Val bought a freezer from Neighbors who were remodeling their kitchen. Val gave Neighbors a check, and Neighbors told Val that she could take the freezer. Val asked if she could pick up the freezer over the weekend instead, when she could borrow her brother’s truck. Neighbors agreed. Before Val could pick up the freezer, however, it was destroyed when faulty wiring caused a fire in Neighbors’ kitchen. In these circumstances, the risk of loss

		Passed to Val when Neighbors tendered delivery.
		Remained with Neighbors because they were the sellers.
		Would not pass to Val until her check cleared.
		Remained with Neighbors because Val had not yet taken possession of the freezer.

QUESTION 6

Which of the following statements is false about sale or return contracts?

		The goods must be used as consumer goods.
		Buyer has the risk of loss until the goods are sold
		Buyer has the risk of loss during shipment of the goods back to the seller.
		The goods are subject to claims by the buyers creditors while they are in his possession.

QUESTION 7

Ted stole a Rolex watch from the locker room of the gym he belonged to. Ted sold the watch to Sonny, who gave value and had no reason to suspect that the watch was stolen. Sonny gave the watch to Dad for Father’s Day. Which of the following accurately represents the chain of title for the watch?

		Ted has voidable title; Sonny has voidable title; Dad has good title.
		Ted has void title; Sonny has voidable title; Dad has good title.
		Ted has void title, Sonny has good title; Dad has good title.
		Ted has void title; Sonny has void title; Dad has void title.

QUESTION 8

Jack and Jill have a one year contract that calls for Jack to make 4 deliveries of flour a month to Jill’s bakery. The pattern of repeated deliveries under this one contract establishes

		A course of performance
		A course of dealing
		A usage of the trade
		A business condition

On Monday, Agnes bought and paid for a sofa from SofaStore. SofaStore offers free furniture delivery, but the first available delivery date was Thursday. On Wednesday the sofa was destroyed in a fire at SofaStore. Who bears the risk of loss?

		Agnes, because she had title to the sofa when it was destroyed.
		Agnes, because the sofa had already been identified to the contract
		Agnes, if her check had cleared; SofaStore, if the check had not yet cleared.
		SofaStore, because it is a merchant and Agnes had not yet taken possession of the sofa.

QUESTION 10

Acme, a Dover, Delaware company, is to send widgets to a customer in Elmira, New York, under a destination contract. The contract will read

		F.O.B.Dover, Delaware
		F.O.B.Elmira, New York
		F.A.S.Dover, Delaware
		F.A.S.Elmira, New York

QUESTION 11

If goods are destroyed while in the buyer’s possession, and the buyer holds the goods under a sale on approval contract, the loss will fall on

		Whichever party has insured the goods.
		The buyer and the seller equally
		The buyer only
		The seller only

QUESTION 12

Seller, a Chicago business, sent a shipment of tractor parts to Buyer, a Detroit business, under a contract that read: “F.O.B.Chicago, Illinois.” The parts were not those specified in the contract and Buyer rejected them. A few hours after Buyer notified Seller of the rejection, the parts were destroyed in a fire at Buyer’s place of business. Which of the following best states the rights and duties of Buyer and Seller in this situation?

		Buyer has the risk of loss because this was a shipment contract.
		Buyer rightfully rejected the tender, but risk of loss did not pass to Seller again until Seller regained physical possession of the goods.
		Seller has the risk of loss because this was a destination contract.
		Seller has the risk of loss because the tender was non-conforming, but only to the extent that Buyer’s insurance does not cover the loss.

QUESTION 13

Sandy bought a large air conditioner from Big Box Home Store for 525. For an additional 100, the store delivered, installed and programmed the unit. Does this sale come under Article 2 of the Code?

		Yes, because at least one element of the transaction was a sale of goods.
		Yes, because the sale of goods predominates
		No, because this is an employment contract
		No, because this is a contract for the sale of services.

QUESTION 14

Which of the following is not a duty that a merchant buyer owes to a seller who sends a non-conforming tender?

		The buyer must accept whatever part of the tender is conforming
		At the seller’s request, the buyer must detail in writing the goods’ defects or non-conformities.
		The buyer must follow the seller’s reasonable instructions for the disposition of the goods.
		The buyer must try to sell the goods for the seller’s benefit if the goods are perishable or likely to decline in value rapidly.

