Contemporary Financial Management 10th Edition James R Mcguigan, R Charles Moyer, William J Kretlow - Solutions

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Often the application of the acquisitions method entails establishing one or more acquisition reserves. Define an acquisition reserve, provide several examples of such reserves, and discuss how the quality of accounting information can be diminished as a result of misusing acquisition reserves.
Firms invest in marketable securities for a variety of reasons. One of the most common reasons is to temporarily invest excess cash. Securities that qualify for the available-for-sale reporting classification are accounted for differently from those that qualify for the trading reporting
GAAP requires firms to account for equity investments in which ownership is between 20 and 50 percent using the equity method. Ace Corporation owns 35 percent of Spear Corporation during 2010. Spear Corporation reported net income of $100.4 million for 2010 and declared and paid dividends of $25
Some accounting theorists propose that firms should consolidate any entity in which they have a “controlling financial interest.” Typically, the percentage of equity ownership that one firm has in another entity determines whether consolidation is appropriate, with greater than 50 percent
Choosing the functional currency is a key decision for translating the financial statements of foreign entities of U.S. firms into U.S. dollars. Qing Corporation, a U.S. firm that sells car batteries, formed a wholly owned subsidiary in Mexico to manufacture components needed in the production of
Identify the exchange rates used to translate income statement and balance sheet items when the foreign currency is defined as the functional currency. Discuss the logic for the use of the exchange rates you identified.
Exhibit 7.29 presents selected financial statement data for three chemical companies: Monsanto Company, Olin Corporation, and NewMarket Corporation. (New Market was formed from a merger of Ethyl Corporation and Afton Chemical Corporation.)Requireda. Compute the average total depreciable life of
Hammerhead Paper Company owns a press used in the production of fine paper products. The press originally cost $2,000,000, and it has a current carrying amount of $1,200,000. A decrease in the demand for fine paper products has caused the company to reassess the future cash flows from using the
Bed and Breakfast (B&B), an Italian company operating in the Tuscany region, follows IFRS and has made the choice to remeasure long-lived assets at fair value. B&B purchased land in 2009 for €150,000. At the end of the next four years, the land is worth €160,000 in 2009, €155,000 in 2010,
SunTrust Banks owns a large block of Coca-Cola Company (Coke) common stock that it has held for many years. SunTrust indicates in a note to its financial statements that all equity securities held by the bank, including its investment in Coke stock, are classified as available for sale. A recent
Lexington Corporation acquired all of the outstanding common stock of Chalfont, Inc., on January 1, 2009. Lexington gave shares of its no par common stock with a market value of $504 million in exchange for the Chalfont common stock. Chalfont will remain a legally separate entity after the
Ormond Co. acquired all of the outstanding common stock of Daytona Co. on January 1, 2010. Ormond Co. gave shares of its common stock with a fair value of $312 million in exchange for 100 percent of the Daytona Co. common stock. Daytona Co. will remain a legally separate entity after the exchange,
Molson Coors Brewing Company (Molson Coors) is the fifth-largest brewer in the world. It is one of the leading brewers in the U.S. and Canada; the company’s brands include Coors, Molson Canadian, Carling, and Killian’s Irish Red. Sales exceeded 32 million barrels (1 U.S. barrel equals 31
On December 31, 2010, Pace Co. paid $3,000,000 to Sanders Corp. shareholders to acquire 100 percent of the net assets of Sanders Corp. Pace Co. also agreed to pay former Sanders shareholders $200,000 in cash if certain earnings projections were achieved over the next two years. Based on
Exhibit 7.34 presents the separate financial statements at December 31, 2011, of Prestige Resorts and its 80 percent-owned subsidiary Booking, Inc. Two years earlier on January 1, 2010, Prestige acquired 80 percent of the common shares of Booking for $1,170 million in cash. Booking’s 2010 net
Foreign Sub is a wholly owned subsidiary of U.S. Domestic Corporation. U.S. Domestic Corporation acquired the subsidiary several years ago. The financial statements for Foreign Sub for 2010 in its own currency appear in Exhibit 7.37. The exchange rates between the U.S. dollar and the foreign
