Question: Specific Electric Co. asks you to implement
Specific Electric Co. asks you to implement a pay-for-performance incentive contract for its new CEO and four EVPs on the Executive Committee. The five managers can either work really hard with 70 hour weeks at a personal opportunity cost of $200,000 in reduced personal entrepreneurship and increased stress-related health care costs or they can reduce effort, thereby avoiding the personal costs. The CEO and EVPs face three possible random outcomes: the probability of the company experiencing good luck is 30 percent, medium luck is 40 percent, and bad luck is 30 percent. Although the senior management team can distinguish the three “states†of luck as the quarter unfolds, the Compensation Committee of the Board of Directors (and the shareholders) cannot do so. Once the board designs an incentive contract, soon thereafter the good, medium, or bad luck occurs, and thereafter the senior managers decide to expend high or reduced work effort. One of the observable shareholder values listed below then results.
Assume the company has 10 million shares outstanding offered at a $65 initial share price, implying a $650,000,000 initial shareholder value. Since the EVPs and CEOs effort and the company’s luck are unobservable to the owners and company directors, it is not possible when the company’s share price falls to $50 and the company’s value to $500,000,000 to distinguish whether the company experienced reduced effort and medium luck or high effort and bad luck.
Design an incentive plan that seeks to elicit high effort by granting restricted stock. Show that one-half million shares granted at $70 improves shareholder value relative to all prior alternatives.
Transcribed Image Text:
Shareholder Value GOOD LUCK MEDIUM LUCK BAD LUCK (30%) (40%) (30%) High Effort $1,000,000,000 $800,000,000 $500,000,000 Reduced Effort $ 800,000,000 $500,000,000 $300,000,000
> Chippewas Company sells one product. Presented below is information for January for Chippewas Company. Chippewas uses the FIFO cost flow assumption. All purchases and sales are on account. Instructions (a) Assume Chippewas uses a periodic system. Prep
> Wizard Industries purchased $12,000 of merchandise on February 1, 2012, subject to a trade discount of 10% and with credit terms of 3/15, n/60. It returned $3,000 (gross price before trade or cash discount) on February 4. The invoice was paid on February
> Presented below are transactions related to Guillen, Inc. May 10 Purchased goods billed at $20,000 subject to cash discount terms of 2/10, n/60. 11 Purchased goods billed at $15,000 subject to terms of 1/15, n/30. 19 Paid invoice of May 10. 24 Purchased
> Two or more items are omitted in each of the following tabulations of income statement data. Fill in the amounts that are missing. 2011 2012 2013 $ ? $290,000 6,000 Sales revenue $410,000 Sales returns and allowances 13,000 347,000 32,000 ? Net sale
> Werth Company asks you to review its December 31, 2012, inventory values and prepare the necessary adjustments to the books. The following information is given to you. 1. Werth uses the periodic method of recording inventory. A physical count reveals $23
> Bradford Machine Company maintains a general ledger account for each class of inventory, debiting such accounts for increases during the period and crediting them for decreases. The transactions below relate to the Raw Materials inventory account, which
> Assume that in an annual audit of Webber Inc. at December 31, 2012, you find the following transactions near the closing date. 1. A special machine, fabricated to order for a customer, was finished and specifically segregated in the back part of the ship
> In your audit of Garza Company, you find that a physical inventory on December 31, 2012, showed merchandise with a cost of $441,000 was on hand at that date. You also discover the following items were all excluded from the $441,000. 1. Merchandise of $61
> Presented below is a list of items that may or may not be reported as inventory in a company’s December 31 balance sheet. 1. Goods sold on an installment basis (bad debts can be reasonably estimated). 2. Goods out on consignment at another company’s stor
> Alex Hardaway borrowed $90,000 on March 1, 2010. This amount plus accrued interest at 12% compounded semiannually is to be repaid March 1, 2020. To retire this debt, Alex plans to contribute to a debt retirement fund five equal amounts starting on March
> The following information relates to the Choctaw Company. Instructions Use the dollar-value LIFO method to compute the ending inventory for Choctaw Company for 2009 through 2013. Ending Inventory (End-of-Year Prices) $ 70,000 Price Date Index Decem
> Presented below is information related to Martin Company. Instructions Compute the ending inventory for Martin Company for 2009 through 2014 using the dollar-value LIFO method. Ending Inventory (End-of-Year Prices) $ 80,000 Price Date Index Decembe
> The dollar-value LIFO method was adopted by King Corp. on January 1, 2012. Its inventory on that date was $160,000. On December 31, 2012, the inventory at prices existing on that date amounted to $151,200. The price level at January 1, 2012, was 100, and
> Sisko Company has used the dollar-value LIFO method for inventory cost determination for many years. The following data were extracted from Sisko’s records. Instructions Calculate the index used for 2012 that yielded the above results
> Belanna Corporation began operations on December 1, 2012. The only inventory transaction in 2012 was the purchase of inventory on December 10, 2012, at a cost of $20 per unit. None of this inventory was sold in 2012. Relevant information is as follows.
