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In forecasting exchange rates, many practitioners use either the Interest Rate Parity, Purchase Price Parity, Asset Approach, or the Balance of Payments Approach. (A) Please define and explain the above four methods of forecasting exchange rates, including their theoretical relevance. (B) If you were a CFO, what forecasting method(s) would you use for the annual budget and why? (C) If you were a CFO, what forecasting method(s) would you use for the five-year plan and why?

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Tod Thiel
Tod ThielLv2
29 Sep 2019

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A. )

Several methods are available to deal with the issue of differing levels of project risk. These include risk adjusted discount rates, simulation analysis, scenario analysis, and break-even analysis. Which of these would you favor if you were CFO of a corporation? Why? Which of the techniques seems like it would yield the most accurate results? Which would be easiest to implement? Elaborate and Explain please

B.)

A corporation’s policy manual states: "Our company’s policy is to use 12%, which is our cost of capital, as the discount rate for NPV calculations on all projects considered for investment." What is wrong with this policy? In what types of projects will this company overinvest? In what types of projects will it underinvest? Elaborate and Explain please

You have been named the Chief Financial Officer (CFO) of a two year old company, SUNY Analytics. Financials have been prepared by a bookkeeper. As CFO, you responsible for the preparation of accurate financials, analysis and review of the financials before they are released and communication of the results of your company to banks, investors, creditors and the government, as necessary.

Please complete the following:

What are the four major financial statements and, in depth, discuss their purpose.

If an outsider is looking for the path of growth of your company, where would you direct them to look? What financials and financial information would they look at?

If an outsider was looking for the liquidity of the company, what financials should be looked at and which ratios should be calculated?

What is the purpose of a budget and what are the components?

Why is it important for the CFO and his/her staff to analyze variances of budget to actual or forecasted to actual amounts, and investigate reasons for significant variances on a timely basis (whether it be monthly, quarterly and/or annually)?

The quarterly or annual analysis of variances may be useful, but to wait that long could be disastrous for the company. Why?

What are the elements of an annual report issued to shareholders; and what is required by GAAP in an annual report and what can be added by management?

Review the Tootsie Roll, Hershey or a researched annual report. What are the most important types of notes to the financials that must be included in every report, and explain.

Why are the summary of earnings and financial highlights included?

What is the purpose of a letter to shareholders?

Why is management’s discussion and analysis included in the annual report?

The Securities Exchange Commission (SEC) requires the Chief Financial Officer and the Chief Executive Officer of a publicly traded company to formally “sign off” on the annual report under the provisions of the Sarbanes-Oxley Act. Why?

What events necessitated the passage the Sarbanes-Oxley Act?

You may use your financial calculator or excel for calculations but be sure to show your work (i.e. rate, periods, payments, etc.). For the amortization schedules be sure to print the schedule so all columns fit on one page.

2. Malcolm Mitchell is the sole proprietor of Mitchell Enterprises. He is exploring the option of going public because his company is growing exponentially. The consulting firm that is reviewing her financials has questioned whether Mitchell’s CFO is technically competent enough to be the CFO of a publically traded company, as they believe he made several bad financial decisions. The two situations, which the firm brings to Malcom’s attention, are as follows:

a) Mitchell purchased the building in which their corporate office is housed on 1/1/10 for $7,800,000. They put down $2,000,000 cash and had to borrow the remaining amount at 8% over a 20-year term. At the time of the purchase, they had the option to lease the building. The 20-year lease would begin on 1/1/10, and called for payments of $600,000 beginning on that date for the first 10 years and payments of $500,000 beginning on 1/1/20 for the remaining 10 years of the lease. Mitchell had the option to purchase the building for $1 on December 31, 2029 at the end of the lease. Did the CFO make the right decision by purchasing the building? Why or why not? Show your work.

b) This year, the company sold land for a non-interest bearing note. The note calls for annual payments of $10,000 for 4 years. The payments will begin one year from the date of the sale. An appropriate rate of interest for this type of note is 6%. The land had an original purchase cost of $25,000. The CFO told the accounting department to record the sale as follows:

(debit) Notes Receivable $40,000

(credit) Land $25,000

(credit) Gain on Sale of Land $15,000

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