Stebbins Corporation established a wholly owned Canadian subsidiary on January 1, Year 1, by contributing US$500,000 for all of the subsidiary’s common stock. The exchange rate on that date was C$1:US$.90 (that is, one Canadian dollar equaled 90 U.S. cents). The Canadian subsidiary invested
Refer to Problem 7.25 for Stebbins Corporation for Year 1, its first year of operations. Exhibit 7.39 shows the amounts for the Canadian subsidiary for Year 2. The average exchange rate during Year 2 was C$1:US$.82, and the exchange rate on December 31, Year 2, was C$1:US$.84. The Canadian
Electronic Computer Systems (ECS) designs, manufactures, sells, and services networked computer systems; associated peripheral equipment; and related network, communications, and software products. Exhibit 7.40 presents geographic segment data. ECS conducts sales and marketing operations outside
Presented below are excerpts from Note 1 to Starbucks’ September 28, 2008, Consolidated Financial Statements in which Starbucks describes accounting policy for long-lived assets. Requireda. Leasehold improvements are substantial costs incurred by Starbucks to outfit, remodel, and improve leased
Starbucks prepares consolidated financial statements. Presented below are excerpts from Note 1 describing accounting policy, Note 2, and a major portion of Note 9 from Starbucks’ fiscal 2008 Consolidated Financial Statements.Requireda. How will the concept of fair value drive the accounting for
Presented below is a major portion of Starbucks’ Note 4 to its fiscal 2008 Consolidated Financial Statements in which it describes its minority passive investments.Requireda. As of its September 28, 2008 fiscal year-end, Starbucks reports short-term investments in trading securities having an
Note 7 to Starbucks’ 2008 Consolidated Financial Statements presents information about equity method (minority, active) investments.Requireda. Starbucks’ 2008 net income is $315.5 million, and its interest expense is $53.4 million. Assuming a tax rate of 35 percent and the information
Presented below is a portion of Note 8 to Starbucks€™ 2008 Consolidated Financial Statements.Note 8: Property, Plant and EquipmentProperty, plant and equipment consisted of the following (in millions):Requireda. Estimate the average total estimated useful life of depreciable property,
In 2008, Interbrand listed Starbucks as having the 85th most valuable brand name in the world and estimated brand value to be $3.9 billion. Examine the disclosures for intangible long-lived assets in Part II and tangible long-lived assets in Part V. Where in the financial statements does Starbucks
In September 2009, The Walt Disney Company announced that it would acquire Marvel Entertainment in a $4 billion cash and common stock deal. On a per-share basis, the consideration given by Disney to Marvel shareholders represents a 29 percent premium over Marvel’s share price at the date of
Software companies often bundle upgrades and technical support services with their software. Assume that a software company promises to automatically deliver upgrades for two years when a customer purchases software costing $100. Describe how the software company should determine the amount of
Revenues are at the core of a firm’s ability to grow and prosper; thus, they are central to the analysis of a firm’s profitability. Although the time-of-sale method is the most common technique employed to recognize revenues, in some instances, a strong argument can be made for recognizing
Three alternative revenue recognition methods are available to long-term contractors when cash inflows are probable: percentage of completion, completed contract, and cost recovery. Assuming that the contract price is known, discuss the appropriate method under U.S. GAAP and IFRS under two
Identify the working capital accounts related to (a) Revenues recognized and deferred, (b) Cost of goods sold, (c) Employee salary and wages, and (d) Income tax expense.For each account, indicate whether an increase in the working capital asset or liability would be an addition or subtraction when
Provide three examples of expense recognition justified by (a) A direct relationship with revenue (cause and effect) and (b) An indirect relationship with revenue (the consumption of an asset or an increase in a liability during a period in which revenue is recognized).
Using the following key, identify the effects of the following transactions or conditions on the various financial statement elements:I = increases;D = decreases;NE = noeffect.
