FINMAN ACTIVITY

Case 1
Given: On Tuesday, March 24, 2015, the share price of Google rose 2%, a roughly $8 billion
increase in the value of the firm’s equity. Was the large increase in Google’s equity value
because the firm’s profits were up? No. Was the positive stock price reaction due to some good
news about a new Google product? No. The reaction was due to Google’s announcement that it
was hiring Ruth Porat as its new chief financial officer (CFO).
Question: Why would the hiring of a new CFO cause Google’s stock price to jump? Comment
and explain your answer.

Case 2
Cash is essential to a firm’s survival. In fact, cash flow is much more important than earnings.
Financial analysts focused primarily not on earnings but on what is called “burn rates” (i.e., the
rate at which a firm uses up or “burns” cash). There is an old saying in finance: “You buy
champagne with your earnings, and you buy beer with your cash.”
Question: Comment on the discussion given that cash is more important than earnings. Explain
your answer.

Case 3
Can the CEO of a large company really be expected to know what is going on at all levels in the
organization? In various court cases, CEO’s have argued that they could not be held
accountable for the actions of others in their companies. Comment and explain your answer
with reference to Section 302 of Sarbanexs-Oxley Act. Give concrete examples.

Case 4
Given: Apple paid a dividend from 1987 to 1995 ($0.12, $0.32, $0.40, $0.44, and then $0.48 per
share from 1991–1995, respectively) but stopped in the second quarter of 1996 after suffering
losses. (Apple still paid the first quarter dividend of $0.12 in 1996 before stopping.) Apple did
not pay any dividends through the end of 2011.
On Monday March 19, 2012, Apple announced it would start paying a quarterly dividend of
$2.65 per share in the fourth quarter of fiscal 2012 (costing the firm $2.5 billion a quarter or
$10 billion a year). The firm also said it would start a share repurchase program. Apple’s stock
price rose 2.7% ($15.53) to a price of $601.10 on the announcement. The quarterly dividend
was increased to $3.05 per share in 2013 (costing the firm $2.9 billion a quarter or $11.6 billion
a year), and $3.29 (pre‐split) in 2014 (a total of $12.4 billion a year). Apple also had a seven‐for‐
one stock split in 2014. Finally, Apple also repurchased $22.9 billion of stock in 2013 and $35.0
billion of stock in 2014. The share buyback program is being conducted in privately negotiated
and open market transactions (complying with Rule 10b5–1 of the Exchange Act).
Finally, the firm issued $17 billion of long‐term debt in 2013 (due from 2016 to 2043). Apple
also issued $6.3 billion of commercial paper in 2014. The firm’s capital structure remained,
however, at zero debt once the excess cash is considered.
Question: Comment on Apple’s dividend policy and how it differs in relation to theory of
corporate dividends by Miller and Modigliani(1961)
Case 5
Given:The production budget shows the number of units of services or goods that are to be
produced during a budget period.
Cozycamp.com’s production budget for the second quarter is based on the following formula:
Sales in units + Desired ending inventory of finished goods= Total units required
Total units required- Expected beginning inventory of finished goods= Units to be produced
The expected sales are 15,000 tents and the desired ending inventory at the end of the quarter
is 2,000 tents whiles 1,500 tents are expected to be at the beginning of the second quarter.
How many units needs to be produced?

Case 6
Given: Put yourself in the position of the division controller. Your bonus and that of your boss,
the division vice president will be determined in part by the division’s income in comparison to
the budget. When your division has submitted budgets in the past, the corporate management
has usually cut your budgeted expense thereby increasing the divisions budgeted profit. This, of
course makes it more difficult for your division to achieve the budgeted profit. Moreover, it
makes it less likely that you and your divisional colleagues will earn a bonus.
Now your boss is pressuring you to pad the expense budget, because “the budgeted expense
will just be cut anyway at the corporate level”. Is padding the budget ethical under these
circumstances? What do you think?
Case 7
Given: Patisserie Cezanne’s director of cost management has determined that electricity is a
variable cost incurred at a rate of $.50 per hour of process time. The predicted level of activity
for September is 7,500 hours of process time. This estimate is based on planned production of
P2,500 multilayer fancy cakes, where each cake requires three hours of total process time.
Patisserie produced 2,000 multilayer fancy cakes during September and used 6,000 hours of
process time and incurred electricity cost of $3,200.
Comment on the two budget below and which of these two budgets is more useful in
answering the question?
Case 8
Given: Currently under consideration is the purchase of a new street cleaner. The controller has
estimated that the city’s old street cleaning machine would last another five years. A new street
cleaner which also would last for five years can be purchased for $50,740. It would cost the city
$14,000 less each year to operate the new equipment than its costs to operate the old
machine. The expected cost saving s with the new machine are due to lower maintenance cost.
Thus, the new street cleaner will cost $50,740 and save $70,000 over its five-year life. Since the
$70,000 in cost savings exceeds the $50,740 acquisition cost the controller concluded to
purchase the new machine. Assume discount rate of 10%. Comment on the decision made by
the controller. Do you think her analysis and decision is correct?