QUESTION 15

In the past 6 months Supplier has made late deliveries to a number of customers and a good portion of the goods delivered have been defective. Buyer is worried that an important scheduled delivery will be late or non-confirming. He sends a written request to Supplier asking for confirmation that the contract terms will be met. When Buyer purchases these goods from another seller after Supplier repudiates the contract, Buyer has exercised his right of

		Cover
		Cure
		Replevin
		Commercial protection

QUESTION 16

ED Engineering specially manufactured a large piece of equipment for Matt Manufacturing. The contract price was 50,000. After ED completed the work at a cost of 40,000, Matt repudiated the contract and refused to accept or pay for the piece of equipment. Despite its best efforts, ED has not been able to sell this unique good at any price. ED has also incurred 500 of storage costs. If ED sues Matt, it will be able to collect _____________ in damages.

		40000
		40500
		50000
		50500

QUESTION 17

A buyer must notify a seller of his intention to reject a non-conforming tender

		Within 10 days of the tender
		Within 30 days of the tender
		Within a seasonable time
		In a certified letter

QUESTION 18

Which of the following would be reasonable grounds for a seller feeling insecure?

		Buyer’s last two payments to the seller were 30 days late.
		Buyer is making late payments to other suppliers in the business.
		Buyer’s check to the seller was returned for insufficient funds.
		All of the above are reasonable grounds for feeling insecure.

QUESTION 19

When Ben Buyer wrongfully repudiated his contract with Sam Seller, Sam had to pay a cancellation fee to the shipper and incurred costs to store and to restock the goods. Sam can recover these costs from the buyer as ______________ damages.

		Consequential
		Incidental
		Punitive
		Liquidated

QUESTION 20

Which of the following remedies are available to both buyers and sellers?

		Cover
		Cure
		Specific performance
		Adequate assurances

QUESTION 21

Buyer sends Seller a written request for adequate assurances. Seller has ______days to respond.

		5
		10
		30
		60

QUESTION 22

If a buyer discovers that a tender is non-conforming he may

		Accept the entire tender
		Reject the entire tender
		Reject a commercially reasonable portion of the tender and accept the rest
		All of the above are remedies available to the buyer.

QUESTION 23

Assume that Buyer wrongfully rejects a conforming tender and Seller wants to sell the goods. To meet Code requirements Seller must

		Sell the goods within 10 days of the rejection
		Post a bond equal to the contract value of the goods
		Sell the goods at a public auction
		Sell the goods either at a public auction or at in a private sale, so long as the sale is commercially reasonable

QUESTION 24

China Manufacturers had a contract with Homestore for 12 dozen dinnerware sets to be delivered in four installments. China has made two deliveries, which Homestore has not yet paid for. A third delivery is in transit on Rapid Lines, a common carrier. China has since learned 1 that Homestore is insolvent and 2 that Homestore has already sold the first shipment to a customer, who paid for the goods and took them home. What are China’s rights in regard to the shipment that was sold to the consumer?

		China can sue Homestore for the contract price of the goods.
		China can sue Homestore only for its lost profits.
		China can replevin the goods from the customer because Homestore only had voidable title
		China can get a decree of specific performance against the customer.

QUESTION 25

China Manufacturers had a contract with Homestore for 12 dozen dinnerware sets to be delivered in four installments. China has made two deliveries, which Homestore has not yet paid for. A third delivery is in transit on Rapid Lines, a common carrier. China has since learned 1 that Homestore is insolvent and 2 that Homestore has already sold the first shipment to a customer, who paid for the goods and took them home. What are China’s rights in regard to the shipment that was sold to the consumer?

		China can sue Homestore for the contract price of the goods.
		China can sue Homestore only for its lost profits.
		China can replevin the goods from the customer because Homestore only had voidable title
		China can get a decree of specific performance against the customer.

QUESTION 26

ED Engineering specially manufactured a large piece of equipment for Matt Manufacturing. The contract price was 50,000. After ED completed the work at a cost of 40,000, Matt repudiated the contract and refused to accept or pay for the piece of equipment. Despite its best efforts, ED has not been able to sell this unique good at any price. ED has also incurred 500 of storage costs. If ED sues Matt, it will be able to collect _____________ in damages.