The acquisition cost of inventory remaining at the end of a period is measured using LIFO, FIFO, or average cost. a. Rank cost of goods sold, gross profit, and ending inventory from highest to lowest under the three cost-flow assumptions when input prices are rising.b. How should differences
What is a LIFO layer liquidation? How does it affect the prediction of future earnings?
The weighted average cost-flow assumption is a common technique used to value inventory and determine cost of goods sold. It falls between LIFO and FIFO as to the differential effect on inventory and cost of goods sold amounts, although normally it is more like FIFO than LIFO in its effect on the
GAAP classifies derivatives as (a) Speculative investments, (b) Fair value hedges, or (c) Cash flow hedges. However, firms revalue all derivatives to market value each period regardless of the firm’s reason for acquiring the derivatives. In addition to increasing or decreasing the derivative
Given the following information, compute December 31, 2010 projected benefit obligation (PBO) and fair market value (FMV) of plan assets for Lee Company.Prior service cost granted in a 2010 plan amendment . $110,000Interest on PBO .................. 70,000Actual return on plan assets .............
Using the following key, identify the effects of the following transactions or conditions on the various financial statement elements: I = increases; D = decreases; NE = no effect. Note that the questions pertain to the employer's financial statements, not to the pension plan's financial statements.
Pension expense typically consists of five components. Answer the following questions related to each component.a. Service cost: Is it possible for the service cost component to reduce pension expense for the year? Explain your answer.b. Interest cost: Is it possible for the interest cost component
The notes to a firm’s financial statements reveal that the obligations for postretirement health care benefits at the end of 2010 total $2.1 billion. The fair value of plan assets for these benefits at the end of 2010 is reported at zero, with an unrecognized net actuarial loss of $310 million
Discuss when each of the following types of businesses is likely to recognize revenues and expenses.a. A bank lends money for home mortgages.b. A travel agency books hotels, transportation, and similar services for customers and earns a commission from the providers of these services.c. A Major
Parametric Technology Corporation (PTC) is a software manufacturer. It develops, markets, and supports software that helps manufacturers improve the competitiveness of their products. PTC provides a detailed description of its revenue streams in a recent SEC filing, excerpts of which are provided
Sapient Corporation is a technology consultancy firm. Sapient’s disclosures in a recent Form 10-K filing provided an extensive discussion of its revenue recognition policies, excerpts of which follow:We recognize revenue from the provision of professional services under written service contracts
Canadian National Railway Company (CN) spans Canada and mid-America and provides freight transport services from the Atlantic Ocean to the Pacific Ocean and to the Gulf of Mexico. It is currently the largest private rail system in Canada and was privatized by the Canadian government when it was
On January 1, 2010, Turner Construction Company agreed to construct an observatory for Dartmouth College for $120 million. Dartmouth College must pay $30 million upon signing and $30 million at the end of 2010, 2011, and 2012. Expected construction costs are $10 million for 2010, $60 million for
Deere & Company manufactures agricultural and industrial equipment and provides financing services for its independent dealers and their retail customers. In recent notes to the financial statements, Deere discloses the following: Note 1: Deere recognizes income from equipment sales for financial
A large manufacturer of truck and car tires recently changed its cost-flow assumption method for inventories at the beginning of 2010. The manufacturer has been in operation for almost 40 years, and for the last decade, it has reported moderate growth in revenues. The firm changed from the LIFO
Use the information provided below toa. Compute the December 31, 2010 PBO and FMV of pension assets.b. Compute 2010 pension expense.c. Use the financial statements effects template to show the effects on the 2010 financial statements.Prior service cost due to 2010 amendment ........... $
Refer to Examples 16 and 20 in the chapter. Firm A places its order for the equipment on June 30, 2010. It simultaneously signs a forward foreign exchange contract for 10,000 GBP. The forward rate on June 30, 2010, for settlement on June 30, 2011, is $1.64 per GBP. Firm A designates the forward
Refer to Examples 19 and 23 in the chapter. Firm D holds 10,000 gallons of whiskey in inventory on October 31, 2010, that costs $225 per gallon. Firm D contemplates selling the whiskey on March 31, 2011, when it completes the aging process. Uncertainty about the selling price of whiskey on March
