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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