The tendency of a stock's price to move up and down with themarket is reflected in its beta coefficient. Therefore, beta is ameasure of an investment's market risk, and is a key element of theCAPM. In this part of the project, you get financial informationusing Yahoo!Finance (found at http://finance.yahoo.com/ ) To find acompany's beta, enter the desired stock symbol and request a basicquote. Once you have the basic quote, select the "Key Statistics".Scroll down this page to find the stock's beta. In your initialresponse to the topic you have to answer all 5 questions. You areexpected to make your own contribution in a main topic as well asrespond with value added comments to at least two of yourclassmates as well as to your instructor. From Yahoo!Finance obtaina report on any two companies. 1.What are the betas listed for these companies? 2.If you made an equal dollar investment in each stocks whatwould be the beta of your portfolio? 3.If you made 70% of dollar investment in stock A, and 30% ofdollar investment in stock B, what would be the beta of yourportfolio? Please show your work. 4.Apply the Capital Asset Pricing Model (CAPM) Security MarketLine to estimate the required return on these two stocks.Assumptions and Data: Note that you will need the risk-free rateand the market risk premium. Assume a 5% market risk premium. Toget the current yield on 10-year Treasury securities go toFinance!Yahooâs (www.finance.yahoo.com) -click on Market Data -Bonds. You will use the current yield on 10-year Treasurysecurities as the risk-free rate to estimate the required rate ofreturn on stocks. 5.Compare the required return on these stocks calculated usingCAPM in question #4 against their historical return over the last52 weeks, found in the Yahoo!Finance - Key Statistics. Is there adifference between these returns? Is this a problem? Why is there adifference?

OneClass: The tendency of a stock's price to move up and down with themarket is reflected in its beta...

Complete one paragraph, profiling each company's business, including information such as brief histories, where each company is located, number of employees, the products each company sells, and so forth. Please reference any websites that you used for the profiles on the Bibliography tab.

Tootsie Roll Industries began in a small candy store in New York in 1896. Tootsie Roll is now headquartered in Chicago and primarily sells its products in the United States, Canada, and Mexico. According to Yahoo! Finance, Tootsie Roll has 2,000 full-time employees. Tootsie Roll sells the following branded candy: Tootsie Roll, Tootsie Roll Pop, Charms Blow Pop, Mason Dots, Andes, Sugar Daddy, Charleston Chew, Double Bubble, Razzles, Caramel Apple Pop, and Junior Mints. Tootsie Roll had 2014 net product sales of $539.9 million.

Hershey Company was founded by Milton S. Hershey in 1893 and is headquartered in Hershey, Pennsylvania. According to Yahoo! Finance, Hershey has 20,800 full-time employees. Hershey is famous for Good & Plenty, Hershey Bar, Hershey's Kisses, Hershey's Bliss, Reese's, Rolo, Twizzlers, Almond Joy, Kit Kat, and Ice Breakers. Hershey had net product sales of $7.4 billion for 2014.

Tootsie Roll			Hershey			Interpretation and comparison between the two companies' ratios (reading Chapter 13 will help you prepare the commentary)
						The comparison of the ratios is an important part of the project. A good approach is to briefly explain what the ratio tells us. Indicate whether a higher or lower ratio is better. Then compare the two companies on this basis. Remember that each ratio below requires a comparison.
		$ 1.05			$ 3.91


$264,621	=	4.11	$2,247,047	=	1.16
$64,459			$1,935,647


$198,962	=	36.9%	$3,336,166	=	45.0%
$539,895			$7,421,768


$63,298	=	11.7%	$846,912	=	11.4%
$539,895			$7,421,768


$340,933		5.2	$4,085,602		5.6
$66,118		times	$730,289		times


365	=	71	365	=	65
5.2		days	5.6		days


$539,895	=	12.9	$7,421,768	=	13.8
$41,987			$537,426

365	=	28.4	365	=	26.4
12.9		days	13.8		days


$539,895	=	0.60	$7,421,768	=	1.35
$899,398			$5,493,502


	=	7.0%		=	15.4%



$219,250	=	24.1%	$4,109,986	=	73.0%
$910,386			$5,629,516


$83,923	=	847.7	1,389,575	=	16.6
$99			83,532


$0.36	=	1.1%	$2.33	=	2.6%
$32.04			$90.32

$63,298	=	9.2%	$846,912	=	54.0%
$685,721			$1,567,791


	=	$78,065			$ 492,274
		$78,065		=


$30.65	=	29	$103.93	=	27
$1.05			$3.91

You all get the chance to play the role of financial analyst below. The summary should be a comparison of each company's performance for each major category of ratios listed below. Focus on major differences as you compare each company's performance. A nice way to conclude is to state which company you feel is the better investment and why.

