Reference no: EM13670330

Part -1:

Mr. Howe, a Junior Partner of the CPA firm Dewey, Cheatem & Howe, has asserted that the business of business is business and that Corporations exist to maximize profits.

Required:

Discuss whether this assertion is a reasonable way to manage corporations, discuss any viable alternatives, and come to a conclusion.

re: Deregulation of GPFS

As the Senior Partner of Dewey, Cheatem, & Howe, you asked us (Wright-way Auditors) to review whether your firm should be concerned about the Deregulation of GPFS.

It is our considered opinion that the Deregulation of general purpose financial statements (GPFS) is unlikely to be viable for the foreseeable future. As such, Deregulation of GPFS does not represent a significant opportunity or threat to the income stream of Dewey, Cheatem, & Howe.

Specifically:

1) Deregulation of financial accounting can only work where there are perfect financial markets (e.g. per the economics definition, perfect markets have perfect and costless information and no transactions costs). Given that financial markets are imperfect and subject to the "Market-for-Lemons" market failure (Akerlof, 1970), accountants, GPFS, regulation on reporting and enforcement by auditors and government agencies are all necessary.

2) Several corporate debacles over the last decade, including Enron, WorldCom, Adelphia, and HIH, have proven the need for even more regulation rather than less.

3) Connivance between Enron and its External Auditors (Arthur Andersen) has clearly shown that audits need to have well established standards and to be closely regulated.

Part -2:

Mr. de Ville, the owner of Tasman Ian de Ville Holdings Ltd. (TIDH) has asked you to evaluate five investment projects. TIDH has a $10,000,000 investment budget, an investment hurdle rate of 11.0 %, and the owner has a requirement that all investments have a Payback Period (PBP) of under 3.5 years. Also, Project 2 brings the offices and warehouse up to the current fire code and the listed savings are the "facilitation payments" that will no longer need to be made to inspectors to avoid the office being shut-down.

Mr Chad Cheatem has asked you to carefully examine two notions (The Semi-strong Efficient Market Hypothesis and Stock-valuation Models). Based on your research, Mr Cheatem expects you to provide a 1½ page memo on whether or not it is possible for someone to develop a Stock-valuation Model that will consistently beat the market.