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Scenarios

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.

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Corporation A. Stockholders’ Equity Questions:
i. Calculate the average stock return from 20X1–20X3.
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 1.50, 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
20X3.

vi. Calculate the (intrinsic) value of Corporation A’s stock price at year-
end 20X3 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 20X3 purchase of treasury
stock.

x. 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. Assume that management made a bold prediction to investors
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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b. Required: Should creditors happy with the decision to
purchase the treasury stock?

c. 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?

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 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:

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 20X4.

b. The life of the equipment is four years (end of 20X7), at which time it is
expected to sell for $40,000.

c. Corporation B will initially purchase $200,000 of inventory; 70% of
inventory purchasesover the life of this project will be financed via
accounts payable.

d. Recurring cash flows occur at year-end of each year, and termination
cash flows occur at year-end 20X7.

e. 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) Calculate the cash flows associated with this project. Calculate these cash

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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:

i. Beginning of 20X4
ii. End of 20X4
iii. End of 20X5
iv. End of 20X6
v. End of 20X7 (includes recurring cash flows and termination

cash flows).

3) Compare the aggregate undiscounted cash flows to the aggregate net
income flows. Explainthe difference (if any).

4) Calculate the present value of the future cash flows.

5) Calculate the net present value and internal rate of return associated with
this project.

6) Should Corporation B accept or reject this project? Explain your decision.

7) Compare the internal rate of return to the weighted average cost of capital. Is
the differencebetween the IRR and WACC consistent with ROE? Explain
your answer.

IV. Deliverables

Submit one Word document

.
NNumber your answers to correspondd too 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.