James Kirk is a financial executive with McDowell Enterprises. Although James Kirk has not had any formal training in finance or accounting, he has a "good sense" for numbers and has helped the company grow from a very small company ($500,000 sales) to a large operation ($45 million in sales). With the business growing steadily, however, the company needs to make a number of difficult financial decisions in which James Kirk feels a little "over his head." He therefore has decided to hire a new employee with "numbers" expertise to help him. As a basis for determining whom to employ, he has decided to ask each prospective employee to prepare answers to questions relating to the following situations he has encountered recently. Here is one of the questions

The company has always followed the policy to take any cash discounts on goods purchased. Re- cently, the company purchased a large amount of raw materials at a price of $800,000 with terms 1/10, n/30 on which it took the discount. McDowell has recently estimated its cost of funds at 10%. Should McDowell continue this policy of always taking the cash discount?

Interstate Automobiles Corporation leased 40 vans to VIP Transport under a four-year noncancelable lease on January 1, 2018. Information concerning the lease and the vans follows:

a. Equal annual lease payments of $\$ 300,000$ are due on January 1, 2018, and thereafter on December 31 each year. The first payment was made January 1, 2018. Interstate's implicit interest rate is $10 \%$ and known by VIP. b. VIP has the option to purchase all of the vans at the end of the lease for a total of $\$ 290,000$. The vans' estimated residual value is $\$ 300,000$ at the end of the lease term and $\$ 50,000$ at the end of 7 years, the estimated life of each van. c. VIP estimates the fair value of the vans to be $\$ 1,240,000$. Interstate's cost was $\$ 1,050,000$. d. VIP's incremental borrowing rate is $9 \%$. e. VIP will pay the maintenance fees not included in the annual lease payments of $\$ 1,000$ per year. The depreciation method is straight-line. Your instructor will divide the class into two to six groups depending on the size of the class. The mission of your group is to assess the proper recording and reporting of the lease described.

Required:

1. Each group member should deliberate the situation independently and draft a tentative argument prior to the class session for which the case is assigned.
2. In class, each group will meet for 10 to 15 minutes in different areas of the classroom. During that meeting, group members will take turns sharing their suggestions for the purpose of arriving at a single group treatment.
3. After the allotted time, a spokesperson for each group (selected during the group meetings) will share the group's solution with the class. The goal of the class is to incorporate the views of each group into a consensus approach to the situation.

Specifically, you should address: a. Identify potential advantages to VIP of leasing the vans rather than purchasing them. b. How should the lease be classified by VIP? by Interstate? c. Regardless of your response to previous requirements, suppose VIP recorded the lease on January 1,2018 , as a finance lease in the amount of $\$ 1,100,000$. What would be the appropriate journal entries related to the finance lease for the second lease payment on December $31,2018 ?$

On December 31, 2016, Largo, Inc., had a $750,000 note payable outstanding, due July 31, 2017. Largo borrowed the money to finance construction of a new plant. Largo planned to refinance the note by issuing longterm bonds. Because Largo temporarily had excess cash, it prepaid$250,000 of the note on January 12, 2017. In February 2017, Largo completed a $1,500,000 bond offering. Largo will use the bond offering proceeds to repay the note payable at its maturity and to pay construction costs during 2017. On March 3, 2017, Largo issued its 2016 financial statements. What amount of the note payable should Largo include in the current liabilities section of its December 31, 2016, balance sheet? a.$250,000 b. $750,000 c.$500,000 d. $ 0

Mark Sexton and Todd Story, the owners of S&S Air, have planned to expand their operations. They instructed their newly hired financial analyst, Chris Guthrie, to enlist an underwriter to help sell $35 million in new 10-year bonds to finance construction. Chris has entered into converstations with Renata Harper, an underwriter from the firm of Raines and Warren, about which bond features S&S Air should consider and what coupon rate the issue will likely have.

 Although Chris is aware of the bond features, he is uncertain about the costs and benefits of some features, so he isn’t sure how each feature would affect the coupon rate of the bond issue. You are Renata’s assistant, and she has asked you to prepare a memo to Chris describing the effect of each of the following bond features on the coupon rate of the bond. She would also like you to list any advantages or disadvantages of he seniority of the bond.