		40,000
		40,500
		50,000
		50,500

QUESTION 27

Which of the following will create an express warranty in a sales transaction?

		A photo of the product
		A sample of the material a product is made from
		Instructions for using a product printed on the package.
		All of the above create express warranties

QUESTION 28

Which of the following does not create an express warranty

		A clothing salesperson telling a customer: “You look like a movie star in that outfit.”
		A label on a step ladder claiming that it will hold 350 pounds.
		A label on a computer that says :”500GB Hard Drive”
		An art expert at a major auction house identifying a print as a Dore worth $12,000.

QUESTION 29

Which of the following will create an express warranty in a sales transaction?

		A catalogue description of the product
		The statements on a product’s label
		Blueprints of a product
		All of the above create express warranties

QUESTION 30

The warranty that enters the contract as part of the bargained-for-exchange is a (n) ____________warranty.

		Conditional
		Implied
		Absolute
		Express

QUESTION 31

The traditional doctrine that only the parties to a contract can sue over the contract is __________ of contract.

		Liberty
		Freedom
		Liability
		Privity

QUESTION 32

A warranty that is imposed on the sales transaction as a matter of law and public policy is a (n) _________warranty.

		Conditional
		Implied
		Absolute
		Express

QUESTION 33

Allen’s Auto Mart, a large car dealership, is upgrading its inventory tracking and billing system. It sold its computers, printers and fax machines to Rods’n’Reels, a local retailer of sporting goods. One of the computers and two of the faxes have stopped working. Does Rods’n’Reels have a claim against Allen’s for breach of an implied warranty of merchantability?

		No, used goods are never covered by the implied warranty of merchantability
		No, because Rods’n’Reels is itself a merchant it is not protected by the implied warranty of merchantability
		No, Allen’s is only a merchant of cars and no warranty of merchantability will be implied for other goods it may sell
		Yes, the warranty of merchantability is implied in every sale by every seller unless it is specifically disclaimed.

QUESTION 34

Which of the following clauses limiting the liability of a seller will a court not enforce?

		A clause in a contract for consumer goods that says it will not be liable for personal injuries caused by a defective product.
		A clause in a contract that limits the seller’s liability to replacing or repairing a defective product.
		A clause in a contract that limits the seller’s liability to refunding the purchase price to the buyer.
		A clause saying that goods are sold “as is”

QUESTION 35

Which of the following statements is false about product liability suits brought in strict liability.

		Most courts will award damages in strict liability only for personal or property loss, not for economic loss.
		The statute of limitations is longer for suits in strict liability than for law suits based on breach of warranty.
		Under Restatement (Third) of Torts, plaintiffs in strict liability cases need only prove the existence of a manufacturing defect, not that the defect was unreasonably dangerous.
		Claims filed in strict liability do not have the same notice requirements that claims based on breach of warranty have.

QUESTION 36

Mary bought a riding mower from Local Dealer for 3,000. She put 500 down and dealer financed the rest of the purchase. Mary is to pay 100 a month and Local took a security interest in the mower until it is paid for. Local has the right to repossess the mower if Mary stops making payments on the loan. When Mary sold the mower to Neighbor, she told her about Local’s security interest. Six months after the sale, the mower broke down because of a defect of which Mary was not aware. Has Mary violated any warranties by selling Neighbor a defective mower?

		Yes, the implied warranty of merchantability
		Yes, the implied warranty of fitness for a particular purpose
		Yes the implied warranty of title
		No, Mary breached no warranties when she sold the defective mower.

QUESTION 37

Mary bought a riding mower from Local Dealer for 3,000. She put 500 down and dealer financed the rest of the purchase. Mary is to pay 100 a month and Local took a security interest in the mower until it is paid for. Local has the right to repossess the mower if Mary stops making payments on the loan. When Mary sold the mower to Neighbor, she told her about Local’s security interest. Would Mary have breached any warranties if she had told Neighbor at the time of the sale: “This mower rides like a dream?”

		Yes, an express warranty
		Yes, an implied warranty of fitness for a particular purpose
		Yes, an implied warranty of merchantability
		No, Mary’s statement created no warranties.

