Criminal Case
Report Issue
Use the web or other resources to research at least two criminal or civil cases in which recovered files played a significant role in how the case was resolved.
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ITM Capstone
Report Issue
Steve Jobs was a strong, charismatic leader who co-founded Apple and is credited with much of the success of the company. Some believe that Tim Cook, who became CEO in 2011, embraces a more collaborative leadership style. Do research to compare and contrast the leadership styles of the two CEOs. Which CEO—Jobs or Cook—do you think developed and executed the most effective strategic plan? What evidence can you find to support your opinion?
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Research government entitlement programs for the elderly population
Deliverable Length: 3 pages
In 2011, the first baby boomers reached what used to be considered “retirement age.” The youngest of the boomers are in their 50s, but the oldest boomers are retiring in droves, creating a concerning growth in the elderly population and as a result, an increased demand on the health care system. For this assignment, complete the following:
Research government entitlement programs for the elderly population
Write an informative research paper discussing these government entitlement programs at the federal, state, and local levels.
Your paper must be in proper APA format.
Your paper should be 3 pages, excluding the cover page, abstract page, and reference page.
Support your work with at least 4 academic or professional peer-reviewed sources that were published within the past 5 years.
APA Format, Cite and References
The post Research government entitlement programs for the elderly population appeared first on graduatepaperhelp.
Write an informative research paper discussing these government entitlement programs at the federal, state, and local levels.
Deliverable Length: 3 pages
In 2011, the first baby boomers reached what used to be considered “retirement age.” The youngest of the boomers are in their 50s, but the oldest boomers are retiring in droves, creating a concerning growth in the elderly population and as a result, an increased demand on the health care system. For this assignment, complete the following:
Research government entitlement programs for the elderly population
Write an informative research paper discussing these government entitlement programs at the federal, state, and local levels.
Your paper must be in proper APA format.
Your paper should be 3 pages, excluding the cover page, abstract page, and reference page.
Support your work with at least 4 academic or professional peer-reviewed sources that were published within the past 5 years.
APA Format, Cite and References
The post Write an informative research paper discussing these government entitlement programs at the federal, state, and local levels. appeared first on graduatepaperhelp.
What would be the cost per unit of producing Guest Room Set A using factory space as the allocation basis?
Instructions
Instructions Read and follow these instructions to complete the workbook. 1. To complete the Income Statement worksheet, Balance Sheet worksheet, and Cash Flow worksheet: a. Visit the SEC website at sec.gov and find the Choice Hotels (CHH) 10-K report for 2017 and 2016. b. Collect Marriott International’s 10-K 2017 and 2016 data from the Securities Exchange Commission website. c. Complete the percent change columns on the right side each table of the workbook. d. Answer the questions in the space given. 2. Given the supplied data in the Cost and Investing worksheet, answer the questions in the space provided. 3. To complete the Budgeting worksheet and Profitability worksheet: a. Solve the ratios provided. b. Answer the questions in the space given.
Income Statement
CHH 2017 10-K Report CHH 2016 10-K Report MAR 2017 10-K Report MAR 2016 10-K Report
Choice Hotels 10-K Marriott International 10-K
2017 2016 (2017/2016)-1 2017 2016 (2017/2016)-1
Account Name 2017 10-K 2016 10-K Percent change from 2016 to 2017 Account Name 2017 10-K 2016 10-K Percent change from 2016 to 2017
REVENUES REVENUES
Royalty fees $ 345,302 $ 320,547 Base management fees $ 1,102 $ 806
Initial franchise and relicensing fees $ 26,262 $ 23,953 Franchise fees $ 1,618 $ 1,169
Procurement services $ 34,661 $ 31,226 Incentive management fees $ 607 $ 425
Marketing and reservation system $ 567,083 $ 525,716 Owned, leased, and other revenue $ 1,802 $ 1,126
Other $ 34,048 $ 23,199 Cost reimbursements $ 17,765 $ 13,546
Total revenues $ 1,007,356 $ 924,641 9% Total revenue $ 22,894 $ 17,072 34%
OPERATING EXPENSES OPERATING COSTS AND EXPENSES
Selling, general and administrative $ 163,377 $ 148,728 Owned, leased, and other-direct $ 1,427 $ 900
Depreciation and amortization $ 12,431 $ 11,705 Reimbursed costs $ 17,765 $ 13,546
Marketing and reservation system $ 567,083 $ 525,716 Depreciation, amortization, and other $ 290 $ 168
Total operating expenses $ 742,891 $ 686,149 General, administrative, and other $ 894 $ 704
Gain (loss) on sale of assets, net $ (32) $ 403 Merger-related costs and charges $ 159 $ 386
Operating income $ 264,433 $ 238,895 11% Costs and Expenses, Total $ 20,535 $ 15,704
Operating income $ 2,359 $ 1,368 72%
OTHER INCOME AND EXPENSES, NET Gains and other income, net $ 688 $ 5
Interest expense $ 45,039 $ 44,446 Interest expense $ (288) $ (234)
Interest income $ (5,920) $ (3,535) Interest income $ 38 $ 35
Other gains $ (3,229) $ (1,504) Equity in earnings $ 39 $ 10
Equity in net (income) loss of affiliates $ 4,546 $ (492)
Total other income and expenses, net $ 40,436 $ 38,915 4%
Income before income taxes $ 223,997 $ 199,980 12% Income before income taxes $ 2,836 $ 1,184 140%
Income taxes $ 109,104 $ 60,609 80% Provision for income taxes $ (1,464) $ (404) 262%
Net income $ 114,893 $ 139,371 -18% Net income $ 1,372 $ 780 76%
Questions: 1. Based on your horizontal analysis of Choice Hotels’ and Marriott International’s total revenue, total expenses, and net income, which company would be a more attractive target for an acquisition by the equity firm and why? 2. Given the changes in total revenue, operating income, and net income from 2016 to 2017, did Choice Hotels or Marriott International experience more change? Which area (total revenue, operating income, or net income) changed most?
Answer questions 1 and 2 here. 1. Marriott’s Hotels would be a more attractive target for an acquisition by the equity firm as it has recorded a higher improvement across the revenues by 76% while Choice has recorded an 18% decline . The operating income has also increased by 725 compared to Choice’s 11%. Futhermore, Marriot’s largest expense, Cost Reimburesments are instantly canceled out by the matching revenue and cost reimbursments. As a reslut, it leaves little worry considering paying back short term expenses. 2. Marriott’s recorded more change in total revenues , operating incomes as well as the net incomes
https://www.sec.gov/Archives/edgar/data/1046311/000104631118000006/0001046311-18-000006-index.htm https://www.sec.gov/Archives/edgar/data/1046311/000104631117000006/0001046311-17-000006-index.htm https://www.sec.gov/Archives/edgar/data/1048286/000162828018001756/0001628280-18-001756-index.htm https://www.sec.gov/Archives/edgar/data/1048286/000162828017001506/0001628280-17-001506-index.htm
Balance Sheet
CHH 2017 10-K Report CHH 2016 10-K Report MAR 2017 10-K Report MAR 2016 10-K Report
Account name 2017 2016 (2017/2016)-1 Account name 2017 2016 (2017/2016)-1
ASSETS CHH 2017 10-K Report CHH 2016 10-K Report Percent change from 2016 to 2017 ASSETS MAR 2017 10-K Report MAR 2016 10-K Report Percent change from 2016 to 2017
Current assets Current assets
Cash and cash equivalents $ 235,336.00 $ 202,463.00 16% Cash and equivalents $ 383.00 $ 858.00 -55%
Receivables $ 125,452.00 $ 107,336.00 17% Accounts and notes receivable, net $ 1,991.00 $ 1,695.00 17%
Income taxes receivable $ – 0 $ 316.00 -100% Prepaid expenses and other $ 224.00 $ 230.00 -3%
Notes receivable, net of allowance $ 13,904.00 $ 7,873.00 77% Assets held for sale $ 149.00 $ 588.00 -75%
Other current assets $ 28,241.00 $ 26,885.00 5% Assets, current, total $ 2,747.00 $ 3,371.00 -19%
Total current assets $ 402,933.00 $ 344,873.00 17% Property and equipment, net $ 1,793.00 $ 2,335.00 -23%
Property and equipment, at cost, net $ 83,374.00 $ 84,061.00 -1% Intangible assets
Goodwill $ 80,757.00 $ 78,905.00 2% Intangible assets $ 8,805.00 $ 9,270.00 -5%
Intangible assets, net $ 14,672.00 $ 15,738.00 -7% Goodwill $ 9,207.00 $ 7,598.00 21%
Notes receivable, net of allowances $ 147,993.00 $ 110,608.00 34% Goodwill and intangible assets, net, total $ 18,012.00 $ 16,868.00 7%
Investments, employee benefit plans, at fair value $ 20,838.00 $ 16,975.00 23% Equity and cost method investments $ 740.00 $ 728.00 2%
Investments in unconsolidated entities $ 134,226.00 $ 94,839.00 42% Notes receivable, net $ 142.00 $ 245.00 -42%
Deferred income taxes $ 13,335.00 $ 52,812.00 -75% Deferred tax assets $ 93.00 $ 116.00 -20%
Other assets $ 29,479.00 $ 53,657.00 -45% Other noncurrent assets $ 421.00 $ 477.00 -12%
Total assets $ 927,607.00 $ 852,468.00 9% Total assets $ 23,948.00 $ 24,140.00 -1%
LIABILITIES AND SHAREHOLDERS EQUITY CHH 2017 10-K Report CHH 2016 10-K Report LIABILITIES AND SHAREHOLDERS EQUITY MAR 2017 10-K Report MAR 2016 10-K Report
Current liabilities Current liabilities
Accounts payable $ 63,540.00 $ 48,071.00 32% Current portion of long-term debt $ 398.00 $ 309.00 29%
Accrued expenses and other current liabilities $ 85,838.00 $ 80,388.00 7% Accounts payable $ 780.00 $ 687.00 14%
Deferred revenue $ 141,111.00 $ 133,218.00 6% Accrued payroll and benefits $ 1,227.00 $ 1,174.00 5%
Current portion of long-term debt $ 1,232.00 $ 1,195.00 3% Liability for guest loyalty programs $ 2,064.00 $ 1,866.00 11%
Income taxes payable $ 2,776.00 $ 796.00 249% Accrued expenses and other $ 1,541.00 $ 1,111.00 39%
Total current liabilities $ 294,497.00 $ 263,668.00 12% Liabilities, current, total $ 6,010.00 $ 5,147.00 17%
Long-term debt $ 725,292.00 $ 839,409.00 -14% Long-term debt $ 7,840.00 $ 8,197.00 -4%
Deferred compensation and retirement plan obligations $ 25,566.00 $ 21,595.00 18% Liability for guest loyalty programs $ 2,876.00 $ 2,675.00 8%
Income taxes payable $ 29,041.00 $ – 0 Deferred tax liabilities $ 604.00 $ 1,020.00 -41%
Deferred income taxes $ 39.00 $ 292.00 -87% Other noncurrent liabilities $ 2,887.00 $ 1,744.00 66%
Other liabilities $ 65,274.00 $ 38,853.00 68% total liabilities $ 20,217.00 $ 18,783.00 8%
Total liabilities $ 1,139,709.00 $ 1,163,817.00 -2% Shareholders’ equity
Class A Common Stock $ 5.00 $ 5.00 0%
Commitments and Contingencies Additional paid-in-capital $ 5,770.00 $ 5,808.00 -1%
Common stock $ 951.00 $ 951.00 0% Retained earnings $ 7,391.00 $ 6,501.00 14%
Additional paid-in-capital $ 182,448.00 $ 159,045.00 15% Treasury stock, at cost $ (9,418.00) $ (6,460.00) 46%
Accumulated other comprehensive loss $ (4,699.00) $ (8,522.00) -45% Accumulated other comprehensive loss $ (17.00) $ (497.00) -97%
Treasury stock $ (1,064,573.00) $ (1,070,383.00) -1% Stockholders’ deficit $ 3,731.00 $ 5,357.00 -30%
Retained earnings $ 673,771.00 $ 607,560.00 11% Liabilities and deficit, total $ 23,948.00 $ 24,140.00 -1%
Total shareholders equity $ (212,102.00) $ (311,349.00) -32%
Total liabilities and shareholders equity $ 927,607.00 $ 852,468.00 9%
Questions: 1. Based on your horizontal analysis of Choice Hotels’ and Marriott International’s total assets, total liabilities, and total equity, which company is most attractive for an acquisition by the equity firm and why? 2. What advice would you give to the client, Choice Hotels, to reduce its total liabilities?
