Having just graduated with your MS degree in accounting and financial management, youre eager to start applying for position

  1. Scenarios
    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?”
  2. Steps to Completion:
    1. Reviewthefinancialstatements,ratios,andOtherInformationforCorporation
      A in Appendix A.
    2. Answer the Corporation A Stockholders’ Equity Questions in paragraph format. Do not rewrite the questions in your report.

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Evaluate the strengths and weaknesses of corporate

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strategies from recent financial performance.

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Corporation A. Stockholders’ Equity Questions:

  1. Calculate the average stock return from 20X1–20X3.
  2. Calculate the standard deviation over this same period.
  3. Calculate the coefficient of variation over this period.
  4. 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.
  5. Calculate the dollar amount of dividends that were declared during
    20X3.
  6. Calculate the (intrinsic) value of Corporation A’s stock price at year-
    end 20X3 using the dividend growth model.
  7. Compare the intrinsic value to the market value of the Corporation A.
    Explain the difference.
  8. Compare the intrinsic value and market value to the book value of
    Corporation A’s. Explain the difference.
  9. Prepare the journal entry to record the 20X3 purchase of treasury
    stock.
  10. 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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  1. Required: Should creditors happy with the decision to purchase the treasury stock?
  2. 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.
    Required:
    Prepare the journal entry to record this transaction.

xii. How does this transaction impact the three financialstatements?

  1. Reviewthefinancialstatements,ratios,andinformationbelowforCorporation
    B in Appendix A.
  2. 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:

  1. Thecostoftheequipment,includingshippingandinstallation,is $400,000. The entire amount will be paid in cash. The equipment will be purchased in early 20X4.
  2. Thelifeoftheequipmentisfouryears(endof20X7),atwhichtimeitis expected to sell for $40,000.
  3. Corporation B will initially purchase $200,000 of inventory; 70% of inventory purchasesover the life of this project will be financed via accounts payable.
  4. Recurring cash flows occur at year-end of each year, and termination cash flows occur at year-end 20X7.
  5. 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.

2) Calculatethecashflowsassociatedwiththisproject.Calculatethesecash

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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:

  1. Beginning of 20X4
  2. End of 20X4
  3. End of 20X5
  4. End of 20X6
  5. End of 20X7 (includes recurring cash flows and termination cash flows).
  6. 3)  Comparetheaggregateundiscountedcashflowstotheaggregatenet income flows. Explainthe difference (if any).
  7. 4)  Calculate the present value of the future cash flows.
  8. 5)  Calculate the net present value and internal rate of return associated with this project.
  9. 6)  Should Corporation B accept or reject this project? Explain your decision.
  10. 7)  Comparetheinternalrateofreturntotheweightedaveragecostofcapital.Is the differencebetween the IRR and WACC consistent with ROE? Explain your answer.
  11. Deliverables
    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.
  12. Rubric
    The rubric is located in the Individual Project folder.
  13. 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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Reference

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.

CorpA Balance Sheets

Corporation A
Comparative Balance Sheets 
As of December 31 
Assets: 20X3  20X2  20X1 
Cash  $ 210,000 $ 780,000 $ 1,530,000
Accounts Receivable  315,000 265,000  240,000 
Inventory  436,000 405,000  330,000 
Prepaid Insurance  15,000 18,000  21,000 
Total Current Assets  $ 976,000 $ 1,468,000 $ 2,121,000
Land  1,650,000  1,630,000  1,400,000 
Buildings  2,300,000  1,760,000  1,400,000 
Less: Accumulated Depreciation  (560,000)  (490,000)  (440,000) 
Net Buildings  1,740,000  1,270,000  960,000 
Total Long-Term Assets  3,390,000  2,900,000  2,360,000 
Total Assets  4,366,000  4,368,000  4,481,000 
Liabilities & Stockholder's Equity
Accounts Payable  215,000  134,000  185,000 
Salaries and Wages Payable  63,000  49,000  40,000 
Dividends Payable  69,702  36,818  0 
Notes Payable—Line of Credit  356,000  205,000  98,000 
Total Current Liabilities  703,702  424,818  323,000 
Notes Payable—Long-Term  1,393,722  949,811  1,017,219 
Bonds Payable  1,000,000  1,000,000  1,000,000 
Less: Discount on Bonds Payable  (41,583)  (48,317)  (54,603) 
Net Bonds Payable  958,417  951,683  945,397 
Total Long-term Liabilities  2,352,139  1,901,494  1,962,617 
Total Liabilities  3,055,841  2,326,312  2,285,617 
Contributed Capital  1,500,000  1,500,000  1,500,000 
Retained Earnings  1,449,159  1,080,688  730,383 
Treasury Stock  (1,639,000)  (539,000)  (35,000) 
Total Stockholders’ Equity (SE)  1,310,159  2,041,688  2,195,383 
Total Liabilities & Stockholdler's Equity $4,366,000  $4,368,000  $4,481,000 

