Exam Code: Return this exam question paper to your invigilator at the end of the exam before you leave the classroom. Page 1/6

Transcription

1 Exam Code: Return this exam question paper to your invigilator at the end of the exam before you leave the classroom. Page 1/6 Attachment A: Attachment B: Attachment C: Express Courier Study Ben & Jerry Ltd. Financial Statements Legal Background to A Letter From Prison THIS EXAMINATION CONSISTS OF 6 PAGES PLEASE ENSURE THAT YOU HAVE A COMPLETE PAPER THE UNIVERSITY OF BRITISH COLUMBIA FACULTY OF LAW FINAL EXAMINATION APRIL 2016 LAW INTRODUCTION TO CORPORATE FINANCE: FINANCIAL ACCOUNTING IN LEGAL PRACTICE Professor King TOTAL MARKS: 100 TIME ALLOWED: 2.5 HOURS and 15 minutes reading time ******************* NOTE: 1. This is an oren book examination, and candidates may refer only to course material. Candidates may use a calculator during the exam. 2. ANSWER ALL QUESTIONS. THIS EXAMINATION CONSISTS OF 4 SECTIONS AND 13 QUESTIONS April 2016 Law 465.doc

2 Page 2/6 LAW 465 SectIon 1 ValuatIon Marks 5 Question 1 The professional valuator who spoke to our class said my valuations are always wrong. a) What do you think he meant? b) What is the goal of a valuator when valuing a business? Explain. 5 Question 2 When valuation of a company is completed, the income from the business is normalized. Explain why this is done and provide examples. 5 Question 3 a) Explain the purpose of a multiplier when valuing a business. b) What are some of the critical factors considered when selecting a multiplier? c) Also, explain why your suggested factors are important considerations for a valuator. 5 Question 4 What is goodwill? Explain the difference between personal goodwill and commercial goodwill. April 2016 Law 465.doc

3 Page 3/6 LAW 465 Section 2 Accounting Marks 6 Question 1 Provide three legal situations where it would be useful for a lawyer to understand financial statements and why. 6 Question 2 An external accountant prepares the financial statements of a business depending on the type of engagement. What are the three types of engagements and the differences between them? 8 Question 3 Maria is the sole owner of a manufacturing business and she wants to know if the business can pay her a dividend at the end of the month. What type of financial statement(s) will Maria need to review to make this decision and why? 15 Question 4 (Please See Attachment A). the following questions: Please carefully read the case study and answer a) Draw a simple Income Statement for Angela s company for each month. Revenue Courier Costs Phone Costs Profit April May June July April 2016 Law 465.doc

4 Page 4/6 b) What is happening to Angela s cash position each month? What happens at the end of July? Cash beginning of month Cash collected in month Cash business spent in month Living expenses End of month Cash position April May June July c) What happens if Angela runs out of cash? What can she do? April2016 Iaw 465.doc

5 Page 5/6 LAW 465 SectIon 3 FinancIal Ratios Marks 10 Question 1 Ben and Jerry Services Ltd. ( Ben & Jerry Ltd. ) would like to expand its services. Currently, Ben & Jerry Ltd. has a credit facility with ABC Bank in the amount of $400,000. The interest rate is 10%. The lender, ABC Bank, requires certain financial covenants as part of the financing agreement. Ben & Jerry Ltd. has agreed to ensure the following ratios: Current Ratio of 5:1 (assume all current assets and liabilities are included) Interest Coverage Ratio of 7:1 Complete an analysis of the financial statements to determine if Ben & Jerry Ltd. is in compliance with each covenant. (Please See Attachment B). ABC Bank was unhappy with the 2014 current ratio and wanted it improved by 50%. Did they achieve it? 10 Question 2 The CEO of Ben & Jerry Ltd. has approached ABC Bank to borrow a further $200,000 under the credit facility. What additional ratios should ABC Bank use to determine the credit risk of the company? Please provide two and calculate those ratios and indicate whether ABC Bank should increase the amount of the loan. April 2016 Law 465.doc