Answer questions 1 and 2 here. 1. The horizontal analysis shows that Choice Hotels is the most attractive as the assets have increased by 9%, the liabilities have reduced by 2% while the paid in capital increased by 15% and the shareholder equity has also improved by 32%. On the other hand, Marriott’s has seen the stockholder equity decrease by 30%, liability has increased by 8% and the assets have reduced by 1% 2. Choice Hotels should consider using internal sources of finance to reduce the total liabilities. The Accounting Manager should know how to reduce the Transition Tax that they pay when bringing in foreign income in the United States. If unable to cut it down, they should consider to paying it over time in lieu of a lump sum. Another alternative would be to apply cash and cas equivalents to any libilities notabily: long-term debt and account payable.
https://www.sec.gov/Archives/edgar/data/1046311/000104631118000006/0001046311-18-000006-index.htm https://www.sec.gov/Archives/edgar/data/1046311/000104631117000006/0001046311-17-000006-index.htm https://www.sec.gov/Archives/edgar/data/1048286/000162828018001756/0001628280-18-001756-index.htm https://www.sec.gov/Archives/edgar/data/1048286/000162828017001506/0001628280-17-001506-index.htm
Cash Flow
CHH 2017 10-K Report CHH 2016 10-K Report MAR 2017 10-K Report MAR 2016 10-K Report
10-K 10-K
Choice Hotels 2017 2016 (2017/2016)-1 Marriott International 2017 2016 (2017/2016)-1
CASH FLOWS FROM OPERATING ACTIVITIES 2017 10-K 2016 10-K Percent change from 2016 to 2017 CASH FLOWS FROM OPERATING ACTIVITIES 2017 10-K 2016 10-K Percent change from 2016 to 2017
Net income $ 114,893 $ 139,371 -0.1756319464 Net income $ 1,372 $ 780 76%
Adjustments to reconcile net income to net cash provided by operating activities Adjustments to reconcile to cash provided by operating activities:
Depreciation and amortization $ 12,431 $ 11,705 6% Depreciation, amortization, and other $ 290 $ 168 73%
Loss (gain) on disposal of assets $ 52 $ (346) -115% Share-based compensation $ 181 $ 212 -15%
Provision for bad debts, net $ 3,440 $ 2,151 60% Income taxes $ 828 $ 76 989%
Non-cash stock compensation and other charges $ 23,340 $ 15,458 51% Liability for guest loyalty program $ 378 $ 343 10%
Non-cash interest and other (income) loss $ (772) $ 1,059 -173% Merger-related charges $ (124) $ 113 -210%
Deferred income taxes $ 39,320 $ (10,542) -473% Working capital changes $ 81 $ (77) -205%
Equity in net losses from unconsolidated joint ventures, less distributions received $ 6,579 $ 1,025 542% (Gain) loss on asset dispositions $ (687) $ 1 -68800%
Changes in assets and liabilities, net of acquisition Other $ 117 $ 66 77%
Receivables $ (23,126) $ (21,919) 6% Net cash provided by operating activities $ 2,436 $ 1,682 45%
Advances to/from marketing and reservation system activities, net $ 51,722 $ (21,449) -341%
Forgivable notes receivable, net $ (30,638) $ (17,410) 76% INVESTING ACTIVITIES
Accounts payable $ 12,455 $ (13,689) -191% Acquisition of a business, net of cash acquired $ – 0 $ (2,412) -100%
Accrued expenses and other current liabilities $ 7,176 $ 5,225 37% Capital expenditures $ (240) $ (199) 21%
Income taxes payable/receivable $ 31,383 $ 5,775 443% Dispositions $ 1,418 $ 218 550%
Deferred revenue $ 7,797 $ 61,646 -87% Loan advances $ (93) $ (32) 191%
Other assets $ 1,521 $ (8,703) -117% Loan collections $ 187 $ 67 179%
Other liabilities $ (199) $ 2,678 -107% Contract acquisition costs $ (189) $ (80) 136%
Net cash provided by operating activities $ 257,374 $ 152,035 69% Redemption of debt security $ – 0 $ – 0
Other $ (63) $ 29 -317%
CASH FLOWS FROM INVESTING ACTIVITIES Net cash provided by (used in) investing activities $ 1,020 $ (2,409) -142%
Investment in property and equipment $ (23,437) $ (25,191) -7%
Investment in intangible assets $ (2,517) $ (2,580) -2% FINANCING ACTIVITIES
Proceeds from sales of assets $ 1,000 $ 11,462 -91% Commercial paper/Credit Facility, net $ 25 $ 1,365 -98%
Acquisitions of real estate $ – 0 $ (28,583) -100% Issuance of long-term debt $ – 0 $ 1,482 -100%
Business acquisition, net of cash acquired $ – 0 $ (1,341) -100% Repayment of long-term debt $ (310) $ (326) -5%
Contributions to equity method investments $ (50,554) $ (34,661) 46% Issuance of Class A Common Stock $ 6 $ 34 -82%
Distributions from equity method investments $ 4,569 $ 3,700 23% Dividends paid $ (482) $ (374) 29%
Purchases of investments, employee benefit plans $ (2,447) $ (1,661) 47% Purchase of treasury stock $ (3,013) $ (568) 430%
Proceeds from sales of investments, employee benefit plans $ 2,245 $ 1,911 17% Share-based compensation withholding taxes $ (157) $ (100) 57%
Issuance of mezzanine and other notes receivable $ (19,738) $ (32,604) -39% Other $ – 0 $ (24) -100%
Collections of mezzanine and other notes receivable $ 655 $ 11,070 -94% Net cash (used in) provided by financing activities $ (3,931) $ 1,489 -364%
Other items, net $ 109 $ 11 891% (DECREASE) INCREASE IN CASH AND EQUIVALENTS $ (475) $ 762 -162%
Net cash used by investing activities $ (90,115) $ (98,467) -8% CASH AND EQUIVALENTS, beginning of period $ 858 $ 96 794%
CASH AND EQUIVALENTS, end of period $ 383 $ 858 -55%
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of long-term debt $ – 0 $ – 0
Net (repayments) borrowings pursuant to revolving credit facilities $ (115,003) $ 25,795 -546%
Principal payments on long-term debt $ (660) $ (988) -33%
Proceeds from other debt agreements $ – 0 $ 550 -100%
Debt issuance costs $ – 0 $ (284) -100%
Purchases of treasury stock $ (9,807) $ (35,926) -73%
Dividends paid $ (48,651) $ (46,182) 5%
Proceeds from transfer of interest in notes receivable $ 24,237 $ – 0
Proceeds from exercise of stock options $ 14,107 $ 12,951 9%
Net cash used by financing activities $ (135,777) $ (44,084) 208%
Net change in cash and cash equivalents $ 31,482 $ 9,484 232%
Effect of foreign exchange rate changes on cash and cash equivalents $ 1,391 $ (462) -401%
Cash and cash equivalents at beginning of period $ 202,463 $ 193,441 5%
Cash and cash equivalents at end of period $ 235,336 $ 202,463 16%
Questions: 1. Based on your horizontal analysis of Choice Hotels’ and Marriott International’s operating, investing, and financing activities, which company is most attractive for an acquisition by the equity firm and why? 2. What advice would you give to the client, Choice Hotels, to improve their investing and financing activities?
Answer questions 1 and 2 here. 1. Choice Hotels has seen an improvement in cash from operations , financing activities and a reduction in the investing activities cash flows. Choie Hotels invests massively in purchasing more real estate. Futhermore, the horizontal analysis and cash flows ratios show that Choice Hotels has enough cash flows from operarations and iti is financially looking good. On the other hand, Marriott’s has seen an improvement in the cash from operation but a reduction in cash flow investing and financing activities. Therefore, Choice Hotels is the most attractive company for acquisition. 2. Concerning Choice Hotels financial activities improvement, the copmany should consider issuing shares of stock to raise raise funds so as to boost its financinf activities. Another way of improving financial activities is to re-negotiate different terms with creditors on how to pay down its debts to reduce long-term debts. Moreover, for Choice Hotels to increase its financial activities, it would best to reduce the amount of dividents paid out each year to shareholders. Regarding how to improve investing activities, Choice Hotels should recognize more shares of the investees’ net loss to reduce its equity mehod of investment. Finally, the company should consider leasing instead of acquiring the assets, seek equity sources to finance the assets instead of issuing notes to pay for the investments. The company should also invest in vehicles that have higher returns
https://www.sec.gov/Archives/edgar/data/1046311/000104631118000006/0001046311-18-000006-index.htm https://www.sec.gov/Archives/edgar/data/1046311/000104631117000006/0001046311-17-000006-index.htm https://www.sec.gov/Archives/edgar/data/1048286/000162828018001756/0001628280-18-001756-index.htm https://www.sec.gov/Archives/edgar/data/1048286/000162828017001506/0001628280-17-001506-index.htm
Cost and Investing
Choice Hotels Sales, Production, and Cost Information Overhead Costs
Room Type Standard Guest Room Junior Suite Presidential Suite Type Cost
Volume 150 110 25 285 Depreciation $3,200,000 $750,000 $8,550,000
Price $140,000 $240,000 $1,050,000 Maintenance $1,800,000
Unit costs Purchasing $320,000 $950,000
Direct materials $30,000 $92,000 $310,000 Inspection $850,000 $100,000
Direct labor $54,000 $85,000 $640,000 Indirect materials $490,000 $104,251.89
Manufacturing $30,000 $30,000 $30,000 Supervision $1,700,000 $35,748
overhead Supplies $190,000
Total unit cost $114,000 $207,000 $980,000 Total manufacturing overhead cost $8,550,000
Unit gross profit $26,000 $33,000 $70,000 Note: Manufacturing overhead costs are fixed. They do not vary with the volume of manufacturing activity.
Direct labor hours 1,200 1,300 5,940
Rate per hour $45.00 $65.38 $107.74
Answer Questions 1 and 2 Below:
135562.12
Choice Hotels’ controller developed the following data for use in activity-based costing: Complete the calculations to help you answer the questions below. Answer Questions 3 to 10 Below:
Manufacturing overhead Amount Cost driver Standard Guest Room Junior Suite Presidential Suite Sum of Cost Drivers Cost per cost driver Cost per Standard Guest room Cost per Junior Suite Cost per Presidential Suite Check
Depreciation $3,200,000 Square feet 50,000 30,000 30,000 110,000 $ 29.09 $ 1,454,545 $ 872,727 $ 872,727 $ 3,200,000
Maintenance $1,800,000 Direct labor hours 180,000 143,000 148,500 471,500 4 687,169 545,917 566,914 1,800,000
Purchasing $320,000 # of purchase orders 2,500 1,500 9,000 13,000 25 61,538 36,923 221,538 320,000
Inspection $850,000 # of inspections 1,000 850 3,500 5,350 159 158,879 135,047 556,075 850,000
Indirect $490,000 Units manufactured 150 110 25 285 $1,719.30 257894.736842105 189122.807017544 42982.4561403509 490000
materials
Supervision $1,700,000 # of inspections 1,000 850 3,500 5,350 $317.76 $317,757.01 $270,093.46 $1,112,149.53 $1,700,000.00
Supplies $190,000 Units manufactured 150 110 25 285 $666.67 $100,000.00 $73,333.33 $16,666.67 $190,000.00
Total $8,550,000 234,800 176,420 194,550 $ 3,037,782.78 $ 2,123,163.96 $ 3,389,053.26 $ 8,550,000.00 19301.4905454545
20251.8852
Questions: 1. What would be the cost per unit of producing Guest Room Set A using factory space as the allocation basis? What would be the cost per unit using labor as the allocation basis? 2. What would be the cost per unit of producing Guest Room Set A using activity-based costing? 3. Should Choice Hotels build Guest Room Set A or Guest Room Set B? Why? 4. Should Choice Hotels build or purchase the guest room furniture? Why?
Choice Hotels produces three models of guest rooms: the standard guest room, Junior Suite, and Presidential Suite. The Standard Guest Room comes with basic furniture, bathroom plan, and amenities. It sells for $140,000 to franchise hotels. The Junior Suite model is larger and includes an enhanced furniture selection, upgraded bathroom fixtures, more comfortable bedding. The guest room is considered an upgrade from the standard guestroom model. The Junior Suite sells for $240,000 to franchise hotels. The Presidential Suite model is a custom-made guest room with floors and walls constructed from specialty wood. The drapes are made from the traditional flax-based canvass. It has the look and feel of a room in the White House, with modern comforts and security. The Presidential Suite sells for $1,050,000 to franchise hotels. Workers who build the Presidential Suite are specialized craftsmen. They earn twice the hourly rate of those working on the Standard Guest Room and Junior Suite models. The labor rate is fully burdened to include benefits. Most of Choice Hotels’ guest room sales come from the Standard Guest Room and the Junior Suite, but sales of the Presidential Suite model have been growing. The company’s sales, production, and cost information for last year is provided to the right.
Questions: 3. Use activity-based costing to allocate the costs of overhead per unit and in total to each guest room type. Show all supporting calculations in the space provided to the right. 4. Calculate the cost of one Presidential Suite using activity-based costing.
Questions: 1. The cost-allocation system Choice Hotels has been using allocates over 90 percent of overhead costs to the Standard Guest Room and the Junior Suite, because over 90 percent of the models produced were one of these two models. How much overhead was allocated to each of the three models last year? Discuss why this might not be an accurate way to assign overhead costs to products. 2. Choice Hotels’ production manager proposes allocating overhead by direct labor hours instead, since the different models require different amounts of labor. How much overhead would be allocated to each guest room (per unit and in total) using this method? Show all supporting calculations.
Questions: 5. At the current selling price, is the company covering its true cost of production of the Presidential Suite? Briefly discuss. 6. What should price should Choice Hotels charges for the Presidential Suite? 7. Assume that the Presidential Suite has the same profit margin as the standard guest room. What should its selling price be? Show all calculations. 8. What should Choice Hotels do if the quantity of the Presidential Suite Guest Rooms sold at the new price falls to 10 per year? 9. What should Choice Hotels do if the price of the Presidential Suite cannot exceed $1,050,000? 10. At a selling price of $1,050,000 each, what is the breakeven unit volume for the Presidential Suite?
