the Maths) 1. Complete the demand schedule in table up to a price of 50. (Looking at the Maths) 2. What is it about equation (2) that makes the demand curve (a) downward sloping; (b) a straight line?

: Define entrepreneurship and the five classifications of entrepreneurs.

1.              : Take swift action to notify the venture capitalists of the truth of the situation—and start cleaning house to get rid of people who would knowingly lie to close a deal.

To what extent is national defence a pure public good? Can it ever be rivalrous or excludable in consumption?

Describe important steps for starting an online or mobile app business.

: Outline the planning necessary to launch an entrepreneurial start-up.

Look ahead to Table 3.1. It shows the income elasticity of demand for various foodstuffs. Explain the difference in the figures for milk, fish and fruit juice..

Balanced scorecard perspectives: internal business process, innovation             and growth The Galaxy Hotel Group owns and operates a number of mid-level boutique hotels mostly in regional Australia. Galaxy is structured around regions with a regional general manager usually given the responsibility of working closely with the managers of the hotels within their region. Commonly, a regional general manager is responsible for around 6 to 8 hotels. Within Australia, Galaxy has six regional general managers who report to the CEO, Angelo Vellma. Galaxy’s strategy has focused on meeting the needs of business and holiday travellers seeking 3 to 3.5 star accommodation for relatively short stays that are affordable but comfortable. One thing Galaxy enforces is its objective of having the same high-level service at each hotel. The CFO of Galaxy, Caitlin Zhang, has raised the idea of introducing a balanced scorecard. At this stage it has only been discussed at board level, but most of the board members are in favour of its implementation. As Zhang points out, ‘it will focus the attention of employees on our key priorities as well as provide the opportunity to reinforce our strategy throughout the company’. Zhang’s first draft balanced scorecard developed for use at the individual hotel level is provided below. To date, Zhang has constructed the first draft alone, without consulting others.       Another board member, Patrick Ryan, wonders about using the balanced scorecard a little differently. ‘Perhaps we could use the scorecard to facilitate discussion with our regional managers and individual hotel managers. Not all are the same and they obviously face different challenges. The scorecard could be used by senior management to meet with regional managers and discuss the performance of hotels in the region, and perhaps re-work part of the scorecard and set different priorities as the regions work to meet local challenges.’ Required (a)          Angelo Vellma is a little concerned about the draft scorecard. He had recently attended a seminar on balanced scorecards and is worried about the lack of measures relating to what he thinks are important issues at the individual hotel level. He is particularly concerned at the lack of an internal business process perspective and a learning and growth perspective in the scorecard. Identify two measures relevant at the individual hotel level at Galaxy for the internal business process perspective and the learning and growth perspective. Provide a brief justification for each measure. (b)          Comment on the implementation process of the balanced scorecard at Galaxy to date.

: Explain three approaches to corporate-level strategy: the portfolio, the Boston Consulting Group (BCG) matrix, and diversification.

1.       : Suppose that you manage an employee who is spending too much time using personal social media at work. As a consequence, he has missed three important deadlines in one week. You are planning a face-to-face conversation to address this performance problem and your goal is to communicate with candor. Using “I” statements as described in this chapter, how would you begin this conversation?

Compare the federal income tax to sales taxes using the “certainty” criterion.

Nieland Industries had one patent recorded on its books as of January 1, 2014. This patent had a book value of $288,000 and a remaining useful life of 8 years. During 2014, Nieland incurred research and development costs of $96,000 and brought a patent infringement suit against a competitor. On December 1, 2014, Nieland received the good news that its patent was valid and that its competitor could not use the process Nieland had patented. The company incurred $85,000 to defend this patent. At what amount should patent(s) be reported on the December 31, 2014, balance sheet, assuming monthly amortization of patents?