Having just graduated with your MS degree in accounting and financial management, you’re eager to start applying for positions with higher salaries. That is, of course, one reason you decided to earn your master’s degree! Fortunately, you’re one of the top three candidates for a position at Benson, Cundiff, & Gilbert a financial accounting and brokerage firm in the heart of Washington, DC. You’ve always wanted to live in the District, as locals call it.
Sasha, the head of Human Resources at Benson, Cundiff, & Gilbert called this morning. After a brief discussion, Sasha says, “in preparation for your third interview you will prepare a financial analysis of financial statements and respond to questions prepared by our Board of Directors. We’ve done this type of interviewing in the past and sometimes more than one candidate is hired: not for the same position but in related jobs. Are you willing to partake in this type of interview?” Without giving it a lot of thought because you didn’t want to sound hesitant, you say “Absolutely; what time and where?”
- Steps to Completion:
A in Appendix A.
- Answer the Corporation A Stockholders’ Equity Questions in paragraph format. Do not rewrite the questions in your report.
Evaluate the strengths and weaknesses of corporate
strategies from recent financial performance.
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Corporation A. Stockholders’ Equity Questions:
- Calculate the average stock return from 20X1–20X3.
- Calculate the standard deviation over this same period.
- Calculate the coefficient of variation over this period.
- Assume that the CAPM holds, the Corporation has a beta of 1.50, and
the 30-year U.S. Treasury bonds sell at an 8% yield. Using the CAPM,
calculate Corporation A’s required rate of return.
- Calculate the dollar amount of dividends that were declared during
- Calculate the (intrinsic) value of Corporation A’s stock price at year-
end 20X3 using the dividend growth model.
- Compare the intrinsic value to the market value of the Corporation A.
Explain the difference.
- Compare the intrinsic value and market value to the book value of
Corporation A’s. Explain the difference.
- Prepare the journal entry to record the 20X3 purchase of treasury
- Recalculate 20X3 earnings per share, 20X3 current ratio, and 20X3
debt-to-assets assuming Corporation A never purchased treasury stock (i.e., has zero treasury stock at year-end 20X3), and instead left the monies in cash.
a. Assumethatmanagementmadeaboldpredictiontoinvestors at year-end 20X2 that 20X3 EPS would be a minimum of $6.50 and that this would confirm the strong growth rate experienced by Corporation A. At the same time, a member of Corporation A’s board of directors complained about the use of capital to purchase Treasury Stock and said that management should reinvest the monies back into Corporation A. Clearly, management believes that the purchase of treasury stock over the past three years increased shareholder value.
Required: Who is correct—management or the member of the board? Use quantitative data to support your answer.
xi. There are three parts to this question:
a. Assume that Corporation A wants to purchase 5,000 more treasury shares in early 20X4 and then sell these same 5,000 shares at year-end 20X4 when, at that time, Corporation A believes that the market price will approximate $62 per share (below its year-end 20X3 intrinsic value).
Required: All else equal, is this purchase a good use of capital?
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- Required: Should creditors happy with the decision to purchase the treasury stock?
- Suppose that on January 1, 20X4, Corporation A sells the 1,000 shares of TS purchased in 20X1; Corporation A sold this stock at the market price at year-end 20X3.
Prepare the journal entry to record this transaction.
xii. How does this transaction impact the three financialstatements?
B in Appendix A.
- Answer the Corporation B Capital Budgeting Questions in paragraph
format. Do not number or rewrite the questions in your report.
Corporation B. Capital Budgeting Questions:
1) Calculate the weighted average cost of capital for Corporation B as of year- end 20X3.
Corporation B purchased equipment in order to facilitate the processing of its product (with the intent ofexpanding its revenue) over the next few years. At the end of this project (end of 20X7), a supplierwill begin to take over the processing of this product. A few facts about the purchase are listed below:
- Thecostoftheequipment,includingshippingandinstallation,is $400,000. The entire amount will be paid in cash. The equipment will be purchased in early 20X4.
- Thelifeoftheequipmentisfouryears(endof20X7),atwhichtimeitis expected to sell for $40,000.
- Corporation B will initially purchase $200,000 of inventory; 70% of inventory purchasesover the life of this project will be financed via accounts payable.
- Recurring cash flows occur at year-end of each year, and termination cash flows occur at year-end 20X7.
- All cash flows generated each year are paid to Corporation B (i.e., owner of the project).
Based on this information, Corporation B prepared the Projected Balance Sheet and Projected Income Statement for this project, which can be found in Appendix A.
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flows by year, andfor 20X4, separately calculate the cash flows that occur at the beginning and end of the year. You will have five cash flow calculations:
- Beginning of 20X4
- End of 20X4
- End of 20X5
- End of 20X6
- End of 20X7 (includes recurring cash flows and termination cash flows).
- 3) Comparetheaggregateundiscountedcashflowstotheaggregatenet income flows. Explainthe difference (if any).
- 4) Calculate the present value of the future cash flows.
- 5) Calculate the net present value and internal rate of return associated with this project.
- 6) Should Corporation B accept or reject this project? Explain your decision.
- 7) Comparetheinternalrateofreturntotheweightedaveragecostofcapital.Is the differencebetween the IRR and WACC consistent with ROE? Explain your answer.
Submit one Word document.
Number your answers to correspond to the numbers in this project file.
Where written answers are required, prepare your responses in correct English grammar, and use spell check before submitting to your assignment folder.
As a reminder, you are preparing this file to present to the Board of Directors for a job interview. Thus, it should be organized and easy to follow. All numeric answers must include the formulas used to find the answers. In other words, show how you derived all numeric answers. Use commas for all numbers greater than 999. Use a dollar sign and two decimal places for all dollar figures.
State any assumptions you make to support your decisions.
The rubric is located in the Individual Project folder.
- Tips for Success
Download Appendix A, which is located in the Integrated Accounting & Financial Management Individual Project 1 folder.
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Read the grading rubric before beginning the project to fully understand the requirements; ask questions about the requirements if needed.
Read this project file until you fully understand the requirements.
Use the financial ratio resources in the Week 2 module along with external resources.
Use spell check before submitting your final version.
Submit the deliverable on or before the due date.
Review the Late Policy, which will be strictly enforced. It is located in Learning Resources/Late Policy.
Ask your professor questions as needed.
Adapted from “An Integrated Approach to Beginning Financial Accounting and Finance Courses,” by McWilliams, V. B., & Peters, M. F., 2012, Issues in Accounting Education, 27(1), p. 299–336. Copyright 2012 by the American Accounting Association.
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McWilliams, V. B., & Peters, M. F. (2012). An Integrated Approach to Beginning Financial Accounting and Finance Courses. Issues in Accounting Education, 27(1), 299–336.