Question: 1 . The allocation based on volumes means that the standard room is allocated $4.5 million, while the Junior suites gets $3.3 million and the presidential suites gets $750,0000. this allocation is erroneous as it does not take into account the actual costs for each of the units. The direct labor overhead should be allocated based on the actual labor used in each units , the direct material overheads should be allocated based on the purchase made but not the number of customers using the suites. Question: 2 standard suites = (1200/8440)8550000 = $1,215,639.81 Junior suites = (1300/8440)8550000 = $1,316,943.13 presidential suites = (5940/8440)*8550000 = $6,017,417.06 Question 2: The answer is incorrect; you must calculate using ABC and show your work.Because the cost driver is labor hours, it is not just the number of hours that need to be considered. The hours for each type must be multiplied by the rate per hour. The Labor Hours Cost must be found by finding rate per hour and multiplying the rate per hour by the unit labor hours. Here is how: multiplying the number of labor hours by the number of units for each type (e.g. Standard is 1,200 x 150 = 180,000) this gives the total labor hours for each type; then add all the total labor hours for each type together to get total labor hours for all manufacturing; then divide the total manufacturing overhead (MoH) cost by the total labor hours, that gives you the rate per hour; then multiply the rate per hour by the hours for each type giving you total MoH (hint: added together, total MoH should equal $8,550,000); then divide the total MoH for each type by the number of units produced to get the MoH per type; then divide the total MoH for each type by the Total MoH to find the percent of total MoH
Answer Questions 3 and 4 here. standard junior Suite presidential Suite depreciation $ 3,200,000 [(50,000/110,000)3,200,000] = $ 1,454,545 [(30,000/110,000)3,200,000] = $ 872,727 [(30,000/110,000)3,200,000] = $ 872,727 Maintenance [(180,000/471,500)1,800,00]= 687,169 [(143,000/471,500)1,800,00]= 545,917 [(471,050/471,500)1,800,00]= 566,914 Purchasing [(2500/13000)32000)= 61,538 [(1500/13000)32000)= 36,923 [(9000/13000)32000)= 221,538 Inspection [(1000/5350)85000] =158,879 [(850/5350)85000] = 135,047 [(850/5350)85000] = 556,075 Indirect Materials [(150/285)$490,000 ]= 257894.74 [(110/285)$490,000 ]= 189122.807 [(25/285)$490,000 ]= 42982.46 Supervision [(1000/5350)$1,700,000]=$317,757.01 [(850/5350)$1,700,000]=$270,093.46 [(3500/5350)$1,700,000]=$1,112,149.53 Supplies [(150/666.7)190,000]= $100,000.00 [(110/666.7)190,000]= $73,333.33 [(285/666.7)*190,000]= $16,666.67 Total $3,037,782.78 $2,123,163.96 $3,389,053.26 Total pr unit ($3,037,782.78 /150)=20251.8852 ($2,123,163.96 /110)=19301.49055 ( $3,389,053.26 /25) =135562.12 Question 4 direct material 310,000 direct labor 640,000 manufacturing overheads 3,389.053/25= 1355662.12 Total costs= Price $1,085,562
Answer Questions 5 to 10 here. 5. At the current price, the company is not meeting the true costs of the presidential suite. The Total costs incurred is $1,085,562 while the unit is selling at $1,050,000, which is $35,562. lower 6. Choice Hotels should sell the units at $110,497.24 ======>(1000,000/0.905) * Selling Price: 1,050,000. * –Direct Labor: 640,000. * –Direct Materials: 310,000. * Gross Profit: 100,000. * Gross Profit Margin: 100,000/1,050,000.====> 0.095 * Net Profit Margin: 1.00 – 0.095= 0.905 * New Sales Price: 100,000/0.905= 110,497.24 7. Standard guest room: costs = $93,333.33 ======>(56,000/0.6) * Selling Price: 140,000. * –Direct Labor: 54,000. * –Direct Materials: 30,000. * Gross Profit: 56,000. * Gross Profit Margin: 56,000/140,000..====> 0.4 * Net Profit Margin: 1.00 – 0.4= 0.6 * New Sales Price: 56,000/0.6= 93,333.33 8. If the units sold reduced to 10 per year, the company continues to make profit and therefore continue production 9. If prices cannot exceed the 105000 price, the company should stop producing these units since it will be a loss 10. the break even units at $1,050,000 is: * fixed costs = $1,085,562 * MOH: 30,000 * Contribution margin per unit: 100,000. =====> 1,050,000 – 950,000) * Breakenven= Fixed Cost / Unit Contribution * variable costs = 105000- (310,000+640,000) = 100000 break even = $1,085,562 /100,000 = 10.8556 units.
Choice Hotels has contracted with a mid-size furniture manufacturer for the production of guestroom furniture for three models of guest rooms: the standard guest room, Junior Suite, and Presidential Suite. The Standard Guest Room comes with basic furniture, bathroom plan, and amenities. It sells for $140,000 to franchise hotels. The Junior Suite model is larger and includes an enhanced furniture selection, upgraded bathroom fixtures, more comfortable bedding. The guest room is considered an upgrade from the standard guestroom model. The Junior Suite sells for $240,000 to franchise hotels. The Presidential Suite model is a custom-made guest room with floors and walls constructed from specialty wood. The drapes are made from the traditional flax-based canvass. It has the look and feel of a room in the White House, with modern comforts and security. The Presidential Suite sells for $1,050,000 to franchise hotels. Workers who build the Presidential Suite are specialized craftsmen. They earn twice the hourly rate of those working on the Standard Guest Room and Junior Suite models. The labor rate is fully burdened to include benefits. Most of Choice Hotels’ guest room sales come from the Standard Guest Room and the Junior Suite, but sales of the Presidential Suite model have been growing. The company’s sales, production, and cost information for last year is provided to the right.
Questions: 3. Use activity-based costing to allocate the costs of overhead per unit and in total to each guest room type. Show all supporting calculations in the space provided to the right. 4. Calculate the cost of one Presidential Suite using activity-based costing. 5. At the current selling price, is the company covering its true cost of production of the Presidential Suite? Briefly discuss. 6. What should price should Choice Hotels charges for the Presidential Suite? 7. Assume that the Presidential Suite has the same profit margin as the standard guest room. What should its selling price be? Show all calculations. 8. What should Choice Hotels do if the quantity of the Presidential Suite Guest Rooms sold at the new price falls to 10 per year? 9. What should Choice Hotels do if the price of the Presidential Suite cannot exceed $1,050,000? 10. At a selling price of $1,050,000 each, what is the breakeven unit volume for the Presidential Suite?
Questions: 1. The cost-allocation system Choice Hotels has been using allocates over 90 percent of overhead costs to the Standard Guest Room and the Junior Suite, because over 90 percent of the models produced were one of these two models. How much overhead was allocated to each of the three models last year? Discuss why this might not be an accurate way to assign overhead costs to products. 2. Choice Hotels’ production manager proposes allocating overhead by direct labor hours instead, since the different models require different amounts of labor. How much overhead would be allocated to each guest room (per unit and in total) using this method? Show all supporting calculations.
Budgeting
Choice Hotels Marriott International (2017/2016)-1 (2017/2016)-1
Ratios 2017 2016 2017 2016 Percent Change from 2016 to 2017 Percent Change from 2016 to 2017
Quick ratio = (cash + cash equivalence + receivables) / current liabilities 1.2723117723 1.2060166573 0.39500832 0.4960170973 5% -20%
Acid test ratio = current assets / current liabilities 1.368207486 1.3079820077 1.21247920 1.7635515834 5% -31%
Debt ratio = total liabilities / total assets 1.2286550231 1.3652324779 1.18454766 1.2852047064 -10% -8%
CHH: 2017 2016 Marriott: 2017 2016
Cash and Cash Equivalents: 235336 202463 383 858
Receivables: 125452 316 1991 1695
Receivables: 13904 7873
Receivables: 107336
Current Assets: 402933 344873 7287 9077
Total Assets: 927607 852468 23948 24140
Current Liabilities: 294497 263668 6010 5147
Total Liabilities: 1139709 1163817 20217 18783
Questions: 1. Quick ratios between 0.5 and 1 are considered satisfactory as long as the collection of receivables is not expected to slow. Does the client, Choice Hotels, have enough current assets to meet the payment schedule of current liabilities with a margin of safety? 2. Which of the above ratios would you use to determine which company, Choice Hotels or Marriott International, is more attractive for an acquisition by the equity firm and why?
Answer Questions 1 to 3 here. 1. The quick ratios are above 1, which means that Choice Hotels has enough current assets to meet the current assets comfortably 2. The debt ratio would be better to determine which company is attractive for acquisition as this ratio indicates whether the company is able to finance all its debt requirements from the assets held. In case of a liquidation, the liability holders will be paid first before the equity holders Feedback for step 4: BUDGETING Quick ratios for both companies are incorrect. Quick and current ratios would be the same since neither company has inventory “Acid test ratio” (which is actually the current ratio) for Marriott are incorrect.. Use Total Liabilities as the numerator (hint: for Marriott you will need to add total current liabilities to long term liabilities [everything between Liabilities, current, total and Shareholders’ Equity titles]) Debt ratios for Marriott are incorrect. Current assets number has Property, Plant & Equipment included, which are not Current Assets Question 1 and 2 are correct.
Profitability
Choice Hotels Marriott International (2017/2016)-1 (2017/2016)-1
Ratios 2017 2016 2017 2016 Percent Change from 2016 to 2017 Percent Change from 2016 to 2017
Return on equity (ROE) = net income / total equity -54% -45% 37% 15% 21% 153%
Return on assets (ROA) = net income / total assets 12% 16% 6% 3% -24% 77%
Questions: 1. The return on assets ratio tells us the profit generated by each dollar in assets. You will want to compare this ratio to Choice Hotels’ historical performance and to Marriott International to understand if it is an acceptable ratio. Is the return on assets ratio acceptable? Why or why not? 2. Which of the above ratios would you use to determine which company, Choice Hotels or Marriott International, is more attractive for an acquisition? Why? 3. Based on the financial statement analysis, earnings per share analysis, budgeting ratios, and the above profitability ratios, which company would you invest in and why?
Answer Questions 1 to 3 here. 1.The ROA of Choice Hotels is more than double that of Marriott, meaning that Choice is more profitable as each asset is generating more returns per each as held than its competitor. ROA and ROE ratios show financial health of the company. If ROE is worse than ROA, it means that the company has borrowed so much. As a result, potential investors will stay away from investing in this company. 2. The ROA is more reliable when making a acquisition choice as it informs how the company is profitable relative to the assets it holds. 3. I would invest in Choice as it has higher returns on the equity and has shown an improvement in the tow years under review choice also has higher liquidity ratios, has seen better improvement in the financial position , cash flows and has higher revenues than Marriott’s. Prof Feedback: PROFITABILITY All ratios are correct The answer to question 1 is partially correct. While the ROA is better, the ROE is much worse. What does that mean for potential buyers?
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Management homework help
Instructions
Instructions Read and follow these instructions to complete the workbook. 1. To complete the Income Statement worksheet, Balance Sheet worksheet, and Cash Flow worksheet: a. Visit the SEC website at sec.gov and find the Choice Hotels (CHH) 10-K report for 2017 and 2016. b. Collect Marriott International’s 10-K 2017 and 2016 data from the Securities Exchange Commission website. c. Complete the percent change columns on the right side each table of the workbook. d. Answer the questions in the space given. 2. Given the supplied data in the Cost and Investing worksheet, answer the questions in the space provided. 3. To complete the Budgeting worksheet and Profitability worksheet: a. Solve the ratios provided. b. Answer the questions in the space given.
Income Statement
CHH 2017 10-K Report CHH 2016 10-K Report MAR 2017 10-K Report MAR 2016 10-K Report
Choice Hotels 10-K Marriott International 10-K
2017 2016 (2017/2016)-1 2017 2016 (2017/2016)-1
Account Name 2017 10-K 2016 10-K Percent change from 2016 to 2017 Account Name 2017 10-K 2016 10-K Percent change from 2016 to 2017
REVENUES REVENUES
Royalty fees $ 345,302 $ 320,547 Base management fees $ 1,102 $ 806
Initial franchise and relicensing fees $ 26,262 $ 23,953 Franchise fees $ 1,618 $ 1,169
Procurement services $ 34,661 $ 31,226 Incentive management fees $ 607 $ 425
Marketing and reservation system $ 567,083 $ 525,716 Owned, leased, and other revenue $ 1,802 $ 1,126
Other $ 34,048 $ 23,199 Cost reimbursements $ 17,765 $ 13,546
Total revenues $ 1,007,356 $ 924,641 9% Total revenue $ 22,894 $ 17,072 34%
OPERATING EXPENSES OPERATING COSTS AND EXPENSES
Selling, general and administrative $ 163,377 $ 148,728 Owned, leased, and other-direct $ 1,427 $ 900
Depreciation and amortization $ 12,431 $ 11,705 Reimbursed costs $ 17,765 $ 13,546
Marketing and reservation system $ 567,083 $ 525,716 Depreciation, amortization, and other $ 290 $ 168
Total operating expenses $ 742,891 $ 686,149 General, administrative, and other $ 894 $ 704
Gain (loss) on sale of assets, net $ (32) $ 403 Merger-related costs and charges $ 159 $ 386
Operating income $ 264,433 $ 238,895 11% Costs and Expenses, Total $ 20,535 $ 15,704
Operating income $ 2,359 $ 1,368 72%
OTHER INCOME AND EXPENSES, NET Gains and other income, net $ 688 $ 5
Interest expense $ 45,039 $ 44,446 Interest expense $ (288) $ (234)
Interest income $ (5,920) $ (3,535) Interest income $ 38 $ 35
Other gains $ (3,229) $ (1,504) Equity in earnings $ 39 $ 10
Equity in net (income) loss of affiliates $ 4,546 $ (492)
Total other income and expenses, net $ 40,436 $ 38,915 4%
Income before income taxes $ 223,997 $ 199,980 12% Income before income taxes $ 2,836 $ 1,184 140%
Income taxes $ 109,104 $ 60,609 80% Provision for income taxes $ (1,464) $ (404) 262%
Net income $ 114,893 $ 139,371 -18% Net income $ 1,372 $ 780 76%
Questions: 1. Based on your horizontal analysis of Choice Hotels’ and Marriott International’s total revenue, total expenses, and net income, which company would be a more attractive target for an acquisition by the equity firm and why? 2. Given the changes in total revenue, operating income, and net income from 2016 to 2017, did Choice Hotels or Marriott International experience more change? Which area (total revenue, operating income, or net income) changed most?