Excerpts from the disclosures on derivatives in a recent year (denoted Year 4) by The Coca-Cola Company (Coke) appear below.Our Company uses derivative financial instruments primarily to reduce our exposure to adverse fluctuations in interest rates and foreign exchange rates, and, to a lesser
Disclosures related to income taxes for The Coca-Cola Company (Coke) for 2006–2008 appear in Exhibit 8.11.Requireda. Why are Coke’s average tax rates so low?b. Is it likely that Coke has recognized a net asset or a net liability on its balance sheet for pension and other postretirement benefit
Presented below is an excerpt from Starbucks’ Note 1, “Summary of Significant Accounting Policies,” in its September 28, 2008 Annual Report.a. The above passages indicate that Starbucks generates revenues in several different ways. For each of the following customers, describe how Starbucks
Joan Locker and Bill Dasher organized the Arizona Land Development Company (ALDC) on January 2, Year 1. They contributed land with a market value of $300,000 and $100,000 cash for all of the common stock of the corporation. The land served as the initial inventory of property sold to
In its December 31, 2008 Consolidated Financial Statements, Cola-Cola reports a substantial shift in its net pension liability ($1,328 million) relative to December 31, 2007 ($85 million).a. Given a portion of Coca-Cola’s Note 16 reconciliations provided below, write a memorandum explaining the
Define shareholder wealth. Explain how it is measured.
What are the differences between shareholder wealth maximization and profit maximization? If a firm chooses to pursue the objective of shareholder wealth maximization, does this preclude the use of profit maximization decision-making rules? Explain.
Which type of corporation is more likely to be a shareholder wealth maximizer —one with wide ownership and no owners directly involved in the firm’s management or one that is closely held?
Is the shareholder wealth maximization goal a short- or long-term goal? Explain your answer.
It has been argued that shareholder wealth maximization is not a realistic normative goal for the firm, given the social responsibility activities that the firm is “expected” to engage in (such as contributing to the arts, education, etc.). Explain why these social responsibility activities are
Explain why management may tend to pursue goals other than shareholder wealth maximization.
Explain what is meant by agency relationships and agency costs.
Give some examples of agency costs incurred by shareholders in the agency relationship between the shareholders (owners) and management of a firm.
What is the source of potential agency conflicts between owners and bondholders? Who is the agent and who is the principal in this relationship?
Explain the differences in the responsibilities of the treasurer and the controller in a large corporation.
Explain the relationship between financial management and (a) Microeconomics and (b) Macroeconomics.
Why is earnings per share not a consistently good measure of a firm’s performance?
Metropolitan Life Insurance Company, Swiss Bank Corporation, and several other holders of RJR Nabisco bonds filed suit against the company to prevent it from completing the leveraged buyout acquisition from Kohlberg Kravis Roberts. Why do you think the bondholders wanted to block this transaction?
What are the major factors that determine the value of a firm’s stock?
What is the relationship between the concepts of net present value and shareholder wealth maximization?
Under pressure from outside investors, including corporate raider Carl Icahn, USX Corporation, the parent corporation for U.S. Steel and Marathon Oil, announced a plan to split its stock into separate steel and energy issues. The market response to this action was immediately positive, with the
In 2001, Polaroid Corporation declared bankruptcy. How can you reconcile a bankruptcy declaration with a management pledged to maximize shareholder wealth?
How can the adherence to high standards of ethical business practice contribute to the goal of shareholder wealth maximization?
Compare the potential for agency problems in sole proprietorships, partnerships, and corporations. In light of your analysis, why is the corporate form of organization so popular?
Describe and discuss the saving-investment cycle.
What roles do financial middlemen and financial intermediaries play in the operation of the U.S. financial system? How do the two differ?
How do money and capital markets differ?
Describe the various types of financial intermediaries, including the sources of their funds and the types of investments they make.
What factors need to be considered when determining the optimal form of organization for a business enterprise?
How do primary and secondary financial markets differ?