CorpA Income Statements

Corporation A
Comparative Income Statements
For the 12 Months Ended December 31 
20X3  20X2  20X1 
Sales Revenue  $4,010,000  $3,400,000  $2,300,000 
Cost of Goods Sold Expense  (2,520,000)  (1,910,000)  (940,000) 
Salaries and Wages Expense  (660,000)  (840,000)  (750,000) 
Depreciation Expense-Building  (115,000)  (88,000)  (70,000) 
Insurance Expense  (117,000)  (102,000)  (95,000) 
Total Expenses  (3,412,000)  (2,940,000)  (1,855,000) 
Operating Income  598,000  460,000  445,000 
Interest Expense—Notes  (76,911)  (69,591)  (54,749) 
Interest Expense—Bonds  (66,734)  (66,286)  (65,868) 
Gain (Loss) Sale of Buildings  (2,000)  45,000  (51,000) 
Gain (Loss) Sale of Land  (3,000)  43,000  7,000 
Total Other  (148,645)  (47,877)  (164,617) 
Net Income  $449,355  $412,123  $280,383 
Earnings per share  $6.71  $4.74  $2.83 

CorpA Statement of Cash Flows

Corporation A
Comparative Statements of Cash Flow
For the 12 Months Ended December 31 
For the 12 Months Ended December 31 20X3 20X2
Cash received from customers $ 3,938,484 $ 3,335,116
Cash paid to suppliers -2,470,000 -2,022,000
Cash paid for salaries and wages -646,000 -831,000
Cash paid for insurance -114,000 -99,000
Cash paid for income taxes -145,556 -129,709
Cash paid for interest—Bonds -60,000 -60,000
Cash paid for interest—Notes Payable -52,740 -66,946
Net Cash from Operating Activities $ 450,188 $ 126,461
Investment in Land -300,000 -1,420,000
Investment in Building -930,000 -640,000
Sale of Building 343,000 287,000
Sale of Land 277,000 1,233,000
Net Cash from Investing Activities $ (610,000) $ (540,000)
Proceeds (Payment) Notes Payable -32,188 128,539
(Purchase) Sale Treasury Stock -330,000 -440,000
Dividends Paid -48,000 -25,000
Cash from Financing Activities $ (410,188) $ (336,461)
Net Change in Cash -570,000 -750,000
Beginning Cash 780,000 1,530,000
Ending Cash $ 210,000 $ 780,000

CorpA Firm & Industry Ratios

Corporation A
Firm and Industry Financial Ratios
20X3  20X2  20X3/20X2  Industry 
Return on Equity  0.27  0.19  0.14 
Dividend Payout  0.18  0.15  0.10 
Return on Assets  0.10  0.09  0.10 
Return on Sales  0.11  0.12  0.11 
Asset Turnover  0.92  0.77  1.02  `
Current Ratio  1.39  3.46  2.35 
Quick Ratio  0.75  2.46  1.75 
Debt/Assets  0.70  0.53  0.35 
Accounts Receivable Days  26.40  27.11  19.50 
Inventory Days  60.91  70.23  41.50 
Accounts Payable Days  25.59  31.73  28.40 
Summary: Cash Conversion Days  61.71  65.61  32.60 

