RELS 2610 Final: Unit 5 Complete Lecture Notes

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raspberrymosquito490

14 Feb 2019

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Much of what we claim to know in any field of study we didn"t figure out on our own: matters of belief. A particular way of knowing that includes more than verifying the data. Determining the veracity of any source requires value judgement about the source and. You don"t believe everything you read on the internet: you must do other research and consult with other sources to ensure that what you are reading online is appropriate to believe, however, we still can"t be sure. If we only acted on what we know was certain, we wouldn"t do very much. Internet creates difficulties with respect to sorting out what sources to trust, the problem of who to believe. Depends on who told you what: damage can be done by gossip, but it can also be good by passing on important information.

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In March 2015 the management team of Londonderry Air (LA) met to discuss a proposal to purchase five short haul aircraft at a total cost of $25 million. There was general enthusiasm for the investment, and the new aircraft were expected to generate an annual cash flow of $4 million for 20 years.

The focus of the meeting was on how to finance the purchase. LA had $20 million in cash and marketable securities (see table), but Ed Johnson, the chief financial officer, pointed out that the company needed at least $10 million in cash to meet normal outflow and as a contingency reserve. This meant that there would be a cash deficiency of $15 million, which the firm would need to cover either by the sale of common stock or by additional borrowing. While admitting that the arguments were finely balanced, Mr. Johnson recommended an issue of stock. He pointed out that the airline industry was subject to wide swings in profits and the firm should be careful to avoid the risk of excessive borrowing. He estimated that in market value terms the long-term debt ratio was about 59% and that a further debt issue would raise the ratio to 62%.

Mr. Johnson's only doubt about making a stock issue was that investors might jump to the conclusion that management believed the stock was overpriced, in which case the announcement might prompt an unjustified selloff by investors. He stressed therefore that the company needed to explain carefully the reasons for the issue. Also, he suggested that demand for the issue would be enhanced if at the same time LA increased its dividend payment. This would provide a tangible indication of management's confidence in the future.

These arguments cut little ice with LA's chief executive. "Ed," she said, "I know that you're the expert on all this, but everything you say flies in the face of common sense. Why should we want to sell more equity when our stock has fallen over the past year by nearly a fifth? Our stock is currently offering a dividend yield of 6.5%, which makes equity an expensive source of capital. Increasing the dividend would simply make it more expensive. What's more, I don't see the point of paying out more money to the stockholders at the same time that we are asking them for cash. If we hike the dividend, we will need to increase the amount of the stock issue; so we will just be paying the higher dividend out of the shareholders' own pockets. You're also ignoring the question of dilution. Our equity currently has a book value of $12 a share; it's not playing fair by our existing shareholders if we now issue stock for around $10 a share.

"Look at the alternative. We can borrow today at 6%. We get a tax break on the interest, so the after-tax cost of borrowing is .65*6 = 3.9%. That's about half the cost of equity. We expect to earn a return of 15% on these new aircraft. If we can raise money at 3.9% and invest it at 15%, that's a good deal in my book.

"You finance guys are always talking about risk, but as long as we don't go bankrupt, borrowing doesn't add any risk at all. In any case my calculations show that the debt ratio is only 45%, which doesn't sound excessive to me.

"Ed, I don't want to push my views on this after all, you're the expert. We don't need to make a firm recommendation to the board until next month. In the meantime, why don't you get one of your new business graduates to look at the whole issue of how we should finance the deal and what return we need to earn on these planes?"

Evaluate Mr. Johnson's arguments about the stock issue and dividend payment as well as the reply of LA's chief executive. Who is correct? What is the required rate of return on the new planes?

Balance sheet
bank Debt	50	cash	20
other current liabilities	20	other current assets	20
10% bond, due 2032*	100	Fixed assets	250
Stockholders' equity**	120
Total liabilities	290	Total Assets	290
Income statement
Gross Profit	$57.5
Depreciation	20.0
Interest	7.5
Pretax profit	30.0
Tax	10.5
Net profit	19.5
Dividend	6.5

*the yield to maturity on LA debt is currently 6%

**LA has 10 million shares outstanding, with a market price of $10 a share. LA's equity beta s estimated at 1.25, the market risk premium is 8%, and the Treasury bill rate is 3%

Local 635 represents kitchen workers at hotels in several southern cities. Part of their labor agreement states that workers âshall receive one free meal per shift up to a cost of $12, with any cost over $12 being deducted from wages paid to said employee.â

A labor dispute arose at the Riverside Hotel shortly after it was opened in June. Kitchen workers who ate dinner on the late shift found that their wages were reduced by $10 for each meal they consumed at the hotel during their dinner break. Josh Parker, a line cook, stated the widely held belief of the workers. âThereâs no way these dinners cost the Riverside Hotel $12 to make, let alone $22. This is just another case of management trying to rip us off. Take last night. I had the prime rib dinner. The piece of meat cost about $7 and the salad less than $1. Thatâs only $8 in total. Really, there arenât any other costs to speak of. The cook, well, heâs going to be working in the kitchen and getting paid for 8 hours whether he makes my meal or not. This claim that my meal cost $22 is baloney!â