Answer questions 1 and 2 here. 1. Marriott’s Hotels would be a more attractive target for an acquisition by the equity firm as it has recorded a higher improvement across the revenues by 76% while Choice has recorded an 18% decline . The operating income has also increased by 725 compared to Choice’s 11%. Futhermore, Marriot’s largest expense, Cost Reimburesments are instantly canceled out by the matching revenue and cost reimbursments. As a reslut, it leaves little worry considering paying back short term expenses. 2. Marriott’s recorded more change in total revenues , operating incomes as well as the net incomes
https://www.sec.gov/Archives/edgar/data/1046311/000104631118000006/0001046311-18-000006-index.htm https://www.sec.gov/Archives/edgar/data/1046311/000104631117000006/0001046311-17-000006-index.htm https://www.sec.gov/Archives/edgar/data/1048286/000162828018001756/0001628280-18-001756-index.htm https://www.sec.gov/Archives/edgar/data/1048286/000162828017001506/0001628280-17-001506-index.htm
Balance Sheet
CHH 2017 10-K Report CHH 2016 10-K Report MAR 2017 10-K Report MAR 2016 10-K Report
Account name 2017 2016 (2017/2016)-1 Account name 2017 2016 (2017/2016)-1
ASSETS CHH 2017 10-K Report CHH 2016 10-K Report Percent change from 2016 to 2017 ASSETS MAR 2017 10-K Report MAR 2016 10-K Report Percent change from 2016 to 2017
Current assets Current assets
Cash and cash equivalents $ 235,336.00 $ 202,463.00 16% Cash and equivalents $ 383.00 $ 858.00 -55%
Receivables $ 125,452.00 $ 107,336.00 17% Accounts and notes receivable, net $ 1,991.00 $ 1,695.00 17%
Income taxes receivable $ – 0 $ 316.00 -100% Prepaid expenses and other $ 224.00 $ 230.00 -3%
Notes receivable, net of allowance $ 13,904.00 $ 7,873.00 77% Assets held for sale $ 149.00 $ 588.00 -75%
Other current assets $ 28,241.00 $ 26,885.00 5% Assets, current, total $ 2,747.00 $ 3,371.00 -19%
Total current assets $ 402,933.00 $ 344,873.00 17% Property and equipment, net $ 1,793.00 $ 2,335.00 -23%
Property and equipment, at cost, net $ 83,374.00 $ 84,061.00 -1% Intangible assets
Goodwill $ 80,757.00 $ 78,905.00 2% Intangible assets $ 8,805.00 $ 9,270.00 -5%
Intangible assets, net $ 14,672.00 $ 15,738.00 -7% Goodwill $ 9,207.00 $ 7,598.00 21%
Notes receivable, net of allowances $ 147,993.00 $ 110,608.00 34% Goodwill and intangible assets, net, total $ 18,012.00 $ 16,868.00 7%
Investments, employee benefit plans, at fair value $ 20,838.00 $ 16,975.00 23% Equity and cost method investments $ 740.00 $ 728.00 2%
Investments in unconsolidated entities $ 134,226.00 $ 94,839.00 42% Notes receivable, net $ 142.00 $ 245.00 -42%
Deferred income taxes $ 13,335.00 $ 52,812.00 -75% Deferred tax assets $ 93.00 $ 116.00 -20%
Other assets $ 29,479.00 $ 53,657.00 -45% Other noncurrent assets $ 421.00 $ 477.00 -12%
Total assets $ 927,607.00 $ 852,468.00 9% Total assets $ 23,948.00 $ 24,140.00 -1%
LIABILITIES AND SHAREHOLDERS EQUITY CHH 2017 10-K Report CHH 2016 10-K Report LIABILITIES AND SHAREHOLDERS EQUITY MAR 2017 10-K Report MAR 2016 10-K Report
Current liabilities Current liabilities
Accounts payable $ 63,540.00 $ 48,071.00 32% Current portion of long-term debt $ 398.00 $ 309.00 29%
Accrued expenses and other current liabilities $ 85,838.00 $ 80,388.00 7% Accounts payable $ 780.00 $ 687.00 14%
Deferred revenue $ 141,111.00 $ 133,218.00 6% Accrued payroll and benefits $ 1,227.00 $ 1,174.00 5%
Current portion of long-term debt $ 1,232.00 $ 1,195.00 3% Liability for guest loyalty programs $ 2,064.00 $ 1,866.00 11%
Income taxes payable $ 2,776.00 $ 796.00 249% Accrued expenses and other $ 1,541.00 $ 1,111.00 39%
Total current liabilities $ 294,497.00 $ 263,668.00 12% Liabilities, current, total $ 6,010.00 $ 5,147.00 17%
Long-term debt $ 725,292.00 $ 839,409.00 -14% Long-term debt $ 7,840.00 $ 8,197.00 -4%
Deferred compensation and retirement plan obligations $ 25,566.00 $ 21,595.00 18% Liability for guest loyalty programs $ 2,876.00 $ 2,675.00 8%
Income taxes payable $ 29,041.00 $ – 0 Deferred tax liabilities $ 604.00 $ 1,020.00 -41%
Deferred income taxes $ 39.00 $ 292.00 -87% Other noncurrent liabilities $ 2,887.00 $ 1,744.00 66%
Other liabilities $ 65,274.00 $ 38,853.00 68% total liabilities $ 20,217.00 $ 18,783.00 8%
Total liabilities $ 1,139,709.00 $ 1,163,817.00 -2% Shareholders’ equity
Class A Common Stock $ 5.00 $ 5.00 0%
Commitments and Contingencies Additional paid-in-capital $ 5,770.00 $ 5,808.00 -1%
Common stock $ 951.00 $ 951.00 0% Retained earnings $ 7,391.00 $ 6,501.00 14%
Additional paid-in-capital $ 182,448.00 $ 159,045.00 15% Treasury stock, at cost $ (9,418.00) $ (6,460.00) 46%
Accumulated other comprehensive loss $ (4,699.00) $ (8,522.00) -45% Accumulated other comprehensive loss $ (17.00) $ (497.00) -97%
Treasury stock $ (1,064,573.00) $ (1,070,383.00) -1% Stockholders’ deficit $ 3,731.00 $ 5,357.00 -30%
Retained earnings $ 673,771.00 $ 607,560.00 11% Liabilities and deficit, total $ 23,948.00 $ 24,140.00 -1%
Total shareholders equity $ (212,102.00) $ (311,349.00) -32%
Total liabilities and shareholders equity $ 927,607.00 $ 852,468.00 9%
Questions: 1. Based on your horizontal analysis of Choice Hotels’ and Marriott International’s total assets, total liabilities, and total equity, which company is most attractive for an acquisition by the equity firm and why? 2. What advice would you give to the client, Choice Hotels, to reduce its total liabilities?
Answer questions 1 and 2 here. 1. The horizontal analysis shows that Choice Hotels is the most attractive as the assets have increased by 9%, the liabilities have reduced by 2% while the paid in capital increased by 15% and the shareholder equity has also improved by 32%. On the other hand, Marriott’s has seen the stockholder equity decrease by 30%, liability has increased by 8% and the assets have reduced by 1% 2. Choice Hotels should consider using internal sources of finance to reduce the total liabilities. The Accounting Manager should know how to reduce the Transition Tax that they pay when bringing in foreign income in the United States. If unable to cut it down, they should consider to paying it over time in lieu of a lump sum. Another alternative would be to apply cash and cas equivalents to any libilities notabily: long-term debt and account payable.
https://www.sec.gov/Archives/edgar/data/1046311/000104631118000006/0001046311-18-000006-index.htm https://www.sec.gov/Archives/edgar/data/1046311/000104631117000006/0001046311-17-000006-index.htm https://www.sec.gov/Archives/edgar/data/1048286/000162828018001756/0001628280-18-001756-index.htm https://www.sec.gov/Archives/edgar/data/1048286/000162828017001506/0001628280-17-001506-index.htm
Cash Flow
CHH 2017 10-K Report CHH 2016 10-K Report MAR 2017 10-K Report MAR 2016 10-K Report
10-K 10-K
Choice Hotels 2017 2016 (2017/2016)-1 Marriott International 2017 2016 (2017/2016)-1
CASH FLOWS FROM OPERATING ACTIVITIES 2017 10-K 2016 10-K Percent change from 2016 to 2017 CASH FLOWS FROM OPERATING ACTIVITIES 2017 10-K 2016 10-K Percent change from 2016 to 2017
Net income $ 114,893 $ 139,371 -0.1756319464 Net income $ 1,372 $ 780 76%
Adjustments to reconcile net income to net cash provided by operating activities Adjustments to reconcile to cash provided by operating activities:
Depreciation and amortization $ 12,431 $ 11,705 6% Depreciation, amortization, and other $ 290 $ 168 73%
Loss (gain) on disposal of assets $ 52 $ (346) -115% Share-based compensation $ 181 $ 212 -15%
Provision for bad debts, net $ 3,440 $ 2,151 60% Income taxes $ 828 $ 76 989%
Non-cash stock compensation and other charges $ 23,340 $ 15,458 51% Liability for guest loyalty program $ 378 $ 343 10%
Non-cash interest and other (income) loss $ (772) $ 1,059 -173% Merger-related charges $ (124) $ 113 -210%
Deferred income taxes $ 39,320 $ (10,542) -473% Working capital changes $ 81 $ (77) -205%
Equity in net losses from unconsolidated joint ventures, less distributions received $ 6,579 $ 1,025 542% (Gain) loss on asset dispositions $ (687) $ 1 -68800%
Changes in assets and liabilities, net of acquisition Other $ 117 $ 66 77%
Receivables $ (23,126) $ (21,919) 6% Net cash provided by operating activities $ 2,436 $ 1,682 45%
Advances to/from marketing and reservation system activities, net $ 51,722 $ (21,449) -341%
Forgivable notes receivable, net $ (30,638) $ (17,410) 76% INVESTING ACTIVITIES
Accounts payable $ 12,455 $ (13,689) -191% Acquisition of a business, net of cash acquired $ – 0 $ (2,412) -100%
Accrued expenses and other current liabilities $ 7,176 $ 5,225 37% Capital expenditures $ (240) $ (199) 21%
Income taxes payable/receivable $ 31,383 $ 5,775 443% Dispositions $ 1,418 $ 218 550%
Deferred revenue $ 7,797 $ 61,646 -87% Loan advances $ (93) $ (32) 191%
Other assets $ 1,521 $ (8,703) -117% Loan collections $ 187 $ 67 179%
Other liabilities $ (199) $ 2,678 -107% Contract acquisition costs $ (189) $ (80) 136%
Net cash provided by operating activities $ 257,374 $ 152,035 69% Redemption of debt security $ – 0 $ – 0
Other $ (63) $ 29 -317%
CASH FLOWS FROM INVESTING ACTIVITIES Net cash provided by (used in) investing activities $ 1,020 $ (2,409) -142%
Investment in property and equipment $ (23,437) $ (25,191) -7%
Investment in intangible assets $ (2,517) $ (2,580) -2% FINANCING ACTIVITIES
Proceeds from sales of assets $ 1,000 $ 11,462 -91% Commercial paper/Credit Facility, net $ 25 $ 1,365 -98%
Acquisitions of real estate $ – 0 $ (28,583) -100% Issuance of long-term debt $ – 0 $ 1,482 -100%
Business acquisition, net of cash acquired $ – 0 $ (1,341) -100% Repayment of long-term debt $ (310) $ (326) -5%
Contributions to equity method investments $ (50,554) $ (34,661) 46% Issuance of Class A Common Stock $ 6 $ 34 -82%
Distributions from equity method investments $ 4,569 $ 3,700 23% Dividends paid $ (482) $ (374) 29%
Purchases of investments, employee benefit plans $ (2,447) $ (1,661) 47% Purchase of treasury stock $ (3,013) $ (568) 430%
Proceeds from sales of investments, employee benefit plans $ 2,245 $ 1,911 17% Share-based compensation withholding taxes $ (157) $ (100) 57%
Issuance of mezzanine and other notes receivable $ (19,738) $ (32,604) -39% Other $ – 0 $ (24) -100%
Collections of mezzanine and other notes receivable $ 655 $ 11,070 -94% Net cash (used in) provided by financing activities $ (3,931) $ 1,489 -364%
Other items, net $ 109 $ 11 891% (DECREASE) INCREASE IN CASH AND EQUIVALENTS $ (475) $ 762 -162%
Net cash used by investing activities $ (90,115) $ (98,467) -8% CASH AND EQUIVALENTS, beginning of period $ 858 $ 96 794%
CASH AND EQUIVALENTS, end of period $ 383 $ 858 -55%
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of long-term debt $ – 0 $ – 0
Net (repayments) borrowings pursuant to revolving credit facilities $ (115,003) $ 25,795 -546%
Principal payments on long-term debt $ (660) $ (988) -33%
Proceeds from other debt agreements $ – 0 $ 550 -100%
Debt issuance costs $ – 0 $ (284) -100%
Purchases of treasury stock $ (9,807) $ (35,926) -73%
Dividends paid $ (48,651) $ (46,182) 5%
Proceeds from transfer of interest in notes receivable $ 24,237 $ – 0
Proceeds from exercise of stock options $ 14,107 $ 12,951 9%
Net cash used by financing activities $ (135,777) $ (44,084) 208%
Net change in cash and cash equivalents $ 31,482 $ 9,484 232%
Effect of foreign exchange rate changes on cash and cash equivalents $ 1,391 $ (462) -401%
Cash and cash equivalents at beginning of period $ 202,463 $ 193,441 5%
Cash and cash equivalents at end of period $ 235,336 $ 202,463 16%
Questions: 1. Based on your horizontal analysis of Choice Hotels’ and Marriott International’s operating, investing, and financing activities, which company is most attractive for an acquisition by the equity firm and why? 2. What advice would you give to the client, Choice Hotels, to improve their investing and financing activities?