What is the primary distinction between the trading process on the New York Stock Exchange and the over-the-counter markets?
Describe the concept of market efficiency. In what sense is this concept an important part of the shareholder wealth maximization objective?
If a capital market is not efficient, what is the impact on a firm seeking to raise capital in that market? Why?
Define the following terms:a. Multinational corporationb. Spot exchange ratec. Forward exchange rated. Direct quote versus indirect quotee. Optionf. LIBORg. Euro
Using the data contained in Figure, what 52-week rate of return, excluding dividend yields, would an investor have received by purchasing the following portfolios of stocks?a. The stocks in the Dow Jones 30 Industrial Averageb. The stocks in the New York Stock Exchange Financial Averagec. The
An investor bought 100 shares of Venus Corporation common stock one year ago for $40 per share. She just sold the shares for $44 each, and during the year, she received four quarterly dividend checks for $40 each. She expects the price of the Venus shares to fall to about $38 over the next year.
An investor bought 10 Ellis Industries, Inc., long-term bonds one year ago, when they were first issued by the company. In addition, he bought 200 shares of the company’s common stock at the same time for $30 per share. He paid $1,000 each for the bonds, and today, the bonds are selling at $950
Suppose a U.S. Treasury bill, maturing in 30 days, can be purchased today for $99,500. Assuming that the security is held until maturity, the investor will receive $100,000 (face amount). Determine the percentage holding period return on this investment.
Suppose a Midwest Telephone and Telegraph (MTT) Company bond, maturing in one year, can be purchased today for $975. Assuming that the bond is held until maturity, the investor will receive $1,000 (principal) plus 6 percent interest (that is, 0.06 × $1000 = $60). Determine the percentage holding
a. National Telephone and Telegraph (NTT) Company common stock currently sells for $60 per share. NTT is expected to pay a $4 dividend during the coming year, and the price of the stock is expected to increase to $65 a year from now. Determine the expected (ex ante) percentage holding period return
One year ago, you purchased a rare Indian-head penny for $14,000. Because of the recession and the need to generate current income, you plan to sell the coin and invest in Treasury bills. The Treasury bill yield now stands at 8 percent, although it was 7 percent one year ago. A coin dealer has
Six months ago, you purchased a tract of land in an area where a new industrial park was rumored to be planned. This land cost you $110,000, and the seller offered you an interest- free loan for 70 percent of the land cost. Today, the industrial park project was formally announced, and an attorney
The stock of Tips, Inc., a new firm operating a chain of sports betting parlors, has just been sold in an initial public offering at a price of $25 per share. One week after this offering, the stock has risen in value to $35. You believe the stock will rise to $45 over the coming year. You do not
Japanese Motors exports cars and trucks to the U.S. market. On November 15, 2001, its most popular model was selling (wholesale) to U.S. dealers for $20,000.What price must Japanese Motors charge for the same model on February 20, 2004, to realize the same amount (of Japanese yen) as it did in 2001?
Valley Stores, a U.S. department store chain, annually negotiates a contract with Alpine Watch Company, located in Switzerland, to purchase a large shipment of watches. On November 15, 2001, Valley purchased 10,000 watches for a total of 1.26 million Swiss francs. Refer to Table 2.2 and determine
Determine the percentage change in the value of the following currencies relative to the U.S. dollar between November 15, 2001 and February 20, 2004. a. Rupeeb. Poundc. Yend. Euroe. Canadian dollar
Compute the indirect quote for the rand, rupee, and yen as of February 20, 2004.
Over the past 10 years, your $15,000 in gold coins has increased in value by 200 percent. You plan to sell these coins today. You have paid annual storage and insurance costs of $500 per year. Assay expenses at the time of sale are expected to total $400. What is your 10-year (not annualized)
What are the primary limitations of ratio analysis as a technique of financial statement analysis?
What is the major limitation of the current ratio as a measure of a firm’s liquidity? How may this limitation be overcome?

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Contemporary Financial Management 10th Edition James R Mcguigan, R Charles Moyer, William J Kretlow - Solutions

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