> The following example was provided to encourage the use of the LIFO method. In a nutshell, LIFO subtracts inflation from inventory costs, deducts it from taxable income, and records it in a LIFO reserve account on the books. The LIFO benefit grows as inf
> Tom Brady Shop began operations on January 2, 2012. The following stock record card for footballs was taken from the records at the end of the year. A physical inventory on December 31, 2012, reveals that 110 footballs were in stock. The bookkeeper inf
> You are the vice president of finance of Mickiewicz Corporation, a retail company that prepared two different schedules of gross margin for the first quarter ended March 31, 2012. These schedules appear below. The computation of cost of goods sold in e
> The board of directors of Oksana Corporation is considering whether or not it should instruct the accounting department to change from a first-in, first out (FIFO) basis of pricing inventories to a last-in, first-out (LIFO) basis. The following informati
> The following is a record of Cannondale Company’s transactions for Boston Teapots for the month of May 2012. Instructions (a) Assuming that perpetual inventories are not maintained and that a physical count at the end of the month sho
> Derek Lee just received a signing bonus of $1,000,000. His plan is to invest this payment in a fund that will earn 6%, compounded annually. Instructions (a) If Lee plans to establish the DL Foundation once the fund grows to $1,898,000, how many years un
> Presented below is information related to radios for the Couples Company for the month of July. Instructions (a) Assuming that the periodic inventory method is used, compute the inventory cost at July 31 under each of the following cost flow assumption
> Esplanade Company was formed on December 1, 2011. The following information is available from Esplanade’s inventory records for Product BAP. A physical inventory on March 31, 2012, shows 1,500 units on hand. Instructions Prepare sche
> LoBianco Company’s record of transactions for the month of April was as follows. Instructions (a) Assuming that periodic inventory records are kept, compute the inventory at April 30 using (1) LIFO and (2) Average cost. (b) Assuming t
> Inventory information for Part 311 of Seminole Corp. discloses the following information for the month of June. Instructions (a) Assuming that the periodic inventory method is used, compute the cost of goods sold and ending inventory under (1) LIFO and
> The net income per books of Adamson Company was determined without knowledge of the errors indicated below. Instructions Prepare a worksheet to show the adjusted net income figure for each of the 6 years after taking into account the inventory errors.
> At December 31, 2012, Dwight Corporation reported current assets of $390,000 and current liabilities of $200,000. The following items may have been recorded incorrectly. Dwight uses the periodic method. 1. Goods purchased costing $22,000 were shipped f.o
> Arna, Inc. uses the dollar-value LIFO method of computing its inventory. Data for the past 3 years follow. Instructions Compute the value of the 2012 and 2013 inventories using the dollar-value LIFO method. Year Ended December 31 Inventory at Curre
> Bienvenu Enterprises reported cost of goods sold for 2012 of $1,400,000 and retained earnings of $5,200,000 at December 31, 2012. Bienvenu later discovered that its ending inventories at December 31, 2011 and 2012, were overstated by $110,000 and $35,000
> On December 31, 2011, the inventory of Powhattan Company amounts to $800,000. During 2012, the company decides to use the dollar-value LIFO method of costing inventories. On December 31, 2012, the inventory is $1,053,000 at December 31, 2012, prices. Usi
> What is the dollar-value method of LIFO inventory valuation? What advantage does the dollar-value method have over the specific goods approach of LIFO inventory valuation? Why will the traditional LIFO inventory costing method and the dollar-value LIFO i
> Explain how the present value of an ordinary annuity interest table is converted to the present value of an annuity due interest table.
> FIFO, weighted-average, and LIFO methods are often used instead of specific identification for inventory valuation purposes. Compare these methods with the specific identification method, discussing the theoretical propriety of each method in the determi
> In an article that appeared in the Wall Street Journal, the phrases “phantom (paper) profits” and “high LIFO profits” through involuntary liquidation were used. Explain these phrases.