Answer questions 1 and 2 here. 1. Choice Hotels has seen an improvement in cash from operations , financing activities and a reduction in the investing activities cash flows. Choie Hotels invests massively in purchasing more real estate. Futhermore, the horizontal analysis and cash flows ratios show that Choice Hotels has enough cash flows from operarations and iti is financially looking good. On the other hand, Marriott’s has seen an improvement in the cash from operation but a reduction in cash flow investing and financing activities. Therefore, Choice Hotels is the most attractive company for acquisition. 2. Concerning Choice Hotels financial activities improvement, the copmany should consider issuing shares of stock to raise raise funds so as to boost its financinf activities. Another way of improving financial activities is to re-negotiate different terms with creditors on how to pay down its debts to reduce long-term debts. Moreover, for Choice Hotels to increase its financial activities, it would best to reduce the amount of dividents paid out each year to shareholders. Regarding how to improve investing activities, Choice Hotels should recognize more shares of the investees’ net loss to reduce its equity mehod of investment. Finally, the company should consider leasing instead of acquiring the assets, seek equity sources to finance the assets instead of issuing notes to pay for the investments. The company should also invest in vehicles that have higher returns
https://www.sec.gov/Archives/edgar/data/1046311/000104631118000006/0001046311-18-000006-index.htm https://www.sec.gov/Archives/edgar/data/1046311/000104631117000006/0001046311-17-000006-index.htm https://www.sec.gov/Archives/edgar/data/1048286/000162828018001756/0001628280-18-001756-index.htm https://www.sec.gov/Archives/edgar/data/1048286/000162828017001506/0001628280-17-001506-index.htm
Cost and Investing
Choice Hotels Sales, Production, and Cost Information Overhead Costs
Room Type Standard Guest Room Junior Suite Presidential Suite Type Cost
Volume 150 110 25 285 Depreciation $3,200,000 $750,000 $8,550,000
Price $140,000 $240,000 $1,050,000 Maintenance $1,800,000
Unit costs Purchasing $320,000 $950,000
Direct materials $30,000 $92,000 $310,000 Inspection $850,000 $100,000
Direct labor $54,000 $85,000 $640,000 Indirect materials $490,000 $104,251.89
Manufacturing $30,000 $30,000 $30,000 Supervision $1,700,000 $35,748
overhead Supplies $190,000
Total unit cost $114,000 $207,000 $980,000 Total manufacturing overhead cost $8,550,000
Unit gross profit $26,000 $33,000 $70,000 Note: Manufacturing overhead costs are fixed. They do not vary with the volume of manufacturing activity.
Direct labor hours 1,200 1,300 5,940
Rate per hour $45.00 $65.38 $107.74
Answer Questions 1 and 2 Below:
135562.12
Choice Hotels’ controller developed the following data for use in activity-based costing: Complete the calculations to help you answer the questions below. Answer Questions 3 to 10 Below:
Manufacturing overhead Amount Cost driver Standard Guest Room Junior Suite Presidential Suite Sum of Cost Drivers Cost per cost driver Cost per Standard Guest room Cost per Junior Suite Cost per Presidential Suite Check
Depreciation $3,200,000 Square feet 50,000 30,000 30,000 110,000 $ 29.09 $ 1,454,545 $ 872,727 $ 872,727 $ 3,200,000
Maintenance $1,800,000 Direct labor hours 180,000 143,000 148,500 471,500 4 687,169 545,917 566,914 1,800,000
Purchasing $320,000 # of purchase orders 2,500 1,500 9,000 13,000 25 61,538 36,923 221,538 320,000
Inspection $850,000 # of inspections 1,000 850 3,500 5,350 159 158,879 135,047 556,075 850,000
Indirect $490,000 Units manufactured 150 110 25 285 $1,719.30 257894.736842105 189122.807017544 42982.4561403509 490000
materials
Supervision $1,700,000 # of inspections 1,000 850 3,500 5,350 $317.76 $317,757.01 $270,093.46 $1,112,149.53 $1,700,000.00
Supplies $190,000 Units manufactured 150 110 25 285 $666.67 $100,000.00 $73,333.33 $16,666.67 $190,000.00
Total $8,550,000 234,800 176,420 194,550 $ 3,037,782.78 $ 2,123,163.96 $ 3,389,053.26 $ 8,550,000.00 19301.4905454545
20251.8852
Questions: 1. What would be the cost per unit of producing Guest Room Set A using factory space as the allocation basis? What would be the cost per unit using labor as the allocation basis? 2. What would be the cost per unit of producing Guest Room Set A using activity-based costing? 3. Should Choice Hotels build Guest Room Set A or Guest Room Set B? Why? 4. Should Choice Hotels build or purchase the guest room furniture? Why?
Choice Hotels produces three models of guest rooms: the standard guest room, Junior Suite, and Presidential Suite. The Standard Guest Room comes with basic furniture, bathroom plan, and amenities. It sells for $140,000 to franchise hotels. The Junior Suite model is larger and includes an enhanced furniture selection, upgraded bathroom fixtures, more comfortable bedding. The guest room is considered an upgrade from the standard guestroom model. The Junior Suite sells for $240,000 to franchise hotels. The Presidential Suite model is a custom-made guest room with floors and walls constructed from specialty wood. The drapes are made from the traditional flax-based canvass. It has the look and feel of a room in the White House, with modern comforts and security. The Presidential Suite sells for $1,050,000 to franchise hotels. Workers who build the Presidential Suite are specialized craftsmen. They earn twice the hourly rate of those working on the Standard Guest Room and Junior Suite models. The labor rate is fully burdened to include benefits. Most of Choice Hotels’ guest room sales come from the Standard Guest Room and the Junior Suite, but sales of the Presidential Suite model have been growing. The company’s sales, production, and cost information for last year is provided to the right.
Questions: 3. Use activity-based costing to allocate the costs of overhead per unit and in total to each guest room type. Show all supporting calculations in the space provided to the right. 4. Calculate the cost of one Presidential Suite using activity-based costing.
Questions: 1. The cost-allocation system Choice Hotels has been using allocates over 90 percent of overhead costs to the Standard Guest Room and the Junior Suite, because over 90 percent of the models produced were one of these two models. How much overhead was allocated to each of the three models last year? Discuss why this might not be an accurate way to assign overhead costs to products. 2. Choice Hotels’ production manager proposes allocating overhead by direct labor hours instead, since the different models require different amounts of labor. How much overhead would be allocated to each guest room (per unit and in total) using this method? Show all supporting calculations.
Questions: 5. At the current selling price, is the company covering its true cost of production of the Presidential Suite? Briefly discuss. 6. What should price should Choice Hotels charges for the Presidential Suite? 7. Assume that the Presidential Suite has the same profit margin as the standard guest room. What should its selling price be? Show all calculations. 8. What should Choice Hotels do if the quantity of the Presidential Suite Guest Rooms sold at the new price falls to 10 per year? 9. What should Choice Hotels do if the price of the Presidential Suite cannot exceed $1,050,000? 10. At a selling price of $1,050,000 each, what is the breakeven unit volume for the Presidential Suite?
Question: 1 . The allocation based on volumes means that the standard room is allocated $4.5 million, while the Junior suites gets $3.3 million and the presidential suites gets $750,0000. this allocation is erroneous as it does not take into account the actual costs for each of the units. The direct labor overhead should be allocated based on the actual labor used in each units , the direct material overheads should be allocated based on the purchase made but not the number of customers using the suites. Question: 2 standard suites = (1200/8440)8550000 = $1,215,639.81 Junior suites = (1300/8440)8550000 = $1,316,943.13 presidential suites = (5940/8440)*8550000 = $6,017,417.06 Question 2: The answer is incorrect; you must calculate using ABC and show your work.Because the cost driver is labor hours, it is not just the number of hours that need to be considered. The hours for each type must be multiplied by the rate per hour. The Labor Hours Cost must be found by finding rate per hour and multiplying the rate per hour by the unit labor hours. Here is how: multiplying the number of labor hours by the number of units for each type (e.g. Standard is 1,200 x 150 = 180,000) this gives the total labor hours for each type; then add all the total labor hours for each type together to get total labor hours for all manufacturing; then divide the total manufacturing overhead (MoH) cost by the total labor hours, that gives you the rate per hour; then multiply the rate per hour by the hours for each type giving you total MoH (hint: added together, total MoH should equal $8,550,000); then divide the total MoH for each type by the number of units produced to get the MoH per type; then divide the total MoH for each type by the Total MoH to find the percent of total MoH
Answer Questions 3 and 4 here. standard junior Suite presidential Suite depreciation $ 3,200,000 [(50,000/110,000)3,200,000] = $ 1,454,545 [(30,000/110,000)3,200,000] = $ 872,727 [(30,000/110,000)3,200,000] = $ 872,727 Maintenance [(180,000/471,500)1,800,00]= 687,169 [(143,000/471,500)1,800,00]= 545,917 [(471,050/471,500)1,800,00]= 566,914 Purchasing [(2500/13000)32000)= 61,538 [(1500/13000)32000)= 36,923 [(9000/13000)32000)= 221,538 Inspection [(1000/5350)85000] =158,879 [(850/5350)85000] = 135,047 [(850/5350)85000] = 556,075 Indirect Materials [(150/285)$490,000 ]= 257894.74 [(110/285)$490,000 ]= 189122.807 [(25/285)$490,000 ]= 42982.46 Supervision [(1000/5350)$1,700,000]=$317,757.01 [(850/5350)$1,700,000]=$270,093.46 [(3500/5350)$1,700,000]=$1,112,149.53 Supplies [(150/666.7)190,000]= $100,000.00 [(110/666.7)190,000]= $73,333.33 [(285/666.7)*190,000]= $16,666.67 Total $3,037,782.78 $2,123,163.96 $3,389,053.26 Total pr unit ($3,037,782.78 /150)=20251.8852 ($2,123,163.96 /110)=19301.49055 ( $3,389,053.26 /25) =135562.12 Question 4 direct material 310,000 direct labor 640,000 manufacturing overheads 3,389.053/25= 1355662.12 Total costs= Price $1,085,562
Answer Questions 5 to 10 here. 5. At the current price, the company is not meeting the true costs of the presidential suite. The Total costs incurred is $1,085,562 while the unit is selling at $1,050,000, which is $35,562. lower 6. Choice Hotels should sell the units at $110,497.24 ======>(1000,000/0.905) * Selling Price: 1,050,000. * –Direct Labor: 640,000. * –Direct Materials: 310,000. * Gross Profit: 100,000. * Gross Profit Margin: 100,000/1,050,000.====> 0.095 * Net Profit Margin: 1.00 – 0.095= 0.905 * New Sales Price: 100,000/0.905= 110,497.24 7. Standard guest room: costs = $93,333.33 ======>(56,000/0.6) * Selling Price: 140,000. * –Direct Labor: 54,000. * –Direct Materials: 30,000. * Gross Profit: 56,000. * Gross Profit Margin: 56,000/140,000..====> 0.4 * Net Profit Margin: 1.00 – 0.4= 0.6 * New Sales Price: 56,000/0.6= 93,333.33 8. If the units sold reduced to 10 per year, the company continues to make profit and therefore continue production 9. If prices cannot exceed the 105000 price, the company should stop producing these units since it will be a loss 10. the break even units at $1,050,000 is: * fixed costs = $1,085,562 * MOH: 30,000 * Contribution margin per unit: 100,000. =====> 1,050,000 – 950,000) * Breakenven= Fixed Cost / Unit Contribution * variable costs = 105000- (310,000+640,000) = 100000 break even = $1,085,562 /100,000 = 10.8556 units.