Sunset Boards is a small company that manufactures and sells surfboards in Malibu. Tad Marks, the founder of the company, is in charge of the design and sale of the surfboards, but his background is in surfing, not business. Hence, the company’s financial records are not well maintained.

 The initial investment in Sunset Boards was provided by Tad and his friends and family. Because the initial investment was relatively small, and the company has made surf-boards only for its own store, the investors haven’t required detailed financial statements from Tad. But thanks to word of mouth among professional surfers, sales have picked up recently, and Tad is considering a major expansion. His plans include opening another surfboard store in Hawaii, as well as supplying his “sticks” (surfer lingo for boards) to other sellers.

Tad’s expansion plans require a significant investment, which he plans to finance with a combination of additional funds from outsiders along with some money borrowed from banks. Naturally, the new investors and creditors require more organized and detailed financial statements than Tad has previously prepared. At the urging of his investors, Tad has hired financial analyst Christina Wolfe to evaluate the performance of the company over the past year.

 After rooting through old bank statements, sales receipts, tax returns, and other records, Christina has assembled the following information:

Sunset Boards currently pays out 40% of net income as dividends to Tad and the other original investors, and it has a 30% tax rate. You are Christina’s assistant, and she has asked you to prepare the following:

1. An income statement for 2014 and 2015.

2 A balance sheet for 2014 and 2015.

3. Operating cash flow for each year.

4. Cash flow from assets for 2015.

5. Cash flow to creditors for 2015.

6. Cash flow to stockholders for 2015.

QUESTION

How would you describe Sunset Boards’ cash flows for 2015? Write a brief discussion.

On July 31, 2020. Amsterdam Company engaged Minsk Tooling Company to construct a special-purpose piece of factory machinery. Construction began immediately and was completed on November 1, 2020. To help finance construction, on July 31 Amsterdam issued a $300,000, 3-year, 12% note payable at Netherlands National Bank, on which interest is payable each July 31.$200,000 of the proceeds of the note was paid to Minsk on July 31. The remainder of the proceeds was temporarily invested in short-term marketable securities (trading securities) at 10% until November 1. On November 1, Amsterdam made a final $100,000 payment to Minsk. Other than the note to the Netherlands, Amsterdam's only outstanding liability at December 31, 2020, is a$30,000, 8%, 6-year note payable, dated January 1, 2017, on which interest is payable each December 31.

Instructions

a. Calculate weighted average accumulated expenditures, avoidable interest, and total interest cost to be capitalized during 2020. (Round all computations to the nearest dollar.)

b. Prepare the journal entries needed on the books of Amsterdam Company at each of the following dates.

1. July 31, 2020.

2. November 1, 2020

3. December 31, 2020.

Tom Ajax purchases a tiny home for his elderly mother. After a large down payment, he finances $\$88,600$ at $7\frac{1}{4}$ for $10$ years. Prepare a repayment schedule for the first two payments. (See the Example discussed before .)

$$\begin{array}{ccccc} \begin{array}{}\text{Payment}\\\text{Number}\end{array}& \begin{array}{}\text{Total}\\\text{Payment}\end{array}& \begin{array}{}\text{Interest}\\\text{Payment}\end{array}& \begin{array}{}\text{Principal}\\\text{Payment}\end{array}& \begin{array}{}\text{Remaining}\\\text{Balance}\end{array}\\ \end{array}$$

A person purchased a house 10 years ago for $160,000. The house was financed by paying 20% down and signing a 30-year mortgage at 7.75% on the unpaid balance. Equal monthly payments were made to amortize the loan over a 30-year period. The owner now (after the 120th payment) wishes to refinance the house due to a need for additional cash. If the loan company agrees to a new 30-year mortgage of 80% of the new appraised value of the house, which is$225,000, how much cash (to the nearest dollar) will the owner receive after repaying the balance of the original mortgage?

The following data have been provided by the finance director of La Pitch which manufactures high-quality tents for the specialist outdoor market. The marketing director wants to reduce the price of the tents to $\$ 39.99$ (he considers this to be a psychologically attractive price to consumers) to increase sales volume but there are concerns about reducing unit contribution and covering costs. There are also concerns about exceeding La Pitch's factory capacity.

