AFM241 Study Guide - Midterm Guide: Business Process, Uptime

Economy A Information

For all questions, consider Economy A.

In this economy, there are four firms potentially interested in issuing a $30,000 bond to do a project each hopes will be profitable:

The Ace Firm has a 50% chance of an $80,000 return.
The Boo Firm has a 70% chance of a $60,000 return.
The Cam Firm has an 85% chance of a $50,000 return.
The Doe Firm is credibly guaranteed to get a $46,500 return.

The only other possibility for all firms is failure, a $0 return.

These firms will issue bonds as long as savers want them.

Stage One: Symmetric Information

We begin in Stage One, assuming that conditions are initially perfectly symmetric. In these conditions, bond buyers demand an expected value with a 25% return in order to buy the bond. In other words, they must expect $30,000 back plus 25% of $30,000, totaling $37,500.

Calculate the expected value of the Cam Firm’s project.

Select the firms that will issue bonds in Stage One, where information is perfectly symmetric. You must select all applicable firms to get the answer correct.

Stage Two: Asymmetric Information I

Next, we enter Stage Two, where information is asymmetric, but bond buyers assume no firms have yet left the market as a result. Because information is now asymmetric, bond buyers demand a higher return to compensate themselves for risk. They now demand a return of 35% ($40,500 total) to buy the bond.

What is the required minimum potential return bond buyers will demand to buy bonds under these conditions, taking into account firm risk? Follow the formatting instructions as in the first question.

Select the firms that will issue bonds in Stage Two, where conditions are as listed above. You must select all applicable firms to get the answer correct.

Stage Three: Asymmetric Information II

Next, we enter Stage Three, in which the firms that you said won't issue bonds in the previous question do indeed drop out of the market, and buyers know this. Answer the question below. (Though I won't ask you to enter the results, go ahead and figure out the required potential return and what firms will drop out in Stage Three as well.)

Considering what firms are left as Stage Three starts, what percentage likelihood of success will bond buyers use in their calculations for Stage Three?

Stage Four: Asymmetric Information III

Finally, we reach Stage Four, in which all the firms you figured would drop out of the market in previous stages are indeed gone, and again, bond buyers know this. Answer the questions below.

What minimum potential return will savers demand to buy bonds in Stage Four? Follow the same formatting instructions you used above.

After the events of Stage Four, describe the market for bonds. Has market failure occurred? Explain as requested in the multiple choice question.

This is our final question concerning Economy A. After the events of Stage Four, describe the market for bonds

Market failure has not occurred because at least one firm is still issuing bonds.

Market failure has occurred because only the riskiest firm is issuing bonds.

Market failure has not occurred because no firms are issuing bonds.

Market failure has occurred because no firms are issuing bonds.

The following financial information was extracted from MCL’scurrent draft financial statements and those of the previousyear:​

The car parts and accessories industry has been very competitiveand consumer demand appears to be slowing in anticipation of changewith electric and driverless cars coming into the market. Thecompany has recently restructured its operations to outsource itsNew Zealand manufacturing to a new factory in China from May2017.

Required:

a) Select an appropriate benchmark fordetermining the preliminary figure for materiality for MCL andbriefly explain your selection.(7 marks)

b) Identify three risk factors andbriefly explain why they will affectaudit planning. Include in your explanation how such risks affectpreliminary overall materiality. (7 marks

Course: Integrated Enterprise Systems

Q. Consider this scenario:

HappyHome is a factory specialized in manufacturing some ranges of home appliances. HappyHome is having a sale transaction selling of washing machines and freezers to a wholesale distributor, named Homy. Details of this transaction are depicted in this table:

Record financial impacts of this sale transaction for HappyHome.

N.B. Show financial impacts for all steps of the transaction in only one figure.

*The answer should not be long and it must be unique not plagiarized. Please make sure that the answer can be copied and paste into Microsoft Word Not a Picture.