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Question 1-3 solution Marginal means additional. Marginal cost benefit analysis is used to evaluating the project. Instead of considering total cost and total benefit like conventional system in this approach only marginal cost and benefit analysed. It means if a project is provide net marginal benefit then it may be an acceptable project. Calculation of Marginal cost, Marginal benefit and net benefit. Particulars Amount Present Value of 400,000 Existing Benefit (a) Present Value of 560,000 Proposed benefit (b) Marginal Benefit ( if 160,000 robotics replaced) (b-a) Existing Cost ( c) - Marginal cost if project 220,000 accepted (d ) Marginal Cost (d-c) 220,000 Cash Flow from ale of 70,000 existing robotics Net Benefit ( Marginal benefit – Marginal cost + opportunity cost 10,000 (160,000+70,000-220,000) through sale of existing robotics) Answer Marginal Benefit-$ 160,000 Marginal Cost- $ 220,000 Net benefit - $ 10,000 Conclusion- As replacement showing net positive figure hence new robotics should be installed after sale of existing robotics. Question 4 solution Ken should recommend (B) : replace the existing robotics because the net profit is positive Question 5 solution Other factors that should be considered include: A,C and D Question 6 solution he principle of Shareholder wealth Maximization (SWM) indicates that the ultimate operating goal and the immediate purpose of a public enterprise should be maximizing return on equity capital. Managers and investors should view SWM on a narrow perspective. The question of whether the enterprise objective can be a strict emphasis on SWM or should recognize significant differences between the operating goal for managers and investors and the social purpose of the public enterprise rests at the intersection of three literatures. SWM is a standard assumption in economics and finance literature. This SWM operating goal is expected to yield the most socially efficient allocation of capital. Literature on business ethics, corporate social responsibility, and stakeholder theory highlights significant differences between an operating goal of SWM and the ultimate social purpose of the public enterprise. Corporate law addresses duties, responsibilities, and rights of both financial and nonfinancial stakeholders. The business judgment rule and in various states corporate constituency statutes permit relaxation in SWM as an operating goal in favor of stakeholder and social considerations in the United States. The view that the corporate objective is shareholder wealth maximization (SWM) is a prescriptive, standard assumption in the economics and finance literature. There is reason to think that markets in which stock prices are set are not always perfect. The principle does not correspond with the actual legal duties of officers and directors. There are objections to strict SWM from business ethics and corporate law, corporate social responsibility, and stakeholder theory. The corporate objective in principle is better understood as constrained maximization and in practice it is constrained wealth seeking. The corporate objective is constrained by three strategic considerations bearing on management choices. Question 7 solution The Securities Exchange Act of 1934 limits, but does not prohibit, corporate insiders from trading in their own firm's shares. The ethical issues that might arise when a corporate insider wants to buy or sell shares in the firm where he or she works is that they might misuse the information and also get an upper hand over those that do not have the option of getting access to the information that is known only to these insiders. In this way the employees may make an unfair profit and this can result in losses to others trading in the market. Moreover the traders may lose trust in such companies which allow insider trading and may then not want to trade in such shares, thus resulting in their devaluation. On the other hand employees may leak out information and make profits out of it and at times this information may also be fake. In this way a lot of manipulation is possible and this is harmful for any company. It will only lead to mistrust and false benefits among traders. The fair trading practice and principle is greatly hampered thus leading to several ethical issues when a corporate insider wants to buy or sell shares in the firm where he or she works. Question 8 solution The Sarbanes-Oxley Act (SOX) came into force in July 2002 and introduced major changes to the regulation of corporate governance and financial practice. It is named after Senator Paul Sarbanes and Representative Michael Oxley, who were its main architects, and it set a number of non-negotiable deadlines for compliance. SOX Section 404: Management Assessment of Internal Controls All annual financial reports must include an Internal Control Report stating that management is responsible for an "adequate" internal control structure, and an assessment by management of the effectiveness of the control structure. Any shortcomings in these controls must also be reported. In addition, registered external auditors must attest to the accuracy of the company management's assertion that internal accounting controls are in place, operational and effective Section 404 places a requirement that management and auditors establish internal controls and reporting methods on the adequacy of those controls. Effect of implemenatation of provisions of Section 404:a) Improved quality of the internal control structure. b) Improved quality of the company’s financial reporting. c) improved ability of the company to prevent and detect fraud. Conclusion:- The implemenatation of Provisions of section 404 will definitely enhance the quality of financial reporting and increase investor confidence. Question 9 solution As per this case, If financila manager is following the directives and inform the public, it will be considered as more ehical practice as he is providing the transparency to investors and public by speaking the actual scenario of their financila figures. Downsides: It would inform investors regarding the expected profits to be lower down, which ultimately impacts the pricing of the shares of the company.It can also affect companies drawing power from the banks debt. Upside: With this announcement, investor trust would increase in the company and that would help the share prices to be stable after correct valuation. This will help the company in longer term. Question 9 solution Question 10 solution Question 11 solution I dont believe that this is acceptable practice because the bonds are rated at the time they are issued, and both bonds and their issuers are periodically reevaluated to see if a ratings change is warranted. Bond ratings are important not only for their role in informing investors, but also because they affect the interest rate that companies and government agencies pay on their issued bonds. Bond rating involves lot of cost for the raters and hence they need some type of benefit to analyze the bond and to get the profits. Credit agencies or Bond rating agencies should be impartial and have absolutely no links with the company. Every credit analyst will offer a slightly different approach to evaluating a company's credit worthiness; however, when comparing bonds on these types of scales, it's a good rule to look at whether the bonds are either investment grade or non-investment grade. The ratings of the bond over time also have major effects on the marketability of the bonds in secondary market, the ability for companies to borrow in other markets, the ability to issue stock, the analysts view the level of debt on the balance sheet and a major psychological aspect that how a company is viewed so it very important activity for both point of view i.e for the investor and for the company so the practice of bond rating agency, To recoup those costs, some bond rating agencies have tied their ratings to the purchase of additional services. is not acceptable practice in my point of veiw question 12 solution B. maximize profits Reason: A business cannot survive in the long term without generating profits. All the other things like generation of efficiency, cost minimization, maximization of stock price are useless if they are not converted in profit maximization. If the company will work with the aim of profit maximization then cost minimization, improvement in efficiency, increase in stock price will automatically achieved. Question 13 solution. C. market efficiency Reason: Efficient market hypothesis shows that stock prices reflect all known informations. In the present case stock prices responding instantly to the release of new information. Question 14 solution. C. Super strong Reason: All the other three are form of efficient market hypothesis. Semi strong, weal form and strong form are the forms of efficiency of market.
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