CorpA Other Information

Corporation A
Common Stock: The firm has 400,000 shares authorized and 100,000 shares issued at year-end 20X1, 20X2, and 20X3.
Treasury Stock: The firm purchased 1,000 shares of treasury stock at year-end 20X1, 12,000 at year-end 20X2, and 20,000 at year-end 20X3.
Market Valuation: The market price of the stock was $31 at year-end 2006, $35 at year-end 20X1, $42 at year-end 20X2, and $55 at year-end 20X3. o  
For valuation purposes, industry experts use the dividend valuation model to value the common equity interest of industry firms. Potential investors’ required rate of return for this firm is 14%; growth rate is 13% for 20X4 and 20X5, and then declines to 12% for all later years.
Market Returns: The stock returns for the market as a whole were as follows: 15.7% in 20X1, 8.2% in 20X2, and 12.1% in 20X3.

CorpB Balance Sheets

Corporation B
Comparative Balance Sheets 
As of December 31,
20X3  20X2  20X1 
Cash  210,000  780,000  1,530,000 
Accounts Receivable  410,000  360,000  300,000 
Less: Allowance for Doubtful Accounts  (4,100)  (14,616)  (1,500) 
Net Accounts Receivable  405,900  345,384  298,500 
Inventory  436,000  405,000  330,000 
Prepaid Insurance  15,000  18,000  21,000 
Total Current Assets  1,066,900  1,548,384  2,179,500 
Land  1,650,000  1,630,000  1,400,000 
Buildings  2,300,000  1,760,000  1,400,000 
Less: Accumulated Depreciation  (560,000)  (490,000)  (440,000) 
Net Buildings  1,740,000  1,270,000  960,000 
Total Long-Term Assets  3,390,000  2,900,000  2,360,000 
Total Assets  4,456,900  4,448,384  4,539,500 
Accounts Payable  215,000  134,000  185,000 
Salaries and Wages Payable  63,000  49,000  40,000 
Dividends Payable  93,216  44,178  0 
Notes Payable—Line of Credit  356,000  205,000  98,000 
Total Current Liabilities  727,216  432,178  323,000 
Notes Payable—Long Term  778,032  961,219  939,680 
Bonds Payable  1,000,000  1,000,000  1,000,000 
Add: Premium on Bonds Payable  89,826  105,753  121,062 
Net Bonds Payable  1,089,826  1,105,753  1,121,062 
Total LT Liabilities  1,867,857  2,066,973  2,060,743 
Total Liabilities  2,595,073  2,499,151  2,383,743 
Contributed Capital  1,500,000  1,500,000  1,500,000 
Retained Earnings  1,167,827  925,233  691,757 
Treasury Stock  (806,000)  (476,000)  (36,000) 
Total Stockholders’ Equity (SE)  1,861,827  1,949,233  2,155,757 
Total Liabilities and SE  4,456,900  4,448,384  4,539,500 

CorpB Income Statements

Corporation B
Comparative Income Statements
For the 12 Months Ended December 31 
20X3  20X2  20X1 
Sales Revenue  4,010,000  3,400,000  2,300,000 
Cost of Goods Sold Expense  (2,520,000)  (1,810,000)  (940,000) 
Salaries and Wages Expense  (660,000)  (840,000)  (750,000) 
Depreciation Expense—Building  (115,000)  (88,000)  (70,000) 
Bad Debt Expense  (11,000)  (18,000)  (8,000) 
Insurance Expense  (117,000)  (102,000)  (95,000) 
Total Expenses  (3,423,000)  (2,858,000)  (1,863,000) 
Operating Income  587,000  542,000  437,000 
Interest Expense—Notes  (52,740)  (66,946)  (51,647) 
Interest Expense—Bonds  (44,072)  (44,691)  (45,285) 
Loss from Inventory Write-Off  0  (86,000)  0 
Gain (Loss) Sale of Buildings  (2,000)  45,000  (1,700) 
Gain (Loss) Sale of Land  (3,000)  43,000  7,000 
Total Other  (101,812)  (109,637)  (91,633) 
Net Income Before Taxes  485,188  432,363  345,367 
Income Tax Expense (30 percent rate)  145,556  129,709  103,610 
Net Income  339,631  302,654  241,757 
Earnings per share  4.04  3.40  2.44 