Choice Hotels has contracted with a mid-size furniture manufacturer for the production of guestroom furniture for three models of guest rooms: the standard guest room, Junior Suite, and Presidential Suite. The Standard Guest Room comes with basic furniture, bathroom plan, and amenities. It sells for $140,000 to franchise hotels. The Junior Suite model is larger and includes an enhanced furniture selection, upgraded bathroom fixtures, more comfortable bedding. The guest room is considered an upgrade from the standard guestroom model. The Junior Suite sells for $240,000 to franchise hotels. The Presidential Suite model is a custom-made guest room with floors and walls constructed from specialty wood. The drapes are made from the traditional flax-based canvass. It has the look and feel of a room in the White House, with modern comforts and security. The Presidential Suite sells for $1,050,000 to franchise hotels. Workers who build the Presidential Suite are specialized craftsmen. They earn twice the hourly rate of those working on the Standard Guest Room and Junior Suite models. The labor rate is fully burdened to include benefits. Most of Choice Hotels’ guest room sales come from the Standard Guest Room and the Junior Suite, but sales of the Presidential Suite model have been growing. The company’s sales, production, and cost information for last year is provided to the right.
Questions: 3. Use activity-based costing to allocate the costs of overhead per unit and in total to each guest room type. Show all supporting calculations in the space provided to the right. 4. Calculate the cost of one Presidential Suite using activity-based costing. 5. At the current selling price, is the company covering its true cost of production of the Presidential Suite? Briefly discuss. 6. What should price should Choice Hotels charges for the Presidential Suite? 7. Assume that the Presidential Suite has the same profit margin as the standard guest room. What should its selling price be? Show all calculations. 8. What should Choice Hotels do if the quantity of the Presidential Suite Guest Rooms sold at the new price falls to 10 per year? 9. What should Choice Hotels do if the price of the Presidential Suite cannot exceed $1,050,000? 10. At a selling price of $1,050,000 each, what is the breakeven unit volume for the Presidential Suite?
Questions: 1. The cost-allocation system Choice Hotels has been using allocates over 90 percent of overhead costs to the Standard Guest Room and the Junior Suite, because over 90 percent of the models produced were one of these two models. How much overhead was allocated to each of the three models last year? Discuss why this might not be an accurate way to assign overhead costs to products. 2. Choice Hotels’ production manager proposes allocating overhead by direct labor hours instead, since the different models require different amounts of labor. How much overhead would be allocated to each guest room (per unit and in total) using this method? Show all supporting calculations.
Budgeting
Choice Hotels Marriott International (2017/2016)-1 (2017/2016)-1
Ratios 2017 2016 2017 2016 Percent Change from 2016 to 2017 Percent Change from 2016 to 2017
Quick ratio = (cash + cash equivalence + receivables) / current liabilities 1.2723117723 1.2060166573 0.39500832 0.4960170973 5% -20%
Acid test ratio = current assets / current liabilities 1.368207486 1.3079820077 1.21247920 1.7635515834 5% -31%
Debt ratio = total liabilities / total assets 1.2286550231 1.3652324779 1.18454766 1.2852047064 -10% -8%
CHH: 2017 2016 Marriott: 2017 2016
Cash and Cash Equivalents: 235336 202463 383 858
Receivables: 125452 316 1991 1695
Receivables: 13904 7873
Receivables: 107336
Current Assets: 402933 344873 7287 9077
Total Assets: 927607 852468 23948 24140
Current Liabilities: 294497 263668 6010 5147
Total Liabilities: 1139709 1163817 20217 18783
Questions: 1. Quick ratios between 0.5 and 1 are considered satisfactory as long as the collection of receivables is not expected to slow. Does the client, Choice Hotels, have enough current assets to meet the payment schedule of current liabilities with a margin of safety? 2. Which of the above ratios would you use to determine which company, Choice Hotels or Marriott International, is more attractive for an acquisition by the equity firm and why?
Answer Questions 1 to 3 here. 1. The quick ratios are above 1, which means that Choice Hotels has enough current assets to meet the current assets comfortably 2. The debt ratio would be better to determine which company is attractive for acquisition as this ratio indicates whether the company is able to finance all its debt requirements from the assets held. In case of a liquidation, the liability holders will be paid first before the equity holders Feedback for step 4: BUDGETING Quick ratios for both companies are incorrect. Quick and current ratios would be the same since neither company has inventory “Acid test ratio” (which is actually the current ratio) for Marriott are incorrect.. Use Total Liabilities as the numerator (hint: for Marriott you will need to add total current liabilities to long term liabilities [everything between Liabilities, current, total and Shareholders’ Equity titles]) Debt ratios for Marriott are incorrect. Current assets number has Property, Plant & Equipment included, which are not Current Assets Question 1 and 2 are correct.
Profitability
Choice Hotels Marriott International (2017/2016)-1 (2017/2016)-1
Ratios 2017 2016 2017 2016 Percent Change from 2016 to 2017 Percent Change from 2016 to 2017
Return on equity (ROE) = net income / total equity -54% -45% 37% 15% 21% 153%
Return on assets (ROA) = net income / total assets 12% 16% 6% 3% -24% 77%
Questions: 1. The return on assets ratio tells us the profit generated by each dollar in assets. You will want to compare this ratio to Choice Hotels’ historical performance and to Marriott International to understand if it is an acceptable ratio. Is the return on assets ratio acceptable? Why or why not? 2. Which of the above ratios would you use to determine which company, Choice Hotels or Marriott International, is more attractive for an acquisition? Why? 3. Based on the financial statement analysis, earnings per share analysis, budgeting ratios, and the above profitability ratios, which company would you invest in and why?
Answer Questions 1 to 3 here. 1.The ROA of Choice Hotels is more than double that of Marriott, meaning that Choice is more profitable as each asset is generating more returns per each as held than its competitor. ROA and ROE ratios show financial health of the company. If ROE is worse than ROA, it means that the company has borrowed so much. As a result, potential investors will stay away from investing in this company. 2. The ROA is more reliable when making a acquisition choice as it informs how the company is profitable relative to the assets it holds. 3. I would invest in Choice as it has higher returns on the equity and has shown an improvement in the tow years under review choice also has higher liquidity ratios, has seen better improvement in the financial position , cash flows and has higher revenues than Marriott’s. Prof Feedback: PROFITABILITY All ratios are correct The answer to question 1 is partially correct. While the ROA is better, the ROE is much worse. What does that mean for potential buyers?
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Project 3 Choice Hotels: Review 3 Questions
Kindly, review only three questions in Reed (Prof Feedback) on Budgeting, Cost & Investment, Profitability Excel worksheet.
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Diss2
How would one distinguish between an organizational weakness and a threat to the organization?
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Securities and Exchange Commission
CHAPTER 17 Investor Protection and E-Securities Transactions
New York Stock Exchange
This is the home of the New York Stock Exchange (NYSE) in New York City. The NYSE, nicknamed the Big Board, is the premier stock exchange in the world. It lists the stocks and securities of approximately 3,000 of the world’s largest companies for trading. The origin of the NYSE dates to 1792, when several stockbrokers met under a buttonwood tree on Wall Street. The NYSE is located at 11 Wall Street, which has been designated a National Historic Landmark. The NYSE is now operated by NYSE Euronext, which was formed when the NYSE merged with the fully electronic stock exchange Euronext.
Learning Objectives
After studying this chapter, you should be able to:
Chapter Outline
“The insiders here were not trading on an equal footing with the outside investors.”
—Judge Waterman Securities and Exchange Commission v. Texas Gulf Sulphur Company 401 F.2d 833, 1968 U.S. App. Lexis 5796 (1968)
Introduction to Investor Protection and E-Securities Transactions
Prior to the 1920s and 1930s, the securities markets in this country were not regulated by the federal government. Securities were issued and sold to investors with little, if any, disclosure. Fraud in these transactions was common. To respond to this lack of regulation, in the early 1930s Congress enacted federal securities statutes to regulate the securities markets, including the Securities Act of 1933 and the Securities Exchange Act of 1934. The federal securities statutes were designed to require disclosure of information to investors, provide for the regulation of securities issues and trading, and prevent fraud. Today, many securities are issued over the Internet. These e-securities transactions are subject to federal regulation.
WEB EXERCISE
Visit the website of the New York Stock Exchange at www.nyse.com .Click on “About Us” and click on “Overview.” Read the description of NYS Euronext.
In 2012, Congress enacted the Jumpstart Our Business Startups (JOBS) Act, to make it easier for smaller businesses to raise capital, and the Stop Trading on Congressional Knowledge (STOCK) Act, to prohibit insider trading by government employees.
This chapter discusses federal securities laws, e-securities transactions, investor protection, ethics, and securities reform.
Securities Law
The federal and state governments have enacted statutes that regulate the issuance and trading of securities. These are referred to collectively as securities law . The primary purpose of these acts is to promote full disclosure to investors and to prevent fraud in the issuance and trading of securities. These federal and state statutes are enforced by federal and state regulatory authorities, respectively. The following feature discusses major federal securities statutes.
Landmark Law Federal Securities Laws
Following the stock market crash of 1929, Congress enacted a series of statutes designed to regulate securities markets. These federal securities statutes are designed to require disclosure to investors and prevent securities fraud. The two primary securities statutes enacted by the federal government, both of which were enacted during the Great Depression years, are:
· Securities act of 1933. The Securities Act of 1933 is a federal statute that regulates primarily the issuance of securities by companies and other businesses. 1 This act applies to original issue of securities, both initial public offerings (IPOs) by new public companies and sales of new securities by existing companies. The primary purpose of this act is to require full and honest disclosure of information to investors at the time of the issuance of the securities. The act also prohibits fraud during the sale of issued securities. Securities are now issued online, and the 1933 act regulates the issue of securities online.
· Securities exchange act of 1934. The Securities Exchange Act of 1934 is a federal statute designed primarily to prevent fraud in the subsequent trading of securities. 2 This act has been applied to prohibit insider trading and other frauds in the purchase and sale of securities in the after markets, such as trading on securities exchanges and other purchases and sales of securities. The act also requires continuous reporting—annual reports, quarterly reports, and other reports—to investors and the Securities and Exchange Commission (SEC). Securities are now sold online and on electronic stock exchanges. The 1934 act regulates the purchase and sale of securities online.
These acts have been amended over the years. Additional federal statutes that promote investor protection and regulate securities issuance and trading are the Jumpstart Our Business Startups (JOBS) Act and the Stop Trading on Congressional Knowledge (STOCK) Act.
Securities and Exchange Commission
The Securities Exchange Act of 1934 created the Securities and Exchange Commission (SEC) , a federal administrative agency that is empowered to administer federal securities law. The SEC is an agency composed of five members who are appointed by the president. The major responsibilities of the SEC are:
Securities and Exchange Commission (SEC)
The federal administrative agency that is empowered to administer federal securities laws. The SEC can adopt rules and regulations to interpret and implement federal securities laws.
WEB EXERCISE
Go to the website of the Securities and Exchange Commission, at www.sec.gov . Click on “What We Do” and read the introduction.
· Adopting rules (also called regulations) that further the purpose of the federal securities statutes. These rules have the force of law.
· Investigating alleged securities violations and bringing enforcement actions against suspected violators. These enforcement actions may include recommendations of criminal prosecution. Criminal prosecutions of violations of federal securities laws are brought by the U.S. Department of Justice.
· Bringing a civil action to recover monetary damages from violators of securities laws. A whistleblower bounty program allows a person who provides information that leads to a successful SEC action in which more than $1 million is recovered to receive 10 percent to 30 percent of the money collected.
· Regulating the activities of securities brokers and advisors. This includes registering brokers and advisors and taking enforcement action against those who violate securities laws.
Definition of Security
Congress has enacted the Securities Act of 1933, the Securities Exchange Act of 1934, and several other securities statutes to regulate the issuance and sale of securities. For these federal statutes to apply, however, a securitymust first be found. Federal securities laws define securities as:
security
(1) An interest or instrument that is common stock, preferred stock, a bond, a debenture, or a warrant; (2) an interest or instrument that is expressly mentioned in securities acts; or (3) an investment contract.
· Common securities. Interests or instruments that are commonly known as securities are common securities .
Examples
Common stock, preferred stock, bonds, debentures, and warrants are common securities.
· Statutorily defined securities. Interests or instruments that are expressly mentioned in securities acts are statutorily defined securities .
Examples
The securities acts specifically define preorganization subscription agreements; interests in oil, gas, and mineral rights; and deposit receipts for foreign securities as securities.
· Investment contracts. A statutory term that permits courts to define investment contracts as securities. The courts apply the Howey test 3 to determine whether an arrangement is an investment contract and therefore a security. Under this test, an arrangement is considered an investment contract if there is an investment of money by an investor in a common enterprise and the investor expects to make profits based on the sole or substantial efforts of the promoter or others.
Examples
A limited partnership interest is an investment contract because the limited partner expects to make money based on the effort of the general partners. Pyramid schemes where persons give money to a promoter who promises them a high rate of return on their investment is an investment contract because the investors expect to make money from the efforts of the promoter.
investment contract
A flexible standard for defining a security.
Howey test
A test stating that an arrangement is an investment contract if there is an investment of money by an investor in a common enterprise and the investor expects to make profits based on the sole or substantial efforts of the promoter or others.
Mutual funds sell shares to the public, make investments in stocks and bonds for the long term, and are restricted from investing in risky investments. Because mutual funds are sold to the public, they must be registered with the SEC.
CONCEPT SUMMARY Definition of Security
Type of Security
Definition
Common securities
Interests or instruments that are commonly known as securities, such as common stock, preferred stock, debentures, and warrants.
Statutorily defined securities
Interests and instruments that are expressly mentioned in securities acts as being securities, such as interests in oil, gas, and mineral rights.
Investment contracts
A flexible standard for defining a security. Under the Howey test, a security exists if an investor invests money in a common enterprise and expects to make a profit from the significant efforts of others.
