Investments

The balance sheets of Cheese Company and Ham Company as of December 31, 2011, follow.Assume that Cheese purchased 100 percent of Ham’s common stock for $1,400,000 immediately prior to December 31, 2011. Also assume that $100,000 of the excess of cost over book value is attributable to the increased value of Ham’s property, plant, and equipment. Cheese considers the rest of the excess to be goodwill.

REQUIRED1. Prepare a work sheet for a consolidated balance sheet as of the acquisition date.2. If you were reading Cheese’s consolidated balance sheet, what account would indicate that Cheese paid more than fair value for Ham, and where would you find it on the balance sheet? Also, would you expect the amount of this account to change from year to year? If so, what would cause it to change?

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The average rate of return on investments in large stocks has outpaced that on investments in Treasury bills by about 7% since 1926. Why, then, does anyone invest in Treasury bills?

The APT itself does not provide guidance concerning the factors that one might expect to determine risk premiums.

How should researchers decide which factors to investigate? Why, for example, is industrial production a reasonable factor to test for a risk premium?

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