QUESTION 38

Which of the following damages may be recovered when an implied warranty of merchantability is breached?

		Damages for personal injury
		Damages for property loss
		Damages for direct economic loss
		All of the above

QUESTION 39

Which of the following is a requirement for a valid notice from a buyer to a seller claiming a breach of warranty?

		The notice must be written
		The notice must make a claim for a specific dollar amount in damages
		The notice must be accompanied by a summons and complaint
		The notice must identify the defect in the product

QUESTION 40

Which of the following is not a remedy when a warranty of fitness for a particular purpose is breached?

		The buyer may disaffirm the contract.
		The buyer may collect damages for personal injury
		The buyer may collect damages for economic loss
		The buyer may collect punitive damages.

Future Telecom plc, a leading company in the telecommunication sector is planning future expansion, by providing new services including cable TV, fibre optics internet technology and a landline telephone network. The planned investment strategy is a step towards the achievement of the company’s main corporate objective of becoming a major provider of cable TV and internet services, rivalling the only two major competitors in the media and entertainment sector.

As the new project will be totally financed by equity, Future Telecom plc shareholders are demanding a full analysis of the company’s financial performance, policies and strategies over the last 4 years and an investment appraisal of the proposed project before any Board decisions are made.

The CEO of Future Telecom plc has commented on the performance and financial position of company.

“…………… a picture of great strength moving forwards. The last four years have seen our company’s operations become increasingly diversified, and our turnover has increased by more than 40% over the last four years – a clear indication of successful management. Our share price has risen over the same period. The sales from the new project will surely result in a substantial increase in the company’s share price, further boosting shareholder value ……………”

Investment Strategy

Future Telecom plc plan to offer international TV channels from all over the globe to capture the market of non-native residents in the country. The company also intends to provide cheap international calls through the newly proposed landline network.

A clear need for such an investment has been established by our comprehensive market research survey, which has just been completed at a cost of £50,000. The impact of this project on the company’s existing products has also been studied. Since the company is currently a mobile telephone network provider, the new fixed line network is expected to have an adverse impact on the existing sales which is estimated to be not more than £2 million a year. Future Telecom plc consider this a price worth paying for the increase in overall market share and brand visibility.

The capital cost of setting up the fibre optics internet, cable TV services and the aerial sites would be £50 million, an expenditure that would attract capital allowances on a straight-line basis over 10 years, commencing from the first year of operation. The capital expenditure will happen one year before operations start.

The company’s current 30,000 square foot headquarters office in Buckinghamshire can accommodate the required customer service offices for the new departments, which is assumed to make use of only 50% of the total space. The annual mortgage cost for the building is approximately £80,000.

Working capital of £1½ million will need to be invested before commencing operations, and it is expected that the same level of working capital would be sufficient for the duration of the project.

The proposed services that will be offered include fibre optics internet, cable TV and a landline telephone network. The total costs associated with the research implemented for development of these new technologies were £1,000,000 paid before the setting up process. The sales forecasts suggest that:

Landline subscribers are going to be 10,000 in the first year and would double each year over the following four years. Thereafter, the number of customers is going to remain constant for the rest of the project’s life.

The number of internet subscribers is expected to be 30,000 in each year.

Cable TV subscribers are expected to be 20,000 over the first five years of the project and would increase to 40,000 subscribers in year 6 where they would remain constant for the rest of the project’s life.

The number of the bundle subscribers is expected to be 10,000 in the first year and would increase by 10,000 each year until the tenth year when it would settle unchanged for the remaining life of the project.

The project does not have a limited lifetime, and although technology would develop in the future that would affect the type of services provided, Future Telecom plc are assuming that the sales and market share will remain unaffected. The company’s marketing department has estimated the average prices of the range of services as follows:

the annual landline subscription is going to be £240

the internet subscription is going to be £180 per year

the annual TV cable subscription is £240

the annual subscription of the bundle product is averaged at £400

The prices will be expected to rise every year according to inflation levels.

The main operating cost would be the annual staff costs, which is expected to be 30% of the same year’s revenue, while the maintenance and inventory costs are forecasted at 10% of the revenue. Other significant operating costs would be services such as gas, electricity, water, and other miscellaneous costs amounting to £1 million per year.

