...Abbott Laboratories—Equity Method Investments Teaching Notes: This case shows students how the equity method of accounting works. Abbott Lab’s footnote disclosure includes simple financial statement and income statement information for the joint venture. This provides a textbook example of the equity method. The case asks students to consider the effect on Abbott’s financial statements had the company reported under IFRS, which allows firms to select between equity method and proportionate consolidation when accounting for joint ventures (entities with joint control). Creating pro forma financials is a useful skill not only to reflect potential IFRS conversion but to enable meaningful comparisons across reporting jurisdictions. Thus, even if the SEC does not require IFRS for domestic registrants, students will benefit from studying non-GAAP reporting requirements. The case starts with the economic and business reasons behind joint ventures. Our teaching philosophy is that accounting does not happen in a vacuum – it is the language of business. We take every opportunity to have students consider the economics of the transaction first and then apply accounting rules. This is good practice for students who will have to make increasingly many judgments with the coming of principles-based accounting. Students have little trouble determining how Abbott Laboratories accounts for its 20-50% owned subsidiaries. They find it much more challenging to trace the effects thereof through the...
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...Areas of Consideration ï Cost-reduction opportunity of replacing old equipments. ï Elimination of investment tax credit for new equipment due to the new taxlegislation. ï Extended depreciation lives for new equipment under the new tax regulation. ï Reduction of corporate tax rate from 46% to 34% subject to the new taxregulation. ï Economic uncertainty on long-term capital investments. Alternative Courses of Action 1. Buy the new machine yet no new legislation is enacted. Advantages ? The company will continue to use a 5 year ACRS depreciationmodel with higher depreciation expense. ? Efficiency in operation due to new equipments.Disadvantage ? The company will retain all tax credits due to using 5 yr. ACRSdepreciation model in equipments with 7 yr useful life.2 . Buy the new machine when the new tax proposal is enacted and bind the contract soon enough to be grandfathered or before the enactment of thelaw. Advantages ? This will allow the company to receive an investment tax creditthat will reduce the companyís taxes. ? The company will continue to use a 5 year ACRS depreciationmodel with higher depreciation expense. ? Tax rate would reduce to 34%. ? Efficiency in operation due to new equipments.Disadvantage ? Depreciation life of the equipment will not be extended. 3 . Buy the new machine when the new tax proposal is enacted but do not bind thecontract in time to be grandfathered or after the enactment of the law. Advantages ? Efficiency...
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...Pressco Case Apr 30. 2015 * Recommendation The management of Paperco would have to buy the new drying equipment via binding contracts before rumored tax legislation was passed * Problem When was the best situation to replace the old drying equipment of Paperco, Inc that would enable the company to avail greater cost savings? * Rationale for Decision The cost saving associated with implementing the new drying equipment was influenced by tax policy, fuel cost, economic outlook, and demand. The management of Paperco had following alternatives with regard to tax policy. * Alternative1. No change in tax legislation * Alternative2. Buy the new equipment before rumored tax legislation was passed * Alternative3. Buy the new equipment after rumored tax legislation was passed In alternative1, Paperco would continue to use a 5 year ACRS depreciation model with higher depreciation expense, receive the investment tax credit and be subject to 46% tax rate. In alternative2, Paperco would also continue to use a 5 year ACRS depreciation model and receive the investment tax credit, but be subject to 34% tax rate. Finally, in alternative3, Paperco would have to use a 7 year MACRS model with lower depreciation expense. Furthermore, Paperco wouldn’t receive the investment tax credit but would be subject to 34% tax rate. Net Present Value (NPV) of above alternatives was as followings. | Alternative1 | Alternative2 | Alternative3 | NPV | (21,205) | 119...
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...Financial Decision Making - Spring 2016 Manuel A. Callizo Pecci Case Study - Pressco, Inc. (1985) Pressco Equipment Purchase History & Research - Pressco, Inc. is a company in the line of mechanical drying equipment. - Paperco is a potential customer of Pressco, Inc. for the purchase of equipment. - Jane Rogers is a marketing representative for Pressco. In the year 1984, Jane Rogers used to persuade Paperco`s management to purchase this new mechanical drying equipment, but it turned out to be unsuccessful because the customer viewed the proposed investment as moderately attractive but easily postponable a little cost to Paperco. In November 1985 a new tax legislation had been rumored that gained the interest of Paperco to buy the new equipments. This situation gave Jane Rogers the opportunity to persuade Paperco`s management again with her well-prepared financial presentation, which was designed to help close the sale of the new equipment. In her presentation, she gave the expected price of the new equipment of $2.9 million, and also pointed out that the cost saving that Paperco would realize from the proposed new calculation. Statement of the problem When is the best situation to replace the old drying equipments of Paperco that will enable the company to avail greater tax benefits and costs savings?, Ms. Rogers, spares to persuade its potential customers like Paperco to sign a binding contract of purchasing new mechanical drying equipment. In view...
