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Corporate governance has become increasingly important over the years. The Sarbanes-Oxley (SOX) Act was enacted to improve transparency in financial accounting and to prevent fraud. Which of the following is correct?

a) fraud has not occurred since enactment of SOX
b) SOX has not increased auditing costs
c)government agencies are not required to comply with SOX
d) SOX requires companies to have a strong board of directors
e) none of the above

Tactics that firms use to avoid hostile takeovers include:

a) none of the items below
b) shareholder rights provisions.
c) restricted voting rights.
d) poison pills.
e) all of the above

Both Flipper and Lawton are large public corporations with subsidiaries throughout the world. Flipper uses a centralized approach and makes most of the decisions for its subsidiaries. Lawton uses a decentralized approach and its subsidiaries make most of their own decisions. Which of the following is correct?

a) the agency problem would probably be more pronounced for Flipper because of a higher probability that subsidiary decisions would conflict with the parent
b) agency costs would be the same for both companies
c) a decentralized approach is almost always better
d) a centralized approach is almost always better
e) none of the above

With convertible bonds,

a) the company receives additional cash money when the convertibles are converted.
b) Investors are willing to accept a lower interest rate on a convertible than on otherwise similar straight debt
c) Investors require a higher interest rate than on otherwise similar straight debt
d) the convertibles cannot be converted for at least 10 years
e) none of the above

A firm's common stock currently sells for $17.50. Its 10% convertible bonds (issued at par $1000) now sell for $900 and the conversion price is $20. What is the conversion ratio?

a) 87.5
b) 17.5
c) 50.0
d) 45.00
e) none of the above

Convertible bonds are:

a) considered equity on the balance sheet
b) similar in risk to the company's common stock
c) riskier than the company's common stock
d) less risky than the company's common stock
e) none of the above

Beam Corporation's common stock currently sells for $27.50. Its 8% convertible bonds (issued at par $1000) now sell for $950. The bonds can be converted into 40 shares of common stock. What is the conversion price?

a) $25
b) $40
c) $23.50
d) $38
e) none of the above

Beam Corporation's common stock currently sells for $27.50. Its 8% convertible bonds (issued at par $1000) now sell for $950. The bonds can be converted into 40 shares of common stock. What is the conversion value of the bond?

a) $688
b) $593.75
c) $950
d) $1,100
e) none of the above

Which of the following is correct?

a) Warrants are similar to long-term put options
b) The company receives additional funds when warrants are exercised
c) The company receives additional funds when bonds are converted
d) Warrants can sometimes be detached and traded separately from the debt with which they were issued, but this is unusual.
e) none of the above

A company will issue 20-year bonds with annual interest payments. Each bond will include 20 warrants that give the holder to purchase one share of stock per warrant. Each warrant is expected to have a value of $5.75. A similar straight-debt issue would require an 8% coupon. What coupon rate should be set on the bonds with warrants so that the package will sell for $1,000?

a) 5.76%
b) 6.83%
c) 7.94%
d) 6.98%
e) none of the above

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Accounting Homework Assistance

2. Elite Industries is a division of Nifco, a diversified manufacturer whose divisions are profit centers. Elite makes a single product, X47, in its plant, which has a capacity of 18,000 units/month. At the normal volume of 10,000 units/month, X47 has a unit cost of $750, consisting of: direct materials, $260; direct labor, $180; overhead, $310. Manufacturing overhead has both fixed and variable components. Fixed overhead is applied at a rate of 150% of direct labor cost. Fixed selling and administrative costs are $620,000/month. Several other companies also make an equivalent product. The market price is normally $900/unit.

a. Prepare a monthly income statement for Elite Industries at a sales volume of 10,000 units, using the contribution format. Note that there is no interest or income tax expense, because Elite is simply a division of the corporation.

b. What is the breakeven level of sales in units per month (round to the nearest whole unit)?

c. The marketing department has proposed an ad campaign for next year that will cost $400,000. How many additional units must be sold at the regular price in order for this campaign to yield an incremental profit of $150,000 (round to the nearest whole unit)?

d. Windsor Division of Nifco is developing a new product for which X47 would be an input. What factors would influence the managers of Elite and Windsor as they negotiate a transfer price?

3. Boppie's is a large, locally-owned general retail business operating out of a single location. A condensed version of their most recent annual segmented income statement is given below (all amounts in thousands of dollars).

Company Dept A Dept B Depts C-F
Sales $3,450 $ 345 $690 $2,415
COGS 1,538 179 345 1,014
Gross Margin 1,912 166 345 1,401
Sales Salaries 737 88 153 496
Dept Manager 236 35 48 153
Advertising 50 5 10 35
Occupancy 120 14 16 90
Gen'l & Admin. 290 29 58 203
Net Income $ 479 $ (5) $ 60 $ 424

Because Department A has been running a loss for several years, the store manager is thinking of eliminating the department. She believes that there is limited additional demand for the products carried in adjacent Department B. If A were closed, B would expand into half of its floor space, with the rest being walled off and left vacant. Sales of Department B would be expected to increase 30%, with the same sales mix. A 20% increase in sales staff in this department would be necessary; these positions could be filled by existing staff from A, with the rest being laid off. Because Department A currently attracts some customers to the store, it is expected that sales of Departments C-F would decline 3%. Occupancy costs include such costs as property taxes, insurance, and utilities, and are allocated on the basis of square footage. The proposal to leave some space vacant would save $2,000/year in utility costs. All advertising is general for the entire store, and the cost is allocated to departments based on sales. General and administrative costs include general store management and support personnel, and are also allocated based on sales.

Advise the store manager as to her plan to close Department A. Include any necessary calculations.

Part II.

4. Waldorf Company has a cash balance on January 1 of $123,219. Given the following data, compute Waldorf's budgeted cash balance on March 31. Round all amounts to the nearest dollar.

Past and budgeted future activity, in $000:
Sales Operating expense

November 1,625 525
December 1,790 460
January 1,428 448
February 1,295 395
March 1,306 421
April 1,422 404

Waldorf has a gross profit of 40%, and has a policy of maintaining an inventory of 150% of expected next-month sales. Operating expenses are paid 75% in the current month, and 25% in the following month. Purchases of merchandise are paid for 50% in the current month, and 50% in the following month. All sales are on credit. Normal pattern of collections is: 40% in month of sale, 44% in following month, 11% in next following month, 5% uncollectible.

5. Answer both parts (5 points each).

a. The Phoenix plant of Zipp Chemical processes alphazine into betazine and gammazine. A batch consists of 20,000 gallons of alphazine, costing $11,000. Processing costs are $52,000, and results in 14,000 gallons of betazine and 6,000 gallons of gammazine. Raw material and processing costs are allocated to the two products based on number of gallons. Betazine can be sold for $15/gallon. Gammazine can be sold for $9/gallon, or it can be processed into deltazine. Deltazine can be sold for $12/gallon. Additional processing costs for a batch of deltazine are $15,500. Should Zipp sell gammazine or deltazine? Explain.

b. Letham Company produces two products, X and Y, with unit data as follows:
X Y
Selling price $140 $200
Prime costs 60 85
Overhead (70% fixed) 40 50

Machine hours 2 3

Letham currently has insufficient machine hours to meet demand for its products. Which product, X or Y, should receive priority in production, and why?

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