Initial Public Offering: Securities Act of 1933
The Securities Act of 1933 regulates primarily the issuance of securities by corporations, limited partnerships, and companies. Section 5 of the Securities Act of 1933 requires securities offered to the public through the use of the mails or any facility of interstate commerce to be registered with the SEC by means of a registration statement and an accompanying prospectus.
Securities Act of 1933
A federal statute that regulates primarily the issuance of securities by corporations, limited partnerships, and associations.
Section 5 of the Securities Act of 1933
A section that requires an issuer to register its securities with the SEC prior to selling them to the public.
A business or party selling securities to the public is called an issuer . An issuer may be a new company (e.g., Facebook) that is selling securities to the public for the first time. This is referred to as going public . Or the issuer may be an established company (e.g., General Motors Corporation) that sells a new security to the public. The issuance of securities by an issuer is called an initial public offering (IPO) .
initial public offering (IPO)
The sale of securities by an issuer to the public.
Many issuers of securities employ investment bankers , which are independent securities companies, to sell their securities to the public. Issuers pay a fee to investment bankers for this service.
Registration Statement
A company that is issuing securities to the public must file a written registration statement with the SEC. The general form for registering with the SEC is called Form S-1 . The issuer’s lawyer normally prepares the S-1 filing registration statement with the help of the issuer’s managers, accountants, underwriters, and other professionals. The registration statement is filed electronically with the SEC.
registration statement
A document that an issuer of securities files with the SEC and that contains required information about the issuer, the securities to be issued, and other relevant information.
A registration statement must contain descriptions of (1) the securities being offered for sale; (2) the registrant’s business; (3) the management of the registrant, including compensation, stock options and benefits, and material transactions with the registrant; (4) pending litigation; (5) how the proceeds from the offering will be used; (6) government regulation; (7) the degree of competition in the industry; and (8) any special risk factors. In addition, a registration statement must be accompanied by financial statements certified by certified public accountants.
Registration statements usually become effective 20 business days after they are filed unless the SEC requires additional information to be disclosed. A new 20-day period begins each time a registration statement is amended. At the registrant’s request, the SEC may accelerate the effective date (i.e., not require the registrant to wait 20 days after the last amendment is filed). The date that the registration becomes effective is called the effective date .
The SEC does not pass judgment on the merits of the securities offered. It decides only whether the issuer has met the disclosure requirements.
Prospectus
A preliminary prospectus is a written disclosure document that must be submitted to the SEC along with the registration statement. A prospectus contains much of the information included in the registration statement. This preliminary prospectus is used as a selling tool by the issuer. It is provided to prospective investors to enable them to evaluate the financial risk of an investment. The issuer must make a final prospectus (which includes the final price of the securities and any amendments required by the SEC) available to purchasers before or at the time of purchase. The issuer can make the final prospectus available on a website.
preliminary prospectus
A written disclosure document that must be submitted to the SEC along with the registration statement and given to prospective purchasers of the securities.
WEB EXERCISE
Go to the New York Stock Exchange website, at www.nyse.com/about/listed/IPO_Index.html ,to view the “IPO Showcase” list of the most recent IPOs. What is the most recent listing? Click on the company’s name and read the brief history of the company.
A prospectus must contain the following language in capital letters and bold (usually red) type:
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The following feature discusses the initial public offering of Facebook, Inc.
Business Environment Facebook’s Initial Public Offering
Facebook is a social networking service that was launched in 2004. Facebook has more than 1 billion users worldwide who post billions of comments and hundreds of millions of photographs daily using the Facebook network.
Facebook originally sold stock to several personal and institutional investors, but the company remained a privately held company for eight years. In 2012, Facebook, Inc., went public by issuing shares in an initial public offering (IPO). In the IPO, 421,233,615 shares of Facebook, Inc., were sold to the public. Of this amount, the company sold 180,000,000 shares, and insiders, including its owner Mark Zuckerberg, sold 241,233,615 shares. The company received the proceeds for the shares it sold, and the individuals and institutional shareholders received the proceeds for the shares they sold. The Facebook IPO was one of the largest in U.S. history. The offering share price was $38.00.
Prior to the IPO, the company created a dual-class stock structure . Zukerberg and the other insiders converted shares to Class B stock. Class A stock was sold to the public in the IPO. Class B stock is entitled to 10 votes per share, while class A stock is entitled to 1 vote per share. After the IPO, the holders of Class B stock controlled 96 percent of the voting power of the company, with Zuckerberg controlling 55.9 percent of the voting power of the company.
As a public company, Facebook, Inc., will have to file annual, quarterly, and other reports with the Securities and Exchange Commission (SEC) and make public disclosures to the SEC and its shareholders. The shares of Facebook, Inc., are traded on NASDAQ under the symbol FB.
The cover page of Facebook’s prospectus appears in Exhibit 17.1 .
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-179287
PROSPECTUS
Facebook, Inc. is offering 180,000,000 shares of its Class A common stock and the selling stockholders are offering 241,233,615 shares of Class A common stock. We will not receive any proceeds from the sale of shares by the selling stockholders. This is our initial public offering and no public market currently exists for our shares of Class A common stock.
We have two classes of common stock, Class A common stock and Class B common stock. The rights of the holders of Class A common stock and Class B common stock are identical, except voting and conversion rights. Each share of Class A common stock is entitled to one vote. Each share of Class B common stock is entitled to ten votes and is convertible at any time into one share of Class A common stock. The holders of our outstanding shares of Class B common stock will hold approximately 96.0% of the voting power of our outstanding capital stock following this offering, and our founder, Chairman, and CEO, Mark Zuckerberg, will hold or have the ability to control approximately 55.9% of the voting power of our outstanding capital stock following this offering.
Our Class A common stock has been approved for listing on the NASDAQ Global Select Market under the symbol “FB.”
We are a “controlled company” under the corporate governance rules for NASDAQ-listed companies, and our board of directors has determined not to have an independent nominating function and instead to have the full board of directors be directly responsible for nominating members of our board.
Investing in our Class A common stock involves risks. See “Risk Factors” beginning on page 12 .
PRICE $38.00 A SHARE
Price to Public
Underwriting Discounts and Commissions
Proceeds to Facebook
Proceeds to Selling Stockholders
Per share
$38.00
$0.418
$37.582
$37.582
Total
$16,006,877,370
$176,075,651
$6,764,760,000
$9,066,041,719
We and the selling stockholders have granted the underwriters the right to purchase up to an additional 63,185,042 shares of Class A common stock to cover over-allotments.
The Securities and Exchange Commission and state regulators have not approved or disapproved of these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The underwriters expect to deliver the shares of Class A common stock to purchasers on May 22, 2012.
MORGAN STANLEY J.P. MORGAN GOLDMAN, SACHS & CO.
May 17, 2012
Exhibit 17.1 Facebook, Inc., Prospectus
Examples
Twitter, Inc., an online social networking and microblogging service, went public in 2013 at $26 per share. Alibaba Group Holding Limited, a China-based company that operates various e-commerce businesses, went public in 2014 at $68 per share. Both companies are listed on the New York Stock Exchange; Twitter is listed under the stock symbol TWTR, and Alibaba is listed under the stock symbol BABA.
WEB EXERCISE
Go to finance.yahoo.com . Enter the symbol “FB” and click. What is Facebook stock currently selling at? Enter the symbol “TWTR” and click. What is Twitter stock currently selling at? Enter the symbol BABA and click. What is Alibaba stock currently selling at?
Small Company Offering Registration (SCOR)
A method for small companies to sell up to $1 million of securities during a 12-month period to the public by using a question-and-answer disclosure form called Form U-7.
Sale of Unregistered Securities
Sale of securities that should have been registered with the SEC but were not violates the Securities Act of 1933. Investors who purchased such unregistered securities can rescind their purchase and recover damages. The U.S. government can impose criminal penalties on any person who willfully violates the Securities Act of 1933.
Example
Space Corporation sells shares of its stock to the public at $8.00 per share. Within months, the price of the stock drops to $2.00. Space Corporation did not register its stock offering with the SEC. Because there has been a sale of unregistered securities in this example, the purchasers can rescind their purchase of the stock and get their money back (which is often highly unlikely). If the management of Space Corporation did not register the securities willfully, the U.S. government can file a criminal lawsuit to seek criminal penalties.
Regulation A Offering
The JOBS Act amends Regulation A to permit nonreporting companies to sell up to $50 million of securities (the SEC can increase the amount every two years) to the public during a 12-month period, pursuant to a simplified registration with the SEC. Issuers must file an offering statement with the SEC. An offering statement requires less disclosure than a registration statement and is less costly to prepare. Investors must be provided with an offering circular prior to the purchase of securities.
Regulation A
A regulation that permits an issuer to sell $50 million of securities pursuant to a simplified registration process.
A Regulation A offering is a public offering. The offering may have an unlimited number of purchasers who do not have to be accredited investors. The issuer can advertise the sale of the security. There are no resale restrictions on the securities, so the investor can immediately sell the securities. Thus, Regulation A permits a company to conduct a mini–public offering and have a public trading market in its securities. Issuers of securities under Regulation A must submit audited financial statements with the SEC annually.
Small Company Offering Registration (SCOR)
Small businesses often need to raise capital and must find public investors to buy company stock. The SEC has adopted the Small Company Offering Registration (SCOR) for companies proposing to raise $1 million or less in any 12-month period from a public offering of securities. The SEC requires that a SCOR form (Form U-7) be completed by the company and be made available to potential investors. Form U-7 is a question-and-answer disclosure form that small businesses can complete and file without the services of an expensive securities lawyer. Form U-7 doubles as a prospectus.
WEB EXERCISE
Go to http://com.ohio.gov/secu/docsU-7.pdf . Review this Form U-7 to determine what information an issuer must provide when completing the form.
SCOR form questions require the issuer to develop a business plan that states specific company goals and how it intends to reach them. The SCOR form is available only to domestic businesses. The offering price of the common stock of a SCOR offering may not be less than $5 per share. Although qualifying as an exemption from federal registration, SCOR requires the offering to be registered with the state. Most states have adopted this form of registration.
The following feature discusses the Jumpstart Our Business Startups (JOBS) Act of 2012.
Contemporary Environment Jumpstart Our Business Startups (JOBS) Act: Emerging Growth Company
In 2012, Congress enacted the Jumpstart Our Business Startups Act (JOBS) Act . 4 The purpose of this federal statute is designed to make it easier for startup companies to raise capital through initial public offerings (IPOs).
Jumpstart Our Business Startups (JOBS) Act
A federal statute that is designed to make it easier for startup companies to raise capital through securities offerings.
The JOBS Act creates a new class of public company and a new category of issuer under federal securities laws called the emerging growth company (EGC) . EGC status is often referred to as the IPO on-ramp . Most entrepreneurial and high-tech companies who are planning to do an initial public offering of securities qualify for this new status, whereas previously they would have been subject to the securities law provisions applicable to much larger companies.
For an existing company to qualify as an EGC, the company must have (1) not gone public more than five years ago, (2) less than $1 billion in annual revenue (to be indexed for inflation every five years), (3) issued no more than $1 billion in debt, and (4) less than $700 million in stock outstanding after an IPO. These companies are not the extremely large corporations that are listed on the New York Stock Exchange (NYSE) or even the size of most companies listed on the NASDAQ stock exchange (although a few companies the size of an EGC are listed on NASDAQ).
By qualifying as an EGC, the company is exempt from a broad range of requirements typically imposed on companies pursuing an IPO. The main benefits for qualifying as an EGC are the following:
· An EGC may submit a confidential draft registration statement with the SEC for review by SEC staff. This confidential filing allows companies, if they choose to do so, to withdraw a proposed IPO without having to disclose confidential business information.
· An EGC is subject to dramatically reduced IPO communication restrictions: An EGC may communicate with institutional accredited investors to test the waters to see if there is enough interest in its IPO before going forward with it.
· An EGC needs to provide only two years of audited financial statements when filing an IPO registration to issue securities, not the three years of audited financial statements that would have previously been required.
· Qualifying as an EGC frees the company from the restriction of the Sarbanes-Oxley Act that prohibits investment banks and research analysts of the same firm from communication with each other.
· Qualification allows EGCs to file for registration of securities using a streamlined process and reduced disclosure of financial information than is true for non-EGC IPOs.
The JOBS Act provisions help EGCs to decide whether to go public and significantly reduces the costs if they choose to go public. A company can retain EGC status for only five years after its IPO. The majority of companies that choose to go public qualify to do so as an EGC.
Well-Known Seasoned Issuer
The public has access to substantial historical and current information and financial data about the largest public companies. In 2005, the SEC created a new category of issuer called a well-known seasoned investor (WKSI) . To qualify as a WKSI, an issuer must have either (1) issued $1 billion of securities in the previous three years or (2) at least $700 million of outstanding equity securities owned by nonaffiliate investors. Because of their size and presence in the market, WKSIs are granted substantial flexibility of communication not provided to other issuers. In addition to a statutory prospectus, a WKSI can release factual information, forward-looking information, electronic communications, and free-writing prospectuses without significant restrictions during the entire offering period. A WKSI can file a simplified registration statement with the SEC and immediately begin selling the registered securities.
emerging growth company (EGC)
A class of public company created by the JOBS Act that may issue securities pursuant to specific rules under federal securities laws.