Case 9
Given: IES recently signed a contract with the U.S. and Canadian government to do a five-year
study of the effects of global warning on the migration of water fowl. The contract fee is
$500,000, payable in equal annual installments over the contract term. Fenwar is now
considering two alternative proposals for carrying out the study. Each proposal entails the
purchase of equipment (the equipment will be obsolete at the end of the contract term) and
the incurrence of various operating costs throughout the term of the contract. Fenwar’s normal
procedure for project evaluation is to calculate each proposal’s NPV using 8% hurdle rate. The
projected costs follows:

Fenwar calculated the NPV of both proposals. After completing her NPV analysis, however,
Fenwar was tempted to ignore it. These thoughts ran through her mind as she drove to work. “
If I approve Proposal 1, the financial picture for the field research branch is going to pieces for
the next two years. After initial investment of $40,000 in equipment. I’m going to show losses
of $50,000 and $20,000 in the first two years. That’s not going to look very good when the
board considers my promotion. When she arrived at the office, Fenwar wrote a memo
approving Proposal 2. Comment on the decision made by Fenwar.
Case 10
Given: Jim Wright, Worldwide Airway’s vice president for operations has been approach by aa
Chinese tourist agency about flying chartered tourist flights from Hong Kong to London. The
tourist agency has offered Worldwide Airways $150,000 per round-trip flight on a jumbo jet.
Given the airlines usual occupancy rate and air fares, a round-trip jumbo jet flight between
Hong Kong and London typically brings in revenue of $250,000. Thus, the tourist agency’s
specially priced offer requires a special analysis by Jim Wright. Wright also determines that the
variable cost of the charter would be less than that of a typical flight because it will not incur
variable cost for reservation and ticketing amounting to $5,000.

Case 11
Case 12
Given: Total Chemical Company (TCC) produces and distributes industrial chemicals. TCC’s
earnings increased sharply in 20x1, and bonuses were paid to the management staff for the first
time in several years. Bonuses are based in part on the amount by which reported income
exceeds budgeted income.
Martin Kern, vice president of finance was pleased with TCC’s 20x1 earnings and thought that
the pressure to show financial results would ease. However, Hildegard Ritter, TCC’s president
told Kern that she saw no reason why the 20x2 bonuses should not be double those of 20x1. As
a result, Kern felt pressure to increase reported income in order to exceed budgeted income. By
an even greater amount. This would assure increased bonuses.
Kern met with Willhelm Keller of Pristeel Inc., a primary vendor of TCC’s manufacturing supplies
and equipment. Kern and Keller have been close business contacts for many years. Kern asked
keller to identify all of TCC’s purchases of perishable supplies as equipment on Pristeel’s sales
invoices. The reason Kern gave for his request was that TCC’s president had imposed stringent
budget constraints on operating expense but not on capital expenditures. Kern planned to
capitalize the purchase of perishable supplies, and include them with the Equipment Account
on the balance sheet date. In this way Kern could defer the expense recognition for these items
to a later year. This procedure would increase reported earnings, leading to increased bonuses.
Keller agreed to do as kern had asked.
While analyzing the second quarter financial statements, Mats Gunther, TCC’s controller,
noticed a large decrease in supplies expense from one year ago. Gunther reviewed the Supplies
expense account and noticed that only equipment and no supplies had been purchased from
Pristeel, a major source for supplies. Gunther who reports to Kern immediately brought this to
Kern’s attention.
Kern told Gunther of Ritter’s high expectations and of the arrangement made with Keller of
Pristeel. Gunther told Kern that his action was an improper accounting treatment for the
supplies purchased from Pristeel. Gunther requested that he be allowed to correct the accounts
and urge that the arrangement with Pristeel be discontinued. Kern refused the request and told
Gunther not to become involved in the arrangement with Pristeel.
After clarifying the situation in a confidential discussion with an objective and qualified peer
within TCC, Gunther arranged to meet with Ritter, TCC’s president. At the meeting, Gunther
disclosed the arrangement Kern had made with Pristeel.
Comment on the case? Recommend alternative basis for calculating bonus. Recommend
procedure on how to detect manipulation of earnings and improper accounting treatment
made by Kern. Do you agree with Gunther?