Hello tutors!

I have a really important homework that needs to be solved. It is a case study called "Xerox Miscopies Foreign Interest Rate Data". It has 7 questions in the end that need to be answered very detailed. I would appreciate a lot if you could answer them within Saturday (28.11.2015). In this link http://higheredbcs.wiley.com/legacy/college/shapiro/047012895X/acs/part_VI.pdf you may find the original case study needed for the homework assignment and in the end are all the questions that I need the answers for.

Thanks in advance and I'm waiting for your solutions.

Best regards,

Irene

41504_Pt6_Case_Studies_p710-711 3/8/02 7:06 AM Page 710 Part VI Case Studies Case VI.1 Xerox Miscopies Foreign Interest Rate Data On May 31, 2001, Xerox disclosed in a filing with the Securities and Exchange Commission (SEC) that several years earlier it had changed the way in which some of its foreign affiliates booked revenues from copiers leased to customers. The company said that the effect of this change in accounting practices, which involved changing the discount-rate assumptions on its leases, was to add $253 million to Xerox's pretax income over the past three years. In response, the SEC launched an investigation to determine if Xerox changed its leaseaccounting assumptions in order to artificially boost revenues and profits in Latin America and elsewhere. A Xerox spokesman stated that the company had used proper accounting assumptions in booking lease revenues and that it only disclosed this practice because it was already under scrutiny for misapplying other accepted accounting rules related to its copier business. Xerox typically leases copiers to customers for periods of three to ve years. The accounting assumptions in question relate to the discount rate Xerox used to value the future stream of lease payments. For example, a customer who buys a copier priced at $10,000 on a ve-year lease will pay a xed monthly lease payment for the next 60 months. The size of the monthly payment depends on the implicit interest rate associated with the lease (which takes into account the time value of money and risk) and the assumed residual value of the copier when the lease expires. In general, the lease payment is the solution L to the following equation: P n L t t1 (1 r) R where P the price of the copier R the residual value in present value terms n the number of months in the lease r the monthly interest rate imbedded in the lease To illustrate, suppose the implicit interest rate is 12% (1% monthly), the lease term is five years, the price is $10,000, and the residual value in present value terms is $2,000. Substituting these numbers into the equation yields a monthly lease payment of $178. The value of the lease receivable given the lease payments and assumed residual value in this illustration is $8,000. However, if the interest rate used to value the lease payments for accounting purposes differs from the interest rate used to set the lease payments in the first place, then the booked value of the lease will differ from its economic value. In particular, if the interest rate for valuation purposes is below the interest rate used to set lease payments, the value of the lease receivable will be overstated. According to the Wall Street Journal (June 1, 2001, p. C1), this is what happened. In the late 1990s, senior executives at Xerox ordered the company's Mexican subsidiary to use a discount rate well below local interest rates to value the peso lease receivables it was generating. For example, in 1996, Xerox Mexico booked leases using a discount rate of 20%. That rate was progressively lowered over the next three years, to 18% in 1997, 10% in 1998, and 6% in 1999. Comparable Mexican interest rates during this period were 34.4% in 1996, 22.5% in 1997, 24.5% in 1998, and 24.1% in 1999. Similar aggressive interest rate 710 41504_Pt6_Case_Studies_p710-711 3/8/02 7:06 AM Page 711 Case VI.1 Xerox Miscopies Foreign Interest Rate Data assumptions were used in other foreign units as well to book revenues and value their lease receivables. Managers at Xerox's business units were given bonuses for meeting or exceeding aggressive revenue targets. Evidently, managers at these units gured out how to get their bonuses. 711 4. Questions 1. What is the purpose and consequence of using a discount rate that is close to the market interest rate in valuing lease rentals? 2. Why were interest rates so high in Mexico in the late 1990s? What factors were built into these interest rates? 3. Assuming a $10,000 copier price and $3,500 residual value in present value terms, what was the consequence of Xerox Mexico booking peso revenues using interest rates of 18% in 1997, 10% in 1998, and 6% in 1999 instead of the comparable Mexican interest rates during this period of 34.4% in 1996, 22.5% in 1997, 24.5% in 1998, and 24.1% in 1999? That is, on each $10,000 copier lease, how much revenue did Xerox Mexico 5. 6. 7. book in each? Compare those figures to their present values using the market rates. Apparently, Xerox used similarly rosy assumptions in Brazil as well. Instead of using a discount rate on the order of 30%, Xerox used a 6% discount rate to record real revenues. Assuming the same $10,000 copier price and $3,500 residual value in present value terms, how much revenue was booked by using a 6% discount rate on a 60-month lease? Compare this gure to its present value using a 30% discount rate. How did the use of low discount rates help managers at Xerox Mexico get their bonuses? How might these low discount rates affect the amount of exchange risk that managers were willing to tolerate? Suppose Xerox tried to sell its foreign lease receivables to an investor. What could you say about the price it would likely receive as compared to their book values? Explain. Do you agree or disagree with Xerox's claim that it used proper accounting assumptions in booking its revenues and recording asset values for foreign lease receivables? Explain. 41504_Pt6_Case_Studies_p710-711 3/8/02 7:06 AM Page 712 1. What is the purpose and consequence of using a discount rate that is close to the market interest rate in valuing lease rentals? The purpose of using a discount rate that is close to the market interest rate in valuing lease materials is accounting assumptions in order to artificially boost revenues and profits 2. Why were interest rates so high in Mexico in the late 1990s? What factors were built into these interest rates? The interest rates were so high in Mexico in the late 1990's due to the executives of the company's Mexican subsidiary to use a discount rate well below local interest rates to value the peso lease receivables it was generating. 3. Assuming a $10,000 copier price and $3,500 residual value in present value terms, what was the consequence of Xerox Mexico booking peso revenues using interest rates of 18% in 1997, 10% in 1998, and 6% in 1999 instead of the comparable Mexican interest rates during this period of 34.4% in 1996, 22.5% in 1997, 24.5% in 1998, and 24.1% in 1999? That is, on each $10,000 copier lease, how much revenue did Xerox Mexico book in each? Compare those figures to their present values using the market rates. Substituting these numbers into the equation yields a monthly lease payment of $178. The value of the lease receivable given the lease payments and assumed residual value in this illustration is $8,000. 4. Apparently, Xerox used similarly rosy assumptions in Brazil as well. Instead of using a discount rate on the order of 30%, Xerox used a 6% discount rate to record real revenues. Assuming the same $10,000 copier price and $3,500 residual value in present value terms, how much revenue was booked by using a 6% discount rate on a 60-month lease? Compare this figure to its present value using a 30% discount rate. The lease-term is five years, the price is $10,000, and the residual value in present value terms is $2,000. Substituting these numbers into the equation yields a monthly lease payment of $178. 5. How did the use of low discount rates help managers at Xerox Mexico get their bonuses? How might these low discount rates affect the amount of exchange risk that managers were willing to tolerate? Managers at Xerox's business units were given bonuses for meeting or exceeding aggressive revenue targets. Evidently, managers at these units figured out how to get their bonuses. 6. Suppose Xerox tried to sell its foreign lease receivables to an investor. What could you say about the price it would likely receive as compared to their book values? Explain. The price that Xerox would be higher, because the company is taking into account the pre-tax savings it will be filing. As an example, Xerox knew that changing the discount rate. 7. Do you agree or disagree with Xerox's claim that it used proper accounting assumptions in booking its revenues and recording asset values for foreign lease receivables? Explain. I disagree Xerox did not use proper accounting assumption in booking its revenue and recording assets values for foreign lease receivable, the Executives were blinded by the financial gain