Civil Liability: Section 11 of the Securities Act of 1933
Private parties who have been injured by certain registration statement violations by an issuer or others may bring a civil action against the violator under Section 11 of the Securities Act of 1933 . Plaintiffs may recover monetary damages when a registration statement, on its effective date, misstates or omits a material fact. Civil liability under Section 11 is imposed on those who (1) defraud investors intentionally or (2) are negligent in not discovering the fraud. Thus, the issuer, certain corporate officers (e.g., chief executive officer, chief financial officer, chief accounting officer), directors, signers of the registration statement, underwriters, and experts (e.g., accountants who certify financial statements and lawyers who issue legal opinions that are included in a registration statement) may be liable.
Section 11 of the Securities Act of 1933
A provision of the Securities Act of 1933 that imposes civil liability on persons who intentionally defraud investors by making misrepresentations or omissions of material facts in the registration statement or who are negligent for not discovering the fraud.
All defendants except the issuer may assert a due diligence defense against the imposition of Section 11 liability. If this defense is proven, the defendant is not liable. To establish a due diligence defense, the defendant must prove that, after reasonable investigation, he or she had reasonable grounds to believe and did believe that, at the time the registration statement became effective, the statements contained therein were true and there was no omission of material facts.
due diligence defense
A defense to a Section 11 action that, if proven, makes the defendant not liable.
Example
In the classic case Escott v. BarChris Construction Corporation , 5 the company was going to issue a new bond to the public. The company prepared financial statements wherein the company overstated current assets, understated current liabilities, overstated sales, overstated gross profits, overstated the backlog of orders, did not disclose loans to officers, did not disclose customer delinquencies in paying for goods, and lied about the use of the proceeds from the offering. The company gave these financial statements to its auditors, Peat, Marwick, Mitchell & Co. (Peat Marwick), who did not discover the lies. Peat Marwick certified the financial statements that became part of the registration statement filed with the SEC.
The bonds were sold to the public. One year later, the company filed for bankruptcy. The bondholders sued Russo, the chief executive officer (CEO) of BarChris; Vitolo and Puglies, the founders of the business and the president and vice president, respectively; Trilling, the controller; and Peat Marwick, the auditors. Each defendant pleaded the due diligence defense. The court rejected each of the party’s defenses, finding that the CEO, president, vice president, and controller were all in positions to have either created or discovered the misrepresentations. The court also found that the auditor, Peat Marwick, did not do a proper investigation and had not proven its due diligence defense. The court found that the defendants had violated Section 11 of the Securities Act of 1933 by submitting misrepresentations and omissions of material facts in the registration statement filed with the SEC.
Section 12 of the Securities Act of 1933
A provision of the Securities Act of 1933 that imposes civil liability on any person who violates the provisions of Section 5 of the act.
Civil Liability: Section 12 of the Securities Act of 1933
Private parties who have been injured by certain securities violations may bring a civil action against the violator under Section 12 of the Securities Act of 1933 . Section 12 imposes civil liability on any person who violates the provisions of Section 5 of the act. Violations include selling securities pursuant to an unwarranted exemption and making misrepresentations concerning the offer or sale of securities. The purchaser’s remedy for a violation of Section 12 is either to rescind the purchase or to sue for damages.
Example
Technology Inc., a corporation, issues securities to investors without qualifying for any of the exempt transactions permitted under the Securities Exchange Act. The securities decrease in value. In this example, the issuer has issued unregistered securities to the public. The investors can sue the issuer to rescind the purchase agreement and get their money back, or they can sue and recover monetary damages.
SEC Actions: Securities Act of 1933
The SEC may take certain legal actions against parties who violate the Securities Act of 1933. The SEC may (1) issue a consent decree whereby a defendant agrees not to violate securities laws in the future but does not admit to having violated securities laws in the past; (2) bring an action in U.S. district court to obtain an injunction to stop challenged conduct; or (3) request the court to grant ancillary relief, such as disgorgement of profits by the defendant.
Criminal Liability: Section 24 of the Securities Act of 1933
Section 24 of the Securities Act of 1933 imposes criminal liability on any person who willfully violates either the act or the rules and regulations adopted thereunder. 6 A violator may be fined, imprisoned, or both. Criminal actions are brought by the Department of Justice.
Section 24 of the Securities Act of 1933
A provision of the Securities Act of 1933 that imposes criminal liability on any person who willfully violates the 1933 act or the rules or regulations adopted thereunder.
E-Securities Transactions
The Internet has become an important vehicle of the disclosure of information about companies, online trading, and the public issuance of securities. Securities—stocks and bonds—are purchased and sold online worldwide by millions of persons and businesses each day. Individuals and businesses can open accounts at online stock brokers, such as Charles Schwab, Ameritrade, and others, and freely trade securities and manage their accounts online. Electronic securities transactions , or e-securities transactions, are becoming commonplace in disseminating information to investors, trading in securities, and issuing stocks and other securities to the public. Trading in e-securities transactions will become an even more important method for offering, selling, and purchasing securities.
E-Securities Exchanges
The New York Stock Exchange (NYSE) is operated by NYSE Euronext , which was formed when the NYSE merged with the fully electronic stock exchange Euronext. The NYSE lists the stocks and securities of approximately 3,000 of the world’s largest companies for trading. These companies include Ford Motor Company, IBM Corporation, The Coca-Cola Company, China Mobile Communications Corporation, and others.
The National Association of Securities Dealers Automated Quotation System (NASDAQ) is an electronic stock market. NASDAQ has the largest trading volume of any securities exchange in the world. More than 3,000 companies are traded on NASDAQ, including companies such as Microsoft Corporation; Yahoo! Inc.; Starbucks Corporation; Amazon.com , Inc.; Facebook, Inc.; and eBay Inc., as well as companies from China, India, and other countries around the world. NASDAQ, which is located in New York City, owns interests in electronic stock exchanges around the world.
EDGAR
Most public company documents—such as annual and quarterly reports—are now available online. The SEC requires both foreign and domestic companies to file registration statements, periodic reports, and other forms on its electronic filing and forms system, EDGAR , the SEC electronic data and records system. Anyone can access and download this information for free.
NASDAQ
NASDAQ is the world’s largest electronic securities exchange. It lists more than 3,000 U.S. and global companies and corporations.
EDGAR
The electronic data and record system of the Securities and Exchange Commission (SEC).
WEB EXERCISE
Visit the website of EDGAR, at www.sec.gov/edgar.shtml. Click on “About EDGAR.” Read the first two paragraphs of “Important Information About EDGAR.”
E-Public Offerings
Companies are now issuing shares of stock over the Internet. This includes companies that are making electronic initial public offerings , or e-initial public offerings (e-IPOs), by selling stock to the public for the first time. E-securities offerings provide an efficient way to distribute securities to the public. Google Inc. conducted its IPO online.
The following feature discusses a new electronic method for issuing securities to the public.
Digital Law Crowdfunding and Funding Portals
The JOBS Act created a new funding mechanism called crowdfunding for entrepreneurs and small businesses to raise small amounts of capital from public investors using online portals. Crowdfunding can be used by small companies that do not want to meet the requirements and expense of issuing securities pursuant to a registered offering and do not qualify for or do not wish to comply with the restrictions of any of the exemptions from registration.
The JOBS Act permits securities of an issuer to be sold to the public using an intermediary’s funding portal , which is an Internet website. A funding portal, the website operator, must register with the SEC. Many crowdfunding portals have launched to fill this role.
Crowdfunding allows small companies to raise up to $1 million during a 12-month period from many small-dollar investors through Web-based platforms. The JOBS Act sets limits on how much money an individual can spend purchasing securities sold pursuant to the crowdfunding provision. The yearly aggregate money each person may invest in offerings of this type is 2 percent of a person’s net worth or annual earnings if neither exceeds $40,000 (at most $1,600) and not more than $10,000 if a person’s annual earnings or net worth exceeds $100,000.
If a company intends to raise less than $100,000, it is not required to have an accountant review its financial statements. If the company intends to raise between $100,000 and $500,000, an independent review of its financial statements must be conducted by a CPA firm. If the company is going to raise more than $500,000 of capital, an independent statement audit must be conducted by a CPA firm. Crowdfunding offerings are subject to the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934.
funding portal
An Internet website that companies may use to issue securities to the public under the crowdfunding provisions of the JOBS Act.
crowdfunding
A method that allows small companies to raise capital from many small-dollar investors through Web-based platforms.
Numerous crowdfunding Websites are available for entrepreneurs to raise money from a crowd of investors to fund their small businesses and projects. These Web platforms include Kickstarter, IndieGoGo, and others. The Web platform usually charges about 5 percent of the money raised.
Exempt Securities
Certain securities are exempt from registration with the SEC. These securities are usually offered by certain institutions, or the securities have certain characteristics that federal laws and the SEC believe do not require SEC oversight when issued. Once a security is exempt, it is exempt forever. It does not matter how many times the security is transferred. Exempt securities include the following:
exempt securities
Securities that are exempt from registration with the SEC.
Securities issued by any government in the United States (e.g., municipal bonds issued by city governments).
Short-term notes and drafts that have a maturity date that does not exceed nine months (e.g., commercial paper issued by corporations).
Securities issued by nonprofit issuers, such as religious institutions, charitable institutions, and colleges and universities.
Securities of financial institutions (e.g., banks, savings associations) that are regulated by the appropriate banking authorities.
Insurance and annuity contracts issued by insurance companies.
Stock dividends and stock splits.
Securities issued in a corporate reorganization in which one security is exchanged for another security.
Critical Legal Thinking
What is an exempt transaction? Why does the government permit securities to be issued without having to register them with the Securities and Exchange Commission (SEC)?
Exempt Transactions
The Securities Act of 1933 primarily regulates the issuance of securities by corporations, limited partnerships, other businesses, and individuals. 7 Pursuant to the Securities Act of 1933 and rules adopted by the SEC, some securities that would otherwise have to be registered with the SEC before being issued (e.g., common stock) are exempt from registration with the SEC because the offering meets requirements established by the act and SEC rules. These are called exempt transactions . Thus, the securities sold pursuant to an exempt transaction do not have to be registered with the SEC.
exempt transaction
An offering of securities that do not have to be registered with the SEC because the offering meets specified requirements established by securities laws and the SEC.
Example
An issuer sells common stock to investors. Normally, such an offering would have to be registered with the SEC. If this sale of common stock is sold in an issuance that qualifies as an exempt transaction, however, the sale of the common stock does not have to be registered with the SEC before being issued.
However, exempt transactions that do not have to be registered with the SEC are subject to the antifraud provisions of the federal securities laws. Therefore, the issuer must provide investors with adequate information, such as annual reports, quarterly reports, proxy statements, and financial statements, even though a registration statement is not required.
The most widely used transaction exemptions include the nonissuer exemption, intrastate offering exemption, private placement exemption, and small offering exemption. These exempt transactions are discussed in the paragraphs that follow.
Nonissuer Exemption
Nonissuers, such as average investors, do not have to file a registration statement prior to reselling securities they have purchased. This nonissuer exemption exists because the Securities Act of 1933 exempts from registration those securities transactions not made by an issuer, an underwriter, or a dealer.
nonissuer exemption
An exemption from registration stating that securities transactions not made by an issuer, an underwriter, or a dealer do not have to be registered with the SEC (e.g., normal purchases of securities by investors).
Example
An investor who owns shares of IBM can resell those shares to another investor at any time without having to register with the SEC.
Intrastate Offering Exemption
The Securities Act of 1933 provides an intrastate offering exemption that permits local businesses to obtain from local investors capital to be used in the local economy without the need to register with the SEC. 8 There is no limit on the dollar amount of capital that can be raised pursuant to an intrastate offering exemption. SEC Rule 147 stipulates that an intrastate offering can be made only in the one state in which all of the following requirements are met: 9
intrastate offering exemption
An exemption from registration that permits local businesses to raise capital from local investors to be used in the local economy without the need to register with the SEC.
The intrastate offering exemption assumes that local investors are sufficiently aware of local conditions to understand the risks associated with their investment.
Private Placement Exemption
The Securities Act of 1933 provides that an issue of securities that does not involve a public offering is exempt from the registration requirements. 10 SEC Rule 506 —known as the private placement exemption—allows issuers to raise capital from an unlimited number of accredited investors without having to register the offering with the SEC. 11 There is no dollar limit on the securities that can be sold pursuant to this exemption.
SEC Rule 506 (private placement exemption)
An exemption from registration that permits issuers to raise capital from an unlimited number of accredited investors and no more than 35 nonaccredited investors without having to register the offering with the SEC.
An accredited investor is defined as: 12
accredited investor
A person, a corporation, a company, an institution, or an organization that meets the net worth, income, asset, position, and other requirements established by the SEC to qualify as an accredited investor.
· Any natural person who has individual net worth or joint net worth with a spouse that exceeds $1 million, to be calculated by excluding the value of the person’s primary residence.
· A natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year.
· A charitable organization, a corporation, a partnership, a trust, or an employee benefit plan with assets exceeding $5 million.
· A bank, an insurance company, a registered investment company, a business development company, or a small business investment company.
· Insiders of the issuers, such as directors, executive officers, or general partners of the company selling the securities.
· A business in which all the equity owners are accredited investors.
The rationale underlying the private placement exemption is that accredited investors have the sophistication to understand the risk involved with the investment and can also afford to lose their money if the investment fails. The SEC is empowered to review the definition of accredited investor periodically and to make changes to the definition.
The law permits no more than 35 nonaccredited investors to purchase securities pursuant to a private placement exemption. These nonaccredited investors are usually friends and family members of the insiders. Nonaccredited investors must be sophisticated investors, however, either through their own experience and education or through representatives (e.g., accountants, lawyers, business managers). General selling efforts, such as general solicitatio
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