Measuring Ability to Pay Current Liabilities: Tootsie Roll has the advantage for the current ratio. Tootsie Roll has $4.11 in current assets for every dollar in current liabilities, while Hershey has only $1.16 in current assets for every dollar in current liabilities.

Measuring Turnover: Hershey has the advantage for the inventory turnover and accounts receivable turnover ratios. Hershey turns over its inventory 5.6 times to Tootsie Roll's 5.2 times, and Hershey turns over its accounts receivable 13.8 times to Tootsie Roll's 12.9 times.

Measuring Leverage - Overall Ability to Pay Debts: Tootsie Roll has significantly less debt than Hershey as evidenced by Tootsie Roll's 24.1% debt-to-asset ratio as compared to Hershey's 73% debt-to-asset ratio. Tootsie Roll can cover its interest expense 847.7 times with income before interest and taxes, while Hershey can only cover its interest expense 16.6 times with their income before interest and taxes. Tootsie Roll has the advantage for each of these ratios.

Measuring Profitability: Hershey has the advantage for 4 of the 5 profitability ratios. Hershey has a significant edge in return on common stockholders' equity, with a 54% return on common stockholders' equity, as compared to Tootsie Roll's 9.2% return on common stockholders' equity. Hershey has a higher gross profit rate (45.0%â36.9%), while Tootise Roll has a higher net profit margin ratio (11.7%â11.4%). Hershey also has a significant advantage for asset turnover (1.35â.60) and rate of return on total assets (15.4%â7.0%).

Analyzing stock as an investment: Hershey returns a 2.6% dividend yield to its investors, while Tootsie Roll's yield is 1.1%. Hershey has positive free-cash flow of $492.2 million, whereas Tootsie Roll has positive free-cash flow of $78.1 million. Free-cash flow can be used to undertake acquisitions, pay additional dividends, pay down debt, or buy back stock.

Conclusion: Tootsie Roll is the safer investment when you examine the ability to pay current liabilities and overall liabilities, but Hershey has the advantage for the turnover and profitability ratios. For the conservative investor, Tootsie Roll looks like the way to go because of its strong current and times interestâearned ratios. For the growth-oriented investor, Hershey is the way to go because of its stronger profitability ratios and large amount of free-cash flow.

BACKGROUND INFORMATION

Wallace & Davey Partners, Chartered Accountants is a mediumsize accounting firm located in Auckland with 4 audit partners, 7business advisor partners and 4 tax partners. The firm has beenappointed to audit Cool and Cute Children Fashion Ltd for the yearended 31 December 2016. The former auditors have been rotated offthe client. The engagement partner is Patrick Wallace, and you arethe audit manager assigned to this client. Your firm does not haveexperience in children fashion industry, but Wallace thinks it is agood opportunity to learn about the industry. The fee for thefinancial audit of Cool and Cute is $150,000, which is about 16% oftotal audit fees your firm generate. The company would also requireadvice on taxation and treasury. Since this is a first time audit,you accompanied Wallace to meet the senior management of theclient. The following is a summary of your notes from theinterviews with senior management of Cool and Cute ChildrenFashion.