All the above revenues, costs and values are estimated at current prices before the implementation of the project, and take no account of inflation. The current level of inflation is 3% per year, and is expected to continue at this level for the foreseeable future, therefore a careful appraisal of this project necessitates adjusting both revenues as well as costs for inflation.

Based on current market rates of return, the after tax weighted average cost of capital for companies within the same industry is 18% (nominal or money interest rate). This rate would represent the opportunity cost of capital to fund the new project. The company will continue to pay corporation tax at the rate of 30 percent per annum for the foreseeable future.

The company is conservatively assuming that this project will not have a termination date. Although the equipment installed in year zero are to be depreciated over the next 10 years, the company does not require any further investment.

Financial Information

Income Statement summaries for the years ending 30 September (£ million)
	2013	2014	2015	2016
Revenue	35	40	43	50
Gross profit	25	27	29	34
Operating profit	12	14	18	22
Interest payable	(1)	(1)	(2)	(2)
Earnings before tax	11	13	16	20
Taxation	(3.3)	(3.9)	(4.8)	(6)
Net Income	7.7	9.1	11.2	14
Dividends	(6.16)	(7.28)	(8.96)	(11.48)
Retained earnings	1.54	1.82	2.24	2.52

Statement of Financial Position for the years as at 30 September (£ million)
Non Current Assets	36	37	39	42
Current Assets
Inventory	3	3.8	4.6	5.5
Debtors	3	3.2	3.2	3.6
Cash	1.1	1.5	1.5	1.6
Total Current Assets	7.1	8.5	9.3	10.7
Total Assets	43.1	45.5	48.3	52.7
Current Liabilities
Trade payables	3	3.6	3.8	4.3
Taxation	1	1.6	1.8	2
Overdraft	0	0	0	0
Other	0.6	0.8	0.9	1
Total Current Liabilities	4.6	6	6.5	7.3
Long-term Liabilities
Irredeemable debentures	15	15	18.06	21.88
Total Liabilities	19.6	21	24.56	29.18
Equity
Ordinary shares (50p pence par value)	16	16	16	16
Share premium account	5.96	6.68	5.5	5
Profit and Loss account	1.54	1.82	2.24	2.52
Shareholders’ fund	23.5	24.5	23.74	23.52
Capital Employed	43.1	45.5	48.3	52.7

Other Information

	2012	2013	2014	2015	2016
Future Telecom plc Share Price	97	130	160	177	180

Share prices of major competitors over the last 4 years period (in pence)
Competitors	2012	2013	2014	2015	2016
Sky TV	480	562	736	732	748
Virgin	7	14	24	25	31
Talk Talk	95	112	140	126	187
BT Telecom	167	129	149	179	234

Major competitors’ key ratios over the last 4 years period (in pence)
Competitors	P/B	2016	Dividend yield	2016
Sky TV		8.2		3.4%
Virgin		2.1		4%
Talk Talk		4.0		4.5%
BT Telecom		5.7		3.39%

Indexes prices of market and industry sectors over the last 4 years period (in pence)
	2012	2013	2014	2015	2016
FT-SE All share index	2012	2561	2923	2735	3067
Mobile telecommunications	2950	3166	3648	3777	4250
Fixed line telecommunications	2337	1852	1976	2070	2738

Required

As the junior finance team of Future Telecom plc, prepare and submit the written report required by the CEO. The report should consist of two parts:

Part 1 Financial Performance Analysis – requires analysing and commenting on the financial performance and position of the company based on the financial information provided. A 4-year trend analysis (15 relevant ratios) and cross-sectional analysis is required. Any interpretations and recommendations should be based on clear reasoning and explanations. A critical evaluation of the chairman’s comments should also be included.

Part 2 – 10-Year Investment Appraisal – requires forecasting the future cash flows of the proposed project and implementing capital budgeting methods (NPV, IRR and PI). An excel spreadsheet of the investment appraisal should be included in the report. The report narrative should include a commentary on the relevant cash flows included in the appraisal and justifications as to the exclusion of others. Your conclusions should reflect your results from the first part and the fact that the company will need a substantial funding for the new project.

Students should also recalculate the NPV and IRR, assuming the project has an unlimited life.