Memo 3

Example:

The partners of Packitup Partnership are considering the decision to convert to the corporate form of business organization. During your discussions with them, you determine that they have only the vaguest ideas about the relationship between corporate debt and equity.

Prepare a memo to the partners of Packitup Partnership describing the concept of solvency, the two main components of corporate capital, and how capital structure decisions affect the risk profile of a firm.

Type your communication below the line in the response area below.

REMINDER: Your response will be graded for both technical content and writing skills. Technical content will be evaluated for information that is helpful to the intended reader and clearly relevant to the issue. Writing skills will be evaluated for development, organization, and the appropriate expression of ideas in professional correspondence. Use a standard business memorandum or letter format with a clear beginning, middle, and end. Do not convey information in the form of a table, bullet point list, or other abbreviated presentation.

To: Packitup Partnership Re: Solvency and capital structure

Level 5 Example To: Packitup Partnership Re: Solvency and capital structure

Solvency is a firm's ability to pay its noncurrent obligations as they come due and thus remain in business in the long run (this is in contrast to liquidity, which is the ability to remain in business in the short run). The key ingredients of solvency are the firm's capital structure and degree of leverage. A firm's capital structure includes its sources of financing, both long- and short-term. These sources can be in the form of debt (external sources) or equity (internal sources).

Debt is creditor interest in the firm. The firm is contractually obligated to repay debtholders. The terms of repayment (i.e., timing of interest and principle) are specified in the debt agreement. As long as the return on debt capital exceeds the amount of interest paid, the use of debt financing is advantageous to a firm. The return is often enhanced due to the fact that interest payments on debt are tax-deductible. The tradeoff is that an increased debt load makes a firm riskier (since debt must be paid regardless of whether or not the company is profitable). At some point, either a firm will have to pay a higher interest rate than its return on debt or creditors will simply refuse to lend any more money.

Equity is the ownership interest in the firm. Equity is the permanent capital on an entity, contributed by the firm's owners in the hopes of earning a return. However, a return on equity is

uncertain because equity embodies only a residual interest in the firms assets (residual because it is the claim left over after all debt has been satisfied). Periodic returns to owners of excess earning are referred to as dividends. The firm may be contractually obligated to pay dividends to preferred stockholders but not to common stockholders.

Capital structure decisions affect the risk profile of a firm. For example, a company with a higher percent of debt capital will be riskier than a firm with a higher percentage of equity capital. Thus, when the relative amount of debt is high, equity investors will demand a higher rate of return on their investments to compensate for risk brought about by the high degree of financial leverage. Alternatively, a company with a relatively larger proportion of equity capital will be able to borrow at lower rates because debt holders will accept lower interest in exchange for the lower risk indicated by the equity cushion.

1.

The partners of Fizzdun Partnership are excited about the possibility of converting all of the partnership's information systems to the online processing mode. They believe that even processing routine payroll transactions this way will result in a productivity gain because online processing is "faster and more efficient" than batch entry.

Prepare a memo to the partners of Fizzdun Partnership explaining the differences between the batch and online processing modes and the appropriate uses of both.

Type your communication in the response area below.

REMINDER: Your response will be graded for technical content and writing skills. Technical content will be evaluated for information that is helpful to the intended audience and clearly relevant to the issue. Writing skills will be evaluated for development, organization, and the appropriate expression of ideas in professional correspondence. Use an appropriate business format with a clear introduction, body, and conclusion. Do not convey information in the form of a table, bullet-point list, or other abbreviated presentation.

2.

Trillium, Inc., created a database of all its customer-related files by linking them together based on customer number. The programmers were quite proud of this achievement, and at first the productivity of searches and queries of customer data were greatly improved. However, as time went by, the effort to maintain the links among the files while keeping customer information up to date became overwhelming. The CIO has asked you to suggest a means of easing the task of maintaining the customer database.

Prepare a memo to the CIO of Trillium, Inc., describing the nature and advantages of a database management system (DBMS). As part of your discussion, describe the database schema and the two languages used in connection with it.

Type your communication in the response area below.

REMINDER: Your response will be graded for technical content and writing skills. Technical content will be evaluated for information that is helpful to the intended audience and clearly relevant to the issue. Writing skills will be evaluated for development, organization, and the appropriate expression of ideas in professional correspondence. Use an appropriate business format with a clear introduction, body, and conclusion. Do not convey information in the form of a table, bullet-point list, or other abbreviated presentation.

3.

3WAT, Inc., is discussing the data-storage possibilities for its highly mobile workforce. Currently, data are stored on laptop hard drives and are not centrally available. Management is concerned about data security, accessibility, and costs.

Prepare a memo to management discussing various options for data storage for a highly mobile workforce, including advantages, disadvantages, and costs.

Type your communication in the response area below.

REMINDER: Your response will be graded for technical content and writing skills. Technical content will be evaluated for information that is helpful to the intended audience and clearly relevant to the issue. Writing skills will be evaluated for development, organization, and the appropriate expression of ideas in professional correspondence. Use an appropriate business format with a clear introduction, body, and conclusion. Do not convey information in the form of a table, bullet-point list, or other abbreviated presentation.

4.

Lanrezac Corporation is expanding rapidly, and the Board of Directors has resisted creating the position of Chief Information Officer (CIO). The Chief Operating Officer (COO) is currently overseeing the IT function, but her background is in production, not controls. The CEO and COO are both aware that, as the company grows, proper IT controls will become more and more important.

Prepare a memo to the CEO and COO of Lanrezac Corporation defining and discussing the classic division of controls in information systems as well as their benefits.

Type your communication in the response area below.

REMINDER: Your response will be graded for technical content and writing skills. Technical content will be evaluated for information that is helpful to the intended

audience and clearly relevant to the issue. Writing skills will be evaluated for development, organization, and the appropriate expression of ideas in professional correspondence. Use an appropriate business format with a clear introduction, body, and conclusion. Do not convey information in the form of a table, bullet-point list, or other abbreviated presentation.

5.

A company's controller maintains a spreadsheet to facilitate the reconciliation of the company's account balance per the bank to the company's account balance per the general ledger. The company's management is considering the implementation of new financial software that includes an automated bank reconciliation process.

In a memo to the controller, discuss the impact on the internal controls of migrating from a manual bank reconciliation process to an automated bank reconciliation process.

Type your communication in the response area below.

REMINDER: Your response will be graded for technical content and writing skills. Technical content will be evaluated for information that is helpful to the intended audience and clearly relevant to the issue. Writing skills will be evaluated for development, organization, and the appropriate expression of ideas in professional correspondence. Use an appropriate business format with a clear introduction, body, and conclusion. Do not convey information in the form of a table, bullet-point list, or other abbreviated presentation.