> In what ways are the inventory accounts of a retailing company different from those of a manufacturing company?
> Zonker Inc. purchases 500 units of an item at an invoice cost of $30,000. What is the cost per unit? If the goods are shipped f.o.b. shipping point and the freight bill was $1,500, what is the cost per unit if Zonker Inc. pays the freight charges? If the
> Mishima, Inc. indicated in a recent annual report that approximately $19 million of merchandise was received on consignment. Should Mishima, Inc. report this amount on its balance sheet? Explain.
> As the new staff person in your company’s treasury department, you have been asked to conduct research related to a proposed transfer of receivables. Your supervisor wants the authoritative sources for the following items that are discussed in the receiv
> On December 31, 2012, Firth Company borrowed $62,092 from Paris Bank, signing a 5-year, $100,000 zero-internet-bearing note. The note was issued to yield 10% interest. Unfortunately, during 2012, Firth began to experience financial difficulty. As a resul
> What are some steps taken by both the FASB and IASB to move to fair value measurement for financial instruments? In what ways have some of the approaches differed?
> The financial statements of Marks and Spencer plc (M&S) are available at the book’s companion website or can be accessed at http://corporate.marksandspencer.com/documents/publications/2010/Annual_Report_2010. Instructions Refer to M&S’s fi nancial state
> In this simulation, you are asked to address various requirements regarding the accounting for receivables. Prepare responses to all parts. KWW Professional Simulatilon Accounting for Receivables Time Remaining 2 hours 20 minutes Unsplit Split Horiz
> Messier Inc. manufactures cycling equipment. Recently, the vice president of operations of the company has requested construction of a new plant to meet the increasing demand for the company’s bikes. After a careful evaluation of the request, the board o
> What is the time value of money? Why should accountants have an understanding of compound interest, annuities, and present value concepts?
> The price elasticity of demand for personal computers is estimated to be −2.2. If the price of personal computers declines by 20 percent, what will be the expected percentage increase in the quantity of computers sold?
> The subway fare in your town has just been increased from a current level of 50 cents to $1.00 per ride. As a result, the transit authority notes a decline in ridership of 30 percent. Compute the price elasticity of demand for subway rides. a. If the tra
> The Olde Yogurt Factory has reduced the price of its popular Mmmm Sundae from $2.25 to $1.75. As a result, the firm’s daily sales of these sundaes have increased from 1,500 per day to 1,800 per day. Compute the arc price elasticity of demand over this pr
> Despite a decade of subsidies and considerable success in Denmark, Germany, and Britain, renewable energy in the U.S. accounts for only 7 to 8 percent of total energy consumption. Hydroelectric power remains the most successful source of renewable energy
> Specific Electric Co. asks you to implement a pay-for-performance incentive contract for its new CEO and four EVPs on the Executive Committee. The five managers can either work really hard with 70 hour weeks at a personal opportunity cost of $200,000 in
> Specific Electric Co. asks you to implement a pay-for-performance incentive contract for its new CEO and four EVPs on the Executive Committee. The five managers can either work really hard with 70 hour weeks at a personal opportunity cost of $200,000 in
> Specific Electric Co. asks you to implement a pay-for-performance incentive contract for its new CEO and four EVPs on the Executive Committee. The five managers can either work really hard with 70 hour weeks at a personal opportunity cost of $200,000 in
> The manager of the aerospace division of General Aeronautics has estimated the price it can charge for providing satellite launch services to commercial firms. Her most optimistic estimate (a price not expected to be exceeded more than 10 percent of the
> Specific Electric Co. asks you to implement a pay-for-performance incentive contract for its new CEO and four EVPs on the Executive Committee. The five managers can either work really hard with 70 hour weeks at a personal opportunity cost of $200,000 in
> Two investments have the following expected returns (net present values) and standard deviation of returns: Which one is riskier? Why? PROJECT EXPECTED RE TURNS ($) STAND ARD DEVIATION (S) A 50,000 40,000 B 250,000 125,000
> The demand for MICHTEC’s products is related to the state of the economy. If the economy is expanding next year (an above-normal growth in GNP), the company expects sales to be $90 million. If there is a recession next year (a decline in GNP), sales are
> ESPN currently pays the NFL $1.1 billion per year for eight years for the right to exclusively televise Monday Night Football. What is the net present value of this investment if the parent Disney Company has an opportunity interest rate equal to its cos