NOTES FROM CLIENT INTERVIEW: T

he company profile

Cool and Cute Children Fashion is an Auckland companyincorporated in 1990. It was founded by Sally Hall, a formerchildrenswear buyer, and a mum. Hall spotted a gap in the marketfor quality and fashionable childrenswear and started the brandwith a mail order catalogue. Hallâs mail order catalogue was verypopular and soon after she opened the first Cool and Cute retailstore. By 1994, Cool and Cute headed into Australia as a mail ordercatalogue, opening its first Australian store three years later.Cool and Cute adapted to ecommerce in 2001, launching atransactional website to service its Australasian markets. Cool andCuteâs rise seemed unstoppable in the early 2000s. It secured itsfirst US wholesale partner Nordstrom in 2002, and in 2003 addedAustralian department store David Jones as a distribution channel.In 2004 it listed on the NZ stock exchange and opened franchisepartner stores across the Middle East. Retail stores in the US,franchises in Singapore, Malaysia, Indonesia, South Africa andPakistan followed, along with the companyâs first ecommerce websitein 2006. Around that time, the founder Hall stepped down from theBoard, leaving the directors to find a new managing director. Sincethen, the company has changed three Managing Directors. The fastexpansion of Cool and Cute was heavily financed through debts,which contributed to a highly geared financial position. It createdpressure for the company in serving the high level of debts. Thecompanyâs expansion ceased in 2007 and its shares price peaked inJanuary 2007 at $4.95 per share. By November 2016, the share pricedropped by 60% to $1.98. As of 2015, the company closed its storesin nearly all international markets, with just 92 stores remainingacross Australia, New Zealand and Ireland. Market commentatorsbelieve that the deterioration of Cool and Cuteâ financialperformance were largely because its inability to sustain the rapidglobal expansion. 4 Despite the highly competitive retail market,the core retail businesses in New Zealand and Australia haveperformed well in the current financial period and progress hasbeen made to improve stock efficiency. Despite the difficulties inperformance, the new Managing Director Neil Jenkins, who wasappointed in June 2015, is confident that the company can be turnedaround because the brand is still strong and well recognised. Thecompany also has reduced net banking debt by $20 million, and itsbanking facilities are secured until the end of 2017. Before he wasappointed as the managing director, Jenkins was an experienceddirector and was the CFO of a large retailing chain in NZ. At themeeting, you discovered that Jenkinsâ daughter works for your firmas an audit graduate. The new Managing Director Neil Jenkins ischanging its business strategy, which aimed at repositioning itselfin the market. The new MD has a turnaround plan. He says that âCooland Cuteâs must redirect its focus to customers, the style ofclothes parents desire to buy for their kids and enhance customersâexperience in the stores. To achieve this, investment will berequired in new design of products, marketing channels and onvarious customer communication mediums.â

Competition in the market

In recent years, clothing retailers in Australia and New Zealandhave struggled. Although Cool and Cute is the biggest player in themarket, it claims to have only 4.2% of the kids fashion market. Itcompetes with brands carried by department stores as well as smallboutiques such as Seed, H&M and Cotton On Kids etc.

Financial situation

Cool and Cute delivered a $9,079,000 after-tax loss for the yearended 31 December 2016, an improvement compared to the prior yearloss of $11,495,000. Jenkins said "the financial position of thecompany has improved significantly over the last year in particularand we have formed a very strong working relationship with thebank. Over the last 12 months, we have made significant progress inreducing inventory level. Our debts (interest bearing liabilities)also have dropped from over $60 million last year to around $40million this year. In our view, this is material and has createdthe platform for us to move forward."

The structure of the Board of Directors

The board of directors consists of five members: the ManagingDirector and four independent directors at end of 2016 financialyear. Three of the four independent directors are also members ofthe Audit Committee. The Company has a formal Code of Conduct andEthics Policy. This policy provides guidance to all Directors,managers, employees and contractors of Cool and Cute Limitedexpected conduct when undertaking business on behalf of thecompany.

Communication with the prior auditor

With the clientâs approval, the predecessor auditor shared theiraudit file for the last financial year. You noted in the auditfile, a concern regarding the valuation of inventory. Thepredecessor auditor believed that the one of the inventory rangecalled âComfort maternity 5 wearâ had a long turnover time andshould be written off. The value of this particular label was 10%the total inventory. However management believed that it can stillbe sold at cost. Eventually no write-off was made for thisinventory range in the last financial statements. The previousauditor also noted that they questioned about the companyâs risk ofbreaching its bank covenant because the turnover was disappointing.The management argued that the company is in a transition periodand the poor performance was partially contributed by the failureof two suppliers because of a major flooding in a key supply regionin China.

Required:

A.Based on your audit planning, discuss which two Key AuditMatters should potentially be included in the Audit Report.

BACKGROUND INFORMATION

Wallace & Davey Partners, Chartered Accountants is a mediumsize accounting firm located in Auckland with 4 audit partners, 7business advisor partners and 4 tax partners. The firm has beenappointed to audit Cool and Cute Children Fashion Ltd for the yearended 31 December 2016. The former auditors have been rotated offthe client. The engagement partner is Patrick Wallace, and you arethe audit manager assigned to this client. Your firm does not haveexperience in children fashion industry, but Wallace thinks it is agood opportunity to learn about the industry. The fee for thefinancial audit of Cool and Cute is $150,000, which is about 16% oftotal audit fees your firm generate. The company would also requireadvice on taxation and treasury. Since this is a first time audit,you accompanied Wallace to meet the senior management of theclient. The following is a summary of your notes from theinterviews with senior management of Cool and Cute ChildrenFashion.