• direct labour per unit $17

• direct materials per unit$\$18$

• fixed costs $\$ 200000$

• current selling price $\$ 45$

• maximum capacity of the factory is $30000$ units

On the basis of La Pitch's financial information construct a fully labelled break-even chart. Calculate the break-even point, the margin of safety and profit from the sale of $25000$ tents.

Did you know that you can get lots of financial information free of charge? Go to finance.yahoo.com. Use the quote lookup located on the left side to get financial information about any publicly traded company. 1. For your company of choice, obtain the most recent income statement and balance sheet information by clicking on the financials in the bottom left hand corner. 2. Click on competitors to obtain a direct competitor comparison with your company of choice. Select a competing company and obtain their most recent income statement and balance sheet information. 3. Calculate the following risk ratios for both companies for the most recent year. Based on these calculations, which company appears to be more risky? a. Receivables turnover ratio. b. Inventory turnover ratio. c. Current ratio. d. Acid-test ratio. e. Debt to equity ratio. 4. Calculate the following profitability ratios for both companies for the most recent year. Based on these calculations, which company appears to be more profitable? a. Gross profit ratio. b. Return on assets. c. Profit margin. d. Asset turnover. e. Return on equity.

Benchmark Metrics, Inc. (BMI), an all-equity financed firm, just reported EPS of $\$ 4.43$ in $2008$. Despite the economic downturn, BMI is confident regarding its current investment opportunities. But due to the financial crisis, BMI does not wish to fund these investments externally. The Board has therefore decided to suspend its stock repurchase plan and cut its dividend to $\$ 1.44$ per share (vs. almost $\$2$ per share in $2007$), and retain these funds instead. The firm has just paid the 2008 dividend, and BMI plans to keep its dividend at $\$ 1.44$ per share in $2009$ as well. In subsequent years, it expects its growth opportunities to slow, and it will still be able to fund its growth internally with a target $45 \%$ dividend payout ratio, and reinitiating its stock repurchase plan for a total payout rate of $58 \%$. (All dividends and repurchases occur at the end of each year.) Suppose BMI's existing operations will continue to generate the current level of earnings per share in the future. Assume further that the return on new investment is $15 \%$, and that reinvestments will account for all future earnings growth (if any). Finally, assume BMI's equity cost of capital is $10 \%$.

a. Estimate BMP's EPS in $2009$ and $2010$ (before any share repurchases).

b. What is the value of a share of BMI at the start of $2009$ ?

Motorcross, Inc. identified the following selected transactions that occurred during 2016: a. Issued 850 shares of $5 par common stock for cash of$21,000. b. Issued 5,600 shares of $5 par common stock for a building with a fair market value of$99,000. c. Purchased new truck with a fair market value of $36,000. Financed it 100% with a long-term note. d. Retired shon-term notes of$26,000 by issuing 2,500 shares of $5 par common stock. e. Paid long-term note of$8,500 to Bank of Tallahassee. Issued new long-term note of $17,000 to Bank of Trust. Identify any non-cash transactions that occurred during the year, and show how they would be reported in the non-cash investing and financing activities section of the statement of cash flows.

Suppose a home buyer secures a bank loan of A dollars to purchase a house. If the interest rate charged is r/year compounded monthly and the loan is to be amortized in t years, then the principal repayment at the end of i months is given by

$$B= f(A,r,t,i) = A \left[ \dfrac{\left(1 + \dfrac{r}{12} \right)^i -1}{\left(1+ \dfrac{r}{12} \right)^{12t}-1} \right] \quad (0 \le i \le 12t)$$

         Suppose the Blakelys borrow a sum of $280 ,000 from a

bank to help finance the purchase of a house and the bank charges interest at a rate of 6%/year. If the Blakelys agree to repay the loan in equal installments over 30 years, how much will they owe the bank after the 60th payment (5 years)? The 240th payment (20 years)?

A large decline in government purchases: Suppose there is a large temporary decline in government purchases in the economy, financed by an unspecified decline in future lump sum taxes.
(a) Analyze the effect of the shock in the labor market diagram of a standard DSGE model (with no sticky prices or wages). What is the effect on the real wage and employment in the short run?
(b) How would your answer change if there are sticky prices?
(c) Discuss how your answer relates to the impulse response functions shown in previous Figure. (Hint: That figure is for an increase in government purchases, so you need to switch the sign of the effects in that figure.)