ACC 110 Lecture Notes - Ontario Securities Commission, Offering Circular, Pricewaterhousecoopers

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viridianzebra871

3 Oct 2012

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The ontario securities commission should order former hedge fund manager otto spork to pay a -million fine and disgorge . 75-million gained from perpetrating a fraud in his now-defunct investment, a hearing was told. We need an administrative penalty to be large enough to be a deterrent not only for mr. spork, but also like-minded individuals, osc lawyer tamara center said wednesday. Fund manager made millions" from investment fraud, osc alleges. She made the arguments at a sentencing hearing for mr. spork, who has not attended any of the osc proceedings against him and his firm, sextant capital management inc. The osc ruled last year that the former toronto dentist turned fund manager committed a non-criminal fraud by inflating returns in his funds. Mr. spork ran sextant strategic opportunities hedge fund, sold in ontario, and two offshore funds.

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19-42 Calculating Return on Investment (ROI) and Residual Income (RI); Comparing Results Blackwood Industries manufactures die machinery. To meet its expansion needs, it recently (2014) acquired one of its suppliers, Delta Steel. To maintain Deltaâs separate identity, Blackwood reports Deltaâs operations as an investment center. Blackwood monitors all of its investment centers on the basis of return on investment (ROI). Management bonuses are based on ROI, and all investment centers are expected to earn a minimum 10% return before income taxes. Deltaâs ROI has ranged from 14% to 18% since 2014. The company recently had the opportunity for a new investment that would have yielded a 13% ROI. However, division management decided against the investment because it believed that the investment would decrease the divisionâs overall ROI. The 2016 operating statement for Delta follows. The divisionâs operating assets were $16,000,000 at the end of 2016, a 6% increase over the 2015 year-end balance.

DELTA DIVISION

Operating Statement for Year Ended

December 31, 2016 (000s omitted)

Sales $29,500

Cost of goods sold 19,920

Gross profit 9,580

Operating expenses:

Administration $2,808

Selling 4,332 7,140

Operating income $2,440

Required

1. Calculate the following performance measures for 2016 for the Delta division:

a. Return on average investment in operating assets.

b. Residual income (RI) calculated on the basis of average operating assets.

2. Which performance measure (ROI or RI) should Blackwood Industries use to provide the proper incentive for each division to act autonomously in the firmâs best interests? Would Deltaâs management have been more likely to accept the capital investment opportunity if RI had been used as a performance measure instead of ROI? Explain.

3. What type of strategic performance measurement do you recommend for the Delta division? Explain.

The following investmentopportunities are available to an investment centermanager:
Project InitialInvestment Annual Earnings
A $800,000 $90,000
B 100,000 20,000
C 300,000 25,000
D 400,000 60,000

1.) If the investment manager iscurrently making a return on investment of 16%, which project(s)would the manager went to pursue? Show work/jusityanswer.
2.) If the cost of capital is 10%and the annual earnings approximate cash flows excluding financcharges, which project(s) should be chosen?
3.) Suppose only one project can bechosen and the annual earnings approximate cash flows excludingfinance charges. Which project should be chosen and why?

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ABC Fund has decided to enter into a joint venture with NewtonDevelopment Inc. to develop and operate an office building thatwill require an initial investment of $200 million to cover all thedevelopment costs. There will be no debt financing for the jointventure. Each part invests its capital at the beginning of thefirst year and cash flow from operations is projected asfollows:

Year 1 $3,000,000

Year 2 $5,000,000

Year 3 $12,000,000

Year 4 $25,000,000

Year 5 $45,000,000

It is expected that the property will sell for $270 million atthe end of year 5.

ABC Fund will invest $80 million and Newton Development willinvest the remaining $120 million. The development costs alreadyinclude a developer fee to Newton and the cash flow projections foreach year above are net of a property management fee being paid toNewton Development Inc. ABC Fund will receive a 5% operating returnthat is noncumulative. After ABC is paid its preferred return,Newton Development Inc. will receive a 5% operating return that isnoncumulative on its contributed capital. Remaining cash flows fromoperation, if any, will be split 50-50 to each party. When theproperty is sold, proceeds from the sale will be distributed asfollows:

1. Repay the initial capital investment by ABC Fund

2. Repay the initial capital investment by Newton DevelopmentInc.

3. Thereafter, split all proceeds 50-50

Use the above assumptions to calculate the cash flows that eachparty will receive and expected IRR.

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ACC 110 Lecture Notes - Ontario Securities Commission, Offering Circular, Pricewaterhousecoopers

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