NOTES FROM CLIENT INTERVIEW: T

he company profile

Cool and Cute Children Fashion is an Auckland companyincorporated in 1990. It was founded by Sally Hall, a formerchildrenswear buyer, and a mum. Hall spotted a gap in the marketfor quality and fashionable childrenswear and started the brandwith a mail order catalogue. Hallâs mail order catalogue was verypopular and soon after she opened the first Cool and Cute retailstore. By 1994, Cool and Cute headed into Australia as a mail ordercatalogue, opening its first Australian store three years later.Cool and Cute adapted to ecommerce in 2001, launching atransactional website to service its Australasian markets. Cool andCuteâs rise seemed unstoppable in the early 2000s. It secured itsfirst US wholesale partner Nordstrom in 2002, and in 2003 addedAustralian department store David Jones as a distribution channel.In 2004 it listed on the NZ stock exchange and opened franchisepartner stores across the Middle East. Retail stores in the US,franchises in Singapore, Malaysia, Indonesia, South Africa andPakistan followed, along with the companyâs first ecommerce websitein 2006. Around that time, the founder Hall stepped down from theBoard, leaving the directors to find a new managing director. Sincethen, the company has changed three Managing Directors. The fastexpansion of Cool and Cute was heavily financed through debts,which contributed to a highly geared financial position. It createdpressure for the company in serving the high level of debts. Thecompanyâs expansion ceased in 2007 and its shares price peaked inJanuary 2007 at $4.95 per share. By November 2016, the share pricedropped by 60% to $1.98. As of 2015, the company closed its storesin nearly all international markets, with just 92 stores remainingacross Australia, New Zealand and Ireland. Market commentatorsbelieve that the deterioration of Cool and Cuteâ financialperformance were largely because its inability to sustain the rapidglobal expansion. 4 Despite the highly competitive retail market,the core retail businesses in New Zealand and Australia haveperformed well in the current financial period and progress hasbeen made to improve stock efficiency. Despite the difficulties inperformance, the new Managing Director Neil Jenkins, who wasappointed in June 2015, is confident that the company can be turnedaround because the brand is still strong and well recognised. Thecompany also has reduced net banking debt by $20 million, and itsbanking facilities are secured until the end of 2017. Before he wasappointed as the managing director, Jenkins was an experienceddirector and was the CFO of a large retailing chain in NZ. At themeeting, you discovered that Jenkinsâ daughter works for your firmas an audit graduate. The new Managing Director Neil Jenkins ischanging its business strategy, which aimed at repositioning itselfin the market. The new MD has a turnaround plan. He says that âCooland Cuteâs must redirect its focus to customers, the style ofclothes parents desire to buy for their kids and enhance customersâexperience in the stores. To achieve this, investment will berequired in new design of products, marketing channels and onvarious customer communication mediums.â

Competition in the market

In recent years, clothing retailers in Australia and New Zealandhave struggled. Although Cool and Cute is the biggest player in themarket, it claims to have only 4.2% of the kids fashion market. Itcompetes with brands carried by department stores as well as smallboutiques such as Seed, H&M and Cotton On Kids etc.

Financial situation

Cool and Cute delivered a $9,079,000 after-tax loss for the yearended 31 December 2016, an improvement compared to the prior yearloss of $11,495,000. Jenkins said "the financial position of thecompany has improved significantly over the last year in particularand we have formed a very strong working relationship with thebank. Over the last 12 months, we have made significant progress inreducing inventory level. Our debts (interest bearing liabilities)also have dropped from over $60 million last year to around $40million this year. In our view, this is material and has createdthe platform for us to move forward."

The structure of the Board of Directors

The board of directors consists of five members: the ManagingDirector and four independent directors at end of 2016 financialyear. Three of the four independent directors are also members ofthe Audit Committee. The Company has a formal Code of Conduct andEthics Policy. This policy provides guidance to all Directors,managers, employees and contractors of Cool and Cute Limitedexpected conduct when undertaking business on behalf of thecompany.

Communication with the prior auditor

With the clientâs approval, the predecessor auditor shared theiraudit file for the last financial year. You noted in the auditfile, a concern regarding the valuation of inventory. Thepredecessor auditor believed that the one of the inventory rangecalled âComfort maternity 5 wearâ had a long turnover time andshould be written off. The value of this particular label was 10%the total inventory. However management believed that it can stillbe sold at cost. Eventually no write-off was made for thisinventory range in the last financial statements. The previousauditor also noted that they questioned about the companyâs risk ofbreaching its bank covenant because the turnover was disappointing.The management argued that the company is in a transition periodand the poor performance was partially contributed by the failureof two suppliers because of a major flooding in a key supply regionin China.

Required:

A. Referring to the case facts, identify and explain potentialthreats to professional independence. Discuss possible safeguard toaddress each threat?

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