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 $$Absolutely; what time and where?$$

III. Steps to Completion:

$1.$ Review the financial statements, ratios, and Other Information for Corporation

A in Appendix A$.$

$2.$ Answer the Corporation A Stockholders$$ Equity Questions in paragraph

format. Do not rewrite the questions in your report.

Page $2$ of $6$

Corporation A$.$ Stockholders$$ Equity Questions:

i$.$ Calculate the average stock return from $20$X$120$X$3.$

ii$.$ Calculate the standard deviation over this same period.

iii. Calculate the coefficient of variation over this period.

iv$.$ Assume that the CAPM holds, the Corporation has a beta of $1\mathrm{.}50,$ and

the $30-$year U$.$S$.$ Treasury bonds sell at an $8\%$ yield. Using the CAPM,

calculate Corporation A$$s required rate of return.

v$.$ Calculate the dollar amount of dividends that were declared during

$20$X$3.$

vi$.$ Calculate the $($intrinsic$)$ value of Corporation A$$s stock price at year$-$

end $20$X$3$ using the dividend growth model.

vii. Compare the intrinsic value to the market value of the Corporation A$.$

Explain the difference.

viii. Compare the intrinsic value and market value to the book value of

Corporation A$$s$.$ Explain the difference.

ix$.$ Prepare the journal entry to record the $20$X$3$ purchase of treasury

stock.

x$.$ Recalculate $20$X$3$ earnings per share, $20$X$3$ current ratio, and $20$X$3$

debt$-$to$-$assets assuming Corporation A never purchased treasury

stock $($i$.$e$.,$ has zero treasury stock at year$-$end $20$X$3),$ and instead left

the monies in cash.

a$.$ Assume that management made a bold prediction to investors

at year$-$end $20$X$2$ that $20$X$3$ EPS would be a minimum of $$6\mathrm{.}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 $20$X$4$ and then sell these same $5,000$

shares at year$-$end $20$X$4$ when, at that time, Corporation A

believes that the market price will approximate $$62$ per share

$($below its year$-$end $20$X$3$ intrinsic value$).$

Required: All else equal, is this purchase a good use of

capital?

Page $3$ of $6$

b$.$ Required: Should creditors happy with the decision to

purchase the treasury stock?

c$.$ Suppose that on January $1,20$X$4,$ Corporation A sells the

$1,000$ shares of TS purchased in $20$X$1$; Corporation A sold this

stock at the market price at year$-$end $20$X$3.$

Required:

Prepare the journal entry torecord this transaction.

xii. How does this transaction impact the three financialstatements?

$3.$ Review the financial statements, ratios, and information below for Corporation

B in Appendix A$.$

$4.$ 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 yearend $20$X$3.$

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 $20$X$7),$ a supplierwill begin to take over the processing

of this product. A few facts about the purchase are listed below:

a$.$ The cost of the equipment, including shipping and installation, is

$$400,000.$ The entire amount will be paid in cash. The equipment will

be purchased in early $20$X$4.$

b$.$ The life of the equipment is four years $($end of $20$X$7),$ at which time it is

expected to sell for $$40,000.$

c$.$ Corporation B will initially purchase $$200,000$ of inventory; $70\%$ of

inventory purcha