CorpB Statement of Cash Flows

Corporation B
Comparative Statements of Cash Flow
For the 12 Months Ended December 31 
20X3  20X2 
Cash received from customers  3,938,484  3,335,116 
Cash paid to suppliers  (2,470,000)  (2,022,000) 
Cash paid for salaries and wages  (646,000)  (831,000) 
Cash paid for insurance  (114,000)  (99,000) 
Cash paid for income taxes  (145,556)  (129,709) 
Cash paid for interest—Bonds  (60,000)  (60,000) 
Cash paid for interest—Notes Payable  (52,740)  (66,946) 
Net Cash from Operating Activities 450,188  126,461 
Investment in Land  (300,000)  (1,420,000) 
Investment in Building  (930,000)  (640,000) 
Sale of Building  343,000  287,000 
Sale of Land  277,000  1,233,000 
Net Cash from Investing Activities (610,000)  (540,000) 
Proceeds (Payment) Notes Payable  (32,188)  128,539 
(Purchase) Sale Treasury Stock  (330,000)  (440,000) 
Dividends Paid  (48,000)  (25,000) 
Cash from Financing Activities (410,188)  (336,461) 
Net Change in Cash  (570,000)  (750,000) 
Beginning Cash  780,000  1,530,000 
Ending Cash  210,000  780,000 

CorpB Firm & Industry Ratios

Benson, Cundiff, & Gilbert
Interview Ratios
Firm and Industry Financial Ratios
20X3 / 20X2
20X3 20X2 Industry
Return on Equity 0.25 0.21 0.19
Dividend Payout 0.2 0.16 0.1
Return on Assets 0.11 0.1 0.1
Return on Sales 0.12 0.13 0.11
Asset Turnover 0.9 0.76 1.02
Current Ratio 1.47 3.58 2.35
Quick Ratio 0.85 2.64 1.75
Debt/Assets 0.58 0.56 0.35
Accounts Receivable Days 35.04 35.43 35.68
Inventory Days 60.91 74.11 41.5
Accounts Payable Days 25.59 33.55 28.4
Summary: Cash Conversion Days 70.36 75.98 48.78

CorpB Projected Balance Sheet

Corporation B
Projected Comparative Balance Sheets 
As of December 31 
20X3 20X4 20X5 20X6 20X7
Cash $ – 0 $ – 0 $ – 0 $ – 0 $ – 0
Accounts Receivable 0 40,000 60,000 70,000 0
Inventory 200,000 230,000 250,000 260,000 0
Current Assets 200,000 270,000 310,000 330,000 0
Equipment 400,000 400,000 400,000 400,000 400,000
Less: Accumulated Depr. 0 -132,000 -312,000 -372,000 -400,000
Net Equipment 400,000 268,000 88,000 28,000 0
Other 0 0 0 0 0
Total Long-Term Assets 400,000 268,000 88,000 28,000 0
Total Assets $ 600,000 $ 538,000 $ 398,000 $ 358,000 $ – 0
Accounts Payable 140,000 161,000 175,000 182,000 0
Total Liabilities 140,000 161,000 175,000 182,000 0
Equity 460,000 377,000 223,000 176,000 0
Total Liabilities & Equity $ 600,000 $ 538,000 $ 398,000 $ 358,000 $ – 0

CorpBProjected Income Statement

Corporation B
Projected Comparative Income Statements
For the Years Ending December 31 
20X4 20X5 20X6 20X7
Sales Revenue $ 440,000 $ 510,000 $ 560,000 $ 630,000
Cost of Goods Sold 140,000 160,000 210,000 250,000
Salaries Expense 60,000 75,000 90,000 120,000
Depreciation Expense 132,000 180,000 60,000 28,000
Other Expense 10,000 10,000 10,000 10,000
Total Operating Expenses 342,000 425,000 370,000 408,000
Gain (Loss) Sale Asset 0 0 0 40,000
Net Income Before Taxes 98,000 85,000 190,000 262,000
Income Tax Expense 29,400 25,500 57,000 78,600
Net Income $ 68,600 $ 59,500 $ 133,000 $ 183,400

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