6 Page 6/6 LAW 465 Section 4 Accounting and Ethics Please answer the following questions based on the case study provided in class A Letter From Prison and Attachment C Legal Background of A Letter from Prison. Marks 5 Question 1 How serious were Stephen Richard s actions? Why? 10 Question 2 Suppose you were placed in Stephen Richard s position at Computer Associates and were under pressure to extend the fiscal quarter. a) Would it matter to you what competitors were doing? b) How would you handle the situation differently? c) What would be the expected consequences? 10 Question 3 Richards describe how difficult it is to operate in the gray. Richards wanted more framework. Do you agree or disagree? Explain. END OF EXAMINATION April 2016 Law 465.doc

7 ATTACHMENT A Case Express Courier Something is going wrong, but I don t know what it is, Angela was telling her friend John. Business seems to be going really well, but I must be wasting my money somehow. Our clients are very happy, and we keep getting more orders, but I seem to be going broke! Angela had started a downtown courier company that serves businesses in the downtown core. Businesses often needed to ship files and documents back and forth between lawyers, bankers and other business people downtown. These documents often needed original signatures which had to go back and forth several times and often immediately. Mail services, even over night express, would be too slow for many deals. Instead of paying staff high salaries to transfer the documents, business relied on couriers transferring the materials either on foot or by bike. Are you making a good profit on the contracts? How do you have your business set up? asked John. It s pretty basic. I saved up about $6000 over the last couple of years while I was working at school. Angela replied. The business required me to get a computer and a number of cell phones. I got a good deal on a used computer, and bought about 5 cell phones for $1000. That was all I needed to start things up. I started with one delivery person and now I have two. The salaries are easy, as my people receive 50% of whatever the sales are for what they delivered. I have to pay them at the end of each month for what they delivered. And how have your sales been? John asked. So far great! Angela stated. In April we made $1,500 in sales. We have doubled our sales every month and now that we are in July, I think we will finish with $12,000 in sales. The only other costs are cell phone charges, and they have doubled each month as well from what they started at as $100 in April. I pay one month in advance, because I can t afford to have them go down. They are vital for the business. That is how the clients call us, and that is how I instruct my delivery people. Do you think your deliverers are stealing money? John inquired. No, they can t. Angela answered. 1 invoice my clients at the end of the month for all of the service we provided that month, and they pay me directly within 30 days. All of my clients pay as well. I had $5,000 in savings at the beginning of April when we started, and I don t think my personal expenses went up. I m trying to live lean, and spend about $1,000 per month. The way things are going though, it looks like I m going to run out of money this month. I ve been dipping into the savings to keep the business going. April 2016 Law 465.dcc

8 ATTACHMENT B ASSETS Current Assets: BEN AND JERRY SERVICES LTD. BALANCE SHEET December 31, $ $ Cash 2,000 35,782 Accounts receivable 370, ,524 Inventories 297, ,963 Prepaid expenses and deposits 2,558 1,102 Due from related company 62,535 18,461 Total current assets 735, ,832 Property and equipment 829, ,946 Intellectual property 15,000 17,000 1,580,597 1,480,778 LIABILITIES AND SHAREHOLDERS EQUITY Current LIabilitIes Accounts payable and accrued liabilities 90, ,571 Income taxes payable 1,126 18,261 Current portion of obligations under capital lease 10,531 9,930 Other liabilities 8,694 - Total current liabilities 110, ,762 Obligations under capital lease 4,129 16,034 Long term debt 400, ,063 Commitments and Contingencies 514, ,859 Shareholders equity Share capital Common shares 150, ,000 Preferred shares Retained earnings 915, ,861 1,065, ,919 1,580,597 1,480,778

