• July 4th, 2015

Case Study

Paper, Order, or Assignment Requirements

 

Session 1

a. Summarize the mission of the FASB in one or two paragraphs. What do you think about the FASB’s mission? Is it too broad; is it too vague, do you think the mission is achievable?
b. How effective do you think the FASB’s processes are? Do you think they will focus on the right issues on a timely basis? Do you think that all relevant parties will be heard in their process?
c. Summarize the current membership of the FASAC including the group’s mix of gender and type of organization they represent. Do you think this group is adequately diverse in order to allow all relevant parties to be heard?

Part 2
Discuss the proposed new format of the statement of financial position

Please post your answers in the discussion forum below:

Case Study Session 2 
a) Discuss the proposed new format of the income statement.

Part 2 

a) What features of the non-U.S. statements do you think are improvements on the U.S. statements?
b) What features did you find to be confusing?

SESSION 3 

1. In the first section, provide a financial overview (charts) and commentary (text) about company. Use a mixture of five-year or most recent year analysis of revenue, operating profit (as defined by Henkel without adjustments), growth, and operating margin. How are revenue and operating profit distributed by segment and geography? No advanced adjustments or analysis is necessary.

2. In the second section, provide a financial overview and commentary by business segment. Specifically, what can you learn from the annual report about each segment? Information disclosed in the annual report about business segments is typically more insightful about the company’s product markets than the notes are. 

SESSION 4
1. In the first section, provide a financial overview (charts) and commentary (text) about company. Use a mixture of five-year or most recent year analysis of revenue, operating profit (as defined by Henkel without adjustments), growth, and operating margin. How are revenue and operating profit distributed by segment and geography? No advanced adjustments or analysis is necessary.

2. In the second section, provide a financial overview and commentary by business segment. Specifically, what can you learn from the annual report about each segment? Information disclosed in the annual report about business segments is typically more insightful about the company’s product markets than the notes are. 

SESSION 5 
Cost Behavior and Cost Function
1. Refer to the prior year income statements shown in Exhibit 1. Classify each of the following costs as fixed, variable, or mixed. Briefly explain how you classified each item.
a. Sales representative commissions:
b. Payroll taxes and employee benefits:
c. Survey labor, printing, photocopying, and other direct job costs:
d. Rent, heat, and lights:

2. Create a cost function for Paukovich Consulting. Use the financial statement information in Exhibit 1 and your cost classifications from question #1. Assume that miscellaneous office costs are mixed. For simplicity, use revenues as the cost driver.

(Hint: Because only two years’ data are available, use the two-point method to estimate the cost function for mixed costs.)

Cost-Volume-Profit Analysis

3. Given your answer to question #2, what amount of revenue must the company generate to achieve net income (after-tax) of $500,000?

4. Given your answer to question #2, calculate the company’s 20×2 operating leverage. Should Richard Paukovich be concerned about the company’s degree of operating leverage? Explain.

5. Given your answer to question #2, calculate the company’s 20×2 margin of safety in revenue, and briefly explain what it means.

SESSION 6 
1. Should universities enter into agreements to offer affinity credit cards to students?
2. Whether or not a university has an affinity credit card, does it have an obligation to educate students about credit card misuse and debt management?
3. Does the existence of an affinity credit card create a conflict of interest for a university if and when it adopts an education program on credit card misuse and debt management?
4. To what extent are students themselves responsible for their predicament?

Session 7 

a. To determine the risk-free rate, please use Treasury data from the “Select Market Data” spreadsheet. On the “Yields” tab, you will find yields to maturities for U.S. and German Treasury rates. For Henkel AG, which Treasury rate at which maturity is most appropriate to use in valuing the company?
b. To determine Henkel’s corporate beta, unlever (and relever) the ordinary least squares (OLS) market betas for each company in the European Household and Personal Care segment. Prices can be found on the “Prices” tab of the “Select Market Data” spreadsheet. To determine the OLS market beta, regress 10-year monthly returns against the MSCI World index denominated in the same currency. In Excel, this can be done using the “SLOPE” formula. Next, unlever the market beta using each company’s year-end debt-to-equity ratio and the formula: bu = be/(1 + D/E). To determine Henkel’s corporate beta, relever the average industry beta using Henkel’s year-end debt-to-equity ratio. Repeat this process for each of Henkel’s divisions. 
c. Assume the market risk premium equals 5 percent.
Henkel does not carry debt beyond five years. Therefore, we determine the after-tax cost of debt using a portfolio of similarly rated bonds. To determine the cost of debt:

a. Use the same risk-free rate used to determine the cost of equity.
b. Add a default premium based on the company’s debt rating by Standard & Poor’s. Yields by credit rating can be found on the “Yields” worksheet of the “Select Market Data” spreadsheet. Henkel reports its debt rating on its investor relations web site atwww.henkel.com/investor-relations/credit-ratings-11952.htm. If the company’s rating is between reported portfolios, interpolate between the nearest ratings.
c. To determine Henkel’s marginal tax rate, use the tax reconciliation table in the annual report. Set the marginal tax rate equal to the “Tax rate on income.”
To complete the cost of capital, weight the after-tax cost of debt and cost of equity using the company’s year-end capital structure (found in the “Select Market Data” spreadsheet).

Session 8 
A. Using web-based or Wall Street Journal sources, determine the current CPI (consumer price index—a measure of inflation) and T-bill rates (use the 3 month T-bill information). Turn in copies of your sources with your case solution. 
B. Pick a MACRS life and find the MACRS factors for this project. Explain your choice.
C. Is this decision a new project or equipment replacement? What types of cash flows are relevant for this type of decision? Categorize and sum the relevant cash flows.
D. Use your judgment to determine the estimated life of the project and explain your choice.
E. Using the CPI and T-bill information and your judgment, develop an inflation rate and risk-free rate that are reasonable over the life of this project. Explain your choices.
F. Considering the risk of the project, determine a risk premium and explain your choice
G. Develop a spreadsheet (use the template from the Wildcat Welding Spreadsheet problem or from Appendix 12A of the textbook) to calculate the net present value of purchasing the new equipment.
H. Identify which of the pieces of information used in the NPV calculation are uncertain. Explain why these uncertainties are important to John Forsythe’s decision.
I. Write out a brief paragraph for John Forsythe explaining whether he should purchase the new pressing machine. Include the most important factors that Forsythe should consider in making his decision.

 

 

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