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...NAMES: Tshilidzi Wendy Mthukwane STUDENT NO: 37213172 ASSIGNMENT: NO1 INV3701 UNIQUE NUMBER: 683992 (A) Rate of return using CAPM = Rf+Bi{E(rm)-Rf} = 0.065+1.36(0.055) =13.98 The value of spiderman Limited’s share using two stage DDM Vo= Do(1+Gs)n (1+GL) Vo=2.25(1+0.15)2 (1+0.08) = 53.74 (r-GL) (0.1398-0.08) Time | Value | Calculation | Dt or Vt | Present Value1.1398 | 1 | D1 | 2.25(1.15) | 2.5875 | 2.2701 | 2 | D2 | 2.25(1.15)2 | 2.9756 | 2.2905 | 3 | D3 | 2.2591.15)2 (1.08)/(0.1398-0.08) | 53.74 | 41.3657 | Total 45.93 (B) FCFE= Cash from Operating Activities 31660 Less Investment in Fixed Capital 12000 Plus Net Borrowing 22000 __________ 41660 Number of Outstanding Shares = Payment of Cash Dividend = 6750 =3000 Recent Dividend Pay 2.25 FCFE per share = 41660 =13.87 3000 (C) Yr0 41660 =13.87 Yr1 41660 + 0.15 = 47909/3000 = 15.97 Yr2 47909 + 0.15 = 55095/3000 = 18.37 Yr3 55095 + 0.08 = 59503/3000 = 19.83 13.87 + 15.97 + 18.37 + 19.83 __ = 50.26 (1.1398) (1.1398)2 (1.1398)3 (1.1398)3 (D) * I will recommend that Louis Lane invest on investment C, since it has a higher intrinsic value than that of investment A. * Investment A has a lower intrinsic value, to intrinsic value of investment C, but is higher that Market value. * Investment C has much higher intrinsic value to A and to the market price (E) * Based on bet, I recommend...
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...Advance Financial Management Graduate Business Administration 645 CRN: 11046 Building 163 – Room 2032 Winter Quarter 2013 Wednesday: 6:00-8:50 Paul Sarmas www.csupomona.edu/~psarmas CATALOG DESCRIPTION: A seminar course in finance utilizing comprehensive cases to simulate the role of the financial manager. 3 seminar-discussion. Prerequisite: GBA 546, all required 500-level courses, and microcomputer proficiency. Concurrent enrollment in GBA 646. Unconditional standing requirement. EXPANDED DESCRIPTION OF THE COURSE AND INSTRUCTIONAL METHODS: A. Expanded Description of the Course: This course reinforces the basic concepts of financial management. The course provides an in-depth discussion of key topics that are critical to financial management: (1) the goals of the firms, (2) financial statement analysis, planning, and forecasting, (3) working capital policy and management, (4) capital budgeting techniques without and with risk, (5) capital structure theory and application, (5) the cost of capital estimation, and (6) long-term financing decisions. In addition, the course examines issues such as lease financing, merger and acquisition, and international financial management. B. Instructional Methods: The delivery system throughout this course will be a combination of class discussion and case analysis. The case analysis will be both in a written format and oral presentation. The amount of lecture will be limited to detailed coverage of concepts...
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...If you have only $8 million for investment (i.e. 4 projects) and your WACC is between 9% and 11%, which projects should you choose and why? You need to justify your answer and show detailed analysis. Your assumptions must be pointed out and should be generally acceptable. (20 points) Answer the following question from Rocky Mountain Advanced Genome case. Q2. Assume that Genome industry will grow at a rate of 4 to 6% in maturity, and discount rate may vary between 18 and 20 %. As a representative of RMAG, What will be your arguments so that Big Sur provides the financing for RMAG? Give at least five reasons in support of your argument. Show all computations in your analysis. (30 points) Answer the following questions from Pressco Inc. case. We worked out a base case of scenario A with no change in tax laws in class. Start with that scenario assumptions as given and answer the following questions. Q3. (Scenario B) What is the net present value of the mechanical drying equipment investment opportunity (as of December 1985) assuming a 12% cost of capital for Paperco and assuming (a) the new tax proposals are enacted, (b) the new drying equipment replaces the old in December 1986, and (c) Paperco signs a binding purchase contract soon enough to be “grandfathered” as to the 8% investment tax credit and the use of ACRS depreciation? (10 points) Q4. (Scenario C) What is the net present value of the investment assuming that (a) the new tax proposals are enacted...
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...Finance 725 Spring 2006 J. E. Hodder Corporation Finance Course Schedule Tuesday, January 17: Introduction Thursday, January 19: Clarkson Lumber Company Reading: Note on Financial Analysis a. How is the company's financial performance? (Examine appropriate financial ratios.) b. Why has Clarkson Lumber borrowed increasing amounts despite its consistent profitability? c. How has Mr. Clarkson met the financing needs of the company during the period 1993 through 1995? Has the financial strength of Clarkson Lumber improved or deteriorated? d. How attractive is it to take trade discounts? Tuesday, January 24: Clarkson Lumber Company (continued) Reading: a. Note on Financial Forecasting b. Note on Bank Loans a. How much of a loan will Mr. Clarkson need to finance the expected expansion in sales to $5.5 million in 1996 and to take all the trade discounts? (Prepare a projected income statement for 1996 and a pro forma balance sheet as of December 31, 1996.) b. As Mr. Clarkson’s financial adviser, would you urge him to go ahead with, or to reconsider, his anticipated expansion and plans for additional debt financing? c. As the banker, would you approve Mr. Clarkson’s loan request; and if so, what conditions would you put on the loan? Thursday, January 26: SureCut Shears, Inc. ...
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