9 ATTACHMENT B REVENUE Sales Cost of sales Gross margin Other income (loss) BEN AND JERRY SERVICES TD STATEMENT OF OPERATIONS AND RETAINED EARNINGS December 31, $ 3,903, ,624 1,074,927 (4,737) 1,070, $ 3,702,054 2,683,858 1,018,196 3,358 1,021,554 EXPENSES Advertising and promotion Depreciation and amortization Bad debts (recovery) Insurance Other Interest on long term debt Materials and supplies Meals and entertainment Office and general Professional fees Rent and property taxes Repairs and maintenance Salaries and benefits Utilities Vehicles Income before Income taxes Income taxes Net Income for the year Retained earnings, beginning of year DMdends paid 14,616 72,186 3,865 6,423 1,647 40,000 4,863 2,000 10,630 10,163 29, , ,216 43,003 3, , ,287 41, , ,861 (30,000) 915,597 5,889 69,245 (2,412) 6,842 1,125 42,000 3,744 2,000 9,834 6,165 26,190 16, ,765 39,011 3, , ,680 51, , ,080 Retained earnings, end of year 717,861

10 ATTACHMENT B OPERATING ACTIVITIES BEN AND JERRY SERVICES LTD. STATEMENT OF CASH FLOWS December 31, $ $ Net Income for the year 227, ,481 Add items not affecting cash Amortization of property and Equipment 72,186 69,245 Change In non-cash operating working capital (123,303) (245,435) Cash provided by operating activities 176, ,291 FINANCING ACTIVITIES Long term debt principal payments (20,063) (24,088) Interest paid (40,000) (42,000) Capital lease repayments (10,109) (9,362) Dividend paid (30,000) - Cash used in investing activities (100,145) (75,450) INVESTING ACTIVITIES Advances to related company (44,074) (14,351) Purchase of property and equipment (66,182) (5,397) Cash used in financing activities (110,256) (19,748) Net increase (decrease) in cash during the year (33,782) 10,093 Cash, beginning of year 35,782 25,689 Cash, end of year 2,000 35,782

11 ATTACHMENT C Legal Background for A Letter From Prison The following additional legal background may be helpful in forming your responses to the questions. A total of seven managers from Computer Associates were indicted. All were alleged to have participated in the backdating of contracts as well as obstructing the investigation into the matter. These individuals were: - Sanjay - Ira - Steven - Stephen - Lloyd - David - David Kumar CEO & Chairman Zar Chief FinancialO. Officer Woghin SVP, Richards Silverstein General Counsel Global Head of Sales SVP, SVP, Finance Rivard Finance Kaplan Division VP, Finance VP In the SEC allegation against Richards, three charges were made against him. The charges along with relevant examples from the SEC allegations are: 1. Richards Participated in the Extended Quarters Practice Richards coordinated with the other CA executives to extend quarters so that CA could obtain the additional contract revenue it needed to meet Wall Street earnings estimates, and he knew that these actions inflated CS s stock price. Many contracts came in five or more business days after the end of quarter. He knew that some clients signed after quarter end. 2. Richards Pressured CA s Sales Force to Obtain Contracts After Quarter End, Knowing that CA Would Recognize Revenue from Them in the Prior Quarter Richards ordered his sales force to bring in additional revenue after quarter end so that CA could count it for the prior quarter and meet analysts estimates. Richards closely monitored contract negotiations and knew when they were taking place after quarter end. 3. Richards Obstructed the Investigation of CA s Outside Counsel, CA s Audit Committee, the Commission and Other Governmental Agencies Richards made false statements to the government about key facts during the government s investigation. Specifically, Richards falsely denied knowing that his sales force s practice of obtaining contracts with false signatures dates resulted in CA recording revenue in the incorrect fiscal quarter. The investigation of the backdating charges was difficult because there was significant information asymmetry between senior management and the board. In particular, executives sought to hide this practice from board members. The record keeping at CA was disorganized, which further hindered the investigation.