Management of the Riverside Hotel sees the situation differently. Take the case of Joshâs dinner. In presenting the hotelâs case to a labor arbitration board, Sandy Ross, manager of the hotel, explained, âLook, that dinner goes for $32 on the menu so assigning a cost of $22 represents a very good value to the kitchen workers. The contention that the meal only costs $8 is nonsense. True, the meat costs $7 and the salad ingredients cost $1, but thereâs also the labor costs related to preparing the meal and the numerous over- head costs, like the cost of the oven that the prime rib is cooked in. That oven cost more than $20,000. And thereâs heat, light, power, etc. Each meal we prepare should be assigned part of these over- head costs. And donât forget that when the worker finishes his or her meal, someone has to clean up. That costs money too. When you add up all of these items, a prime rib dinner easily adds up to $22!â

a. List examples of costs at the Riverside Hotel that are variable, fixed, and sunk. Provide an example of an opportunity cost.

b. What is the source of conflict between labor and management? What changes would you recommend in the wording of the labor agreement?

rosetermite394

Your original post is due by Day 4 by 11:59 PM Central Time. Your responses to at least three other original posts are due by Day 6 by 11:59 PM Central Time. Posts should take place on multiple calendar days throughout the week to generate conversation among students and the instructor. Posts are expected to be at least 150 words in length, well-written, APA formatted, meaningfully add to the conversation about the given topic, and incorporate material from the text and other sources into your original post and responses. Ethics and the Manager Tom Kemper Case Study Using the Tom Kemper Case Study, your textbook, and at least one outside source, share with your peers what you believe Tom Kemper should do. Explain your thought process in complete sentences. Include proper APA citations for the sources you use.

Discussion from tom Kemper and I need to make a question about waht I think of the Tom Kemper report.

Tom Kemper is the controller of the Wichita manufacturing facility of Prudhom Enterprises, Inc. The annual cost control report is one of the many reports that must be filed with corporate headquarters and is due at corporate headquarters shortly after the beginning of the New Year. Kemper does not like putting work off to the last minute, so just before Christmas he prepared a preliminary draft of the cost control report. Some adjustments would later be required for transactions that occur between Christmas and New Yearâs Day. The following is a copy of the preliminary draft report, which Kemper completed on December 21:

Wichita Manufacturing Facility Cost Control Report December 21 Preliminary Draft
	Actual Results	Flexible Budget	Spending Variances
Labor-hours	18,000	18,000
Direct labor	â$ââ 326,000	$ââ 324,000	$ 2,000 U
Power	19,750	18,000	1,750 U
Supplies	105,000	99,000	6,000 U
Equipment depreciation	343,000	332,000	11,000 U
Supervisory salaries	273,000	275,000	2,000 F
Insurance	37,000	37,000	0
Industrial engineering	189,000	210,000	21,000 F
Factory building lease	60,000	ââ 60,000	0
Total expense	$ 1,352,750	$1,355,000	$ 2,250 F

Melissa Ilianovitch, the general manager at the Wichita facility, asked to see a copy of the preliminary draft report. Kemper carried a copy of the report to her office where the following discussion took place:

Ilianovitch: Wow! Almost all of the variances on the report are unfavorable. The only favorable variances are for supervisory salaries and industrial engineering. How did we have an unfavorable variance for depreciation?

Kemper: Do you remember that milling machine that broke down because the wrong lubricant was used by the machine operator?

Ilianovitch: Yes.

Kemper: We couldnât fix it. We had to scrap the machine and buy a new one.

Ilianovitch: This report doesnât look good. I was raked over the coals last year when we had just a few unfavorable variances.

Kemper: Iâm afraid the final report is going to look even worse.

Ilianovitch: Oh?

Kemper: The line item for industrial engineering on the report is for work we hired Ferguson Engineering to do for us. The original contract was for $210,000, but we asked them to do some additional work that was not in the contract. We have to reimburse Ferguson Engineering for the costs of that additional work. The $189,000 in actual costs that appears on the preliminary draft report reflects only their billings up through December 21. The last bill they had sent us was on November 28, and they completed the project just last week. Yesterday I got a call from Laura Sunder over at Ferguson and she said they would be sending us a final bill for the project before the end of the year. The total bill, including the reimbursements for the additional work, is going to be â¦

Ilianovitch: I am not sure I want to hear this.

Kemper: $225,000

Ilianovitch: Ouch!

Kemper: The additional work added $15,000 to the cost of the project.

Ilianovitch: I canât turn in a report with an overall unfavorable variance! Theyâll kill me at corporate headquarters. Call up Laura at Ferguson and ask her not to send the bill until after the first of the year. We have to have that $21,000 favorable variance for industrial engineering on the report.

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RELS 2610 Final: Unit 5 Complete Lecture Notes

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