> The Ajax Corporation has the following set of projects available to it: Ajax can raise funds with the following marginal costs: First $250 million……………
> Gasoline prices above $3 per gallon have affected what Enterprise Rental Car Co. can charge for various models of rental cars. SUVs are $37 with one-day return and subcompacts are $41 with one-day return. Why would the equilibrium price of SUVs be lower
> For each of the determinants of demand in Equation 2.1, identify an example illustrating the effect on the demand for hybrid gasoline-electric vehicles such as the Toyota Prius. Then do the same for each of the determinants of supply in Equation 2.2. In
> How would each of the following actions be expected to affect shareholder wealth? a. Southern Company adopts fuel-switching technology at its largest power plants. b. Ford Motor Company pays $2.5 billion for Jaguar. c. General Motors offers large rebates
> In 2008–2009, the price of jet and diesel fuel used by air freight companies decreased dramatically. As the CEO of FedEx, you have been presented with the following proposals to deal with the situation: a. Reduce shipping rates to reflect the expense red
> In the context of the shareholder wealth-maximization model of a firm, what is the expected impact of each of the following events on the value of the firm? Explain why. a. New foreign competitors enter the market. b. Strict pollution control requirement
> Firms in the patented pharmaceutical industry earned an average return on net worth of 22 percent in 2006, compared with an average return of 14 percent earned by over 1,400 firms followed by Value Line. Which theory or theories of profit do you think be
> Specific Electric Co. asks you to implement a pay-for-performance incentive contract for its new CEO and four EVPs on the Executive Committee. The five managers can either work really hard with 70 hour weeks at a personal opportunity cost of $200,000 in
> In the Southern Company Managerial Challenge, which alternative for complying with the Clean Air Act creates the greatest real option value? How exactly does that alternative save money? Why? Explain why installing a scrubber “burns” this option.
> Corporate profitability declined by 20 percent from 2008 to 2009. What performance percentage would you use to trigger executive bonuses for that year? Why? What issues would arise with hiring and retaining the best managers?
> Explain several dimensions of the shareholder-principal conflict with manager agents known as the principal-agent problem. To mitigate agency problems between senior executives and shareholders, should the compensation committee of the board devote mor
> One of the approaches for the Southern Company to comply with the Clean Air Act is to adopt fuel-switching technology. Do you think this strategic flexibility would have value to Southern Company’s shareholders? Why?
> Illustrate the relationship between product positioning and customer targeting using the facts of the Ford dealership direct mail coupon example. Which customer is least likely and second least likely to buy a Taurus for this reason?
> What conceptual determinant of auto demand price elasticity is most closely associated with the differences in switching cost across the target customers in the “Direct Mail Coupon at a Ford Dealership” example—low switching cost for the German couple wh
> Federal excise taxes on gasoline vary widely across the developed world. The United States has the lowest taxes at USD $0.40 per gallon (or £0.07 per liter), Canada has taxes of $0.60 per gallon, Japan and much of Europe is $2.00 per gallon, while Britai
> The Reliable Aircraft Company manufactures small, pleasure-use aircraft. Based on past experience, sales volume appears to be affected by changes in the price of the planes and by the state of the economy as measured by consumers’ dispo
> The Sydney Transportation Company operates an urban bus system in New South Wales, Australia. Economic analysis performed by the firm indicates that two major factors influence the demand for its services: fare levels and downtown parking rates. Table 1
> The Stopdecay Company sells an electric toothbrush for $25. Its sales have averaged 8,000 units per month over the past year. Recently, its closest competitor, Decayfighter, reduced the price of its electric toothbrush from $35 to $30. As a result, Stopd
> Specific Electric Co. asks you to implement a pay-for-performance incentive contract for its new CEO and four EVPs on the Executive Committee. The five managers can either work really hard with 70 hour weeks at a personal opportunity cost of $200,000 in
> In an attempt to increase revenues and profits, a firm is considering a 4 percent increase in price and an 11 percent increase in advertising. If the price elasticity of demand is −1.5 and the advertising elasticity of demand is +0.6, would you expect an
> The demand function for bicycles in Holland has been estimated to be: where Y is income in thousands of euros, Q is the quantity demanded in units, and P is the price per unit. When P = 150 euros and Y = 15(000) euros, determine the following: a. Price
> If the marginal revenue from a product is $15 and the price elasticity of demand is −1.2, what is the price of the product?
> The Potomac Range Corporation manufactures a line of microwave ovens costing $500 each. Its sales have averaged about 6,000 units per month during the past year. In August, Potomac’s closest competitor, Spring City Stove Works, cut its price for a closel
> Despite a decade of subsidies and considerable success in Denmark, Germany, and Britain, renewable energy in the U.S. accounts for only 7 to 8 percent of total energy consumption. Hydroelectric power remains the most successful source of renewable energy
> Despite a decade of subsidies and considerable success in Denmark, Germany, and Britain, renewable energy in the U.S. accounts for only 7 to 8 percent of total energy consumption. Hydroelectric power remains the most successful source of renewable energy
> Despite a decade of subsidies and considerable success in Denmark, Germany, and Britain, renewable energy in the U.S. accounts for only 7 to 8 percent of total energy consumption. Hydroelectric power remains the most successful source of renewable energy
> Despite a decade of subsidies and considerable success in Denmark, Germany, and Britain, renewable energy in the U.S. accounts for only 7 to 8 percent of total energy consumption. Hydroelectric power remains the most successful source of renewable energy
> Airlines face highly cyclical demand; American reported profitability in the strong expansion of 2006–2007 but massive losses in the severe recession of 2008–2009. Demand also fluctuates day to day. One of the ways American copes with random demand is th
> Airlines face highly cyclical demand; American reported profitability in the strong expansion of 2006–2007 but massive losses in the severe recession of 2008–2009. Demand also fluctuates day to day. One of the ways American copes with random demand is th
> Specific Electric Co. asks you to implement a pay-for-performance incentive contract for its new CEO and four EVPs on the Executive Committee. The five managers can either work really hard with 70 hour weeks at a personal opportunity cost of $200,000 in
> Airlines face highly cyclical demand; American reported profitability in the strong expansion of 2006–2007 but massive losses in the severe recession of 2008–2009. Demand also fluctuates day to day. One of the ways American copes with random demand is th
> The setting is a Ralph Lauren outlet store, and the product line is Polo golf shirts. A product manager and the General Manager for Outlet Sales are analyzing the discounted price to be offered at the outlet stores. Let’s work through t
> The setting is a Ralph Lauren outlet store, and the product line is Polo golf shirts. A product manager and the General Manager for Outlet Sales are analyzing the discounted price to be offered at the outlet stores. Let’s work through t
> The setting is a Ralph Lauren outlet store, and the product line is Polo golf shirts. A product manager and the General Manager for Outlet Sales are analyzing the discounted price to be offered at the outlet stores. Let’s work through t
> The setting is a Ralph Lauren outlet store, and the product line is Polo golf shirts. A product manager and the General Manager for Outlet Sales are analyzing the discounted price to be offered at the outlet stores. Let’s work through t
> The setting is a Ralph Lauren outlet store, and the product line is Polo golf shirts. A product manager and the General Manager for Outlet Sales are analyzing the discounted price to be offered at the outlet stores. Let’s work through t
> The setting is a Ralph Lauren outlet store, and the product line is Polo golf shirts. A product manager and the General Manager for Outlet Sales are analyzing the discounted price to be offered at the outlet stores. Let’s work through t
> The setting is a Ralph Lauren outlet store, and the product line is Polo golf shirts. A product manager and the General Manager for Outlet Sales are analyzing the discounted price to be offered at the outlet stores. Let’s work through t
> The setting is a Ralph Lauren outlet store, and the product line is Polo golf shirts. A product manager and the General Manager for Outlet Sales are analyzing the discounted price to be offered at the outlet stores. Let’s work through t
> The setting is a Ralph Lauren outlet store, and the product line is Polo golf shirts. A product manager and the General Manager for Outlet Sales are analyzing the discounted price to be offered at the outlet stores. Let’s work through t
> Specific Electric Co. asks you to implement a pay-for-performance incentive contract for its new CEO and four EVPs on the Executive Committee. The five managers can either work really hard with 70 hour weeks at a personal opportunity cost of $200,000 in
> Virginia is an accountant for a global CPA firm. She is being temporarily transferred from the Raleigh, North Carolina, office to Tokyo. She will leave Raleigh on October 7, 2017, and will be out of the country for four years. She sells her personal resi
> Using the information from Problem 54, calculate the amount of tax liability in each instance. Data from question 54: Determine taxable income in each of the following instances. Assume that the corporation is a C corporation and that book income is be
> Reid’s personal residence is condemned on September 12, 2017, as part of a plan to add two lanes to the existing highway. His adjusted basis is $300,000. He receives condemnation proceeds of $340,000 on September 30, 2017. He purchases another personal r
