Engr_111_Midterm_Exam_Winter_09_Version_A_SOLUTIONS-1

# Engr_111_Midterm_Exam_Winter_09_Version_A_SOLUTIONS-1 -...

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1 UCLA Finance for Engineers and Scientists E111 Midterm Exam Winter 2009 Prof. Bristow Version A Solutions

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2 Q1.(5 pts) Draft a common-size income statement for a hypothetical firm using the following information: The tax rate is 33% of IBT. Net income is 1/5 th of sales. Opex is twice ROS. Costs of goods sold are 1.5x ROS. ROS = NI/sales = 0.20= 20% OPEX = 40% COGS = 30% sales 100% COGS 30% ------ Gross 70% OPEX 40% ------ IBT 30% tax 10% ------ Net Income 20% Q2.(5 pts) Draft a common-sized balance sheet for a hypothetical firm using the following information: A/R = A/P, Notes Payable = cash, Net Fixed Assets = 30% and long term debt is half of net fixed assets. Current assets = 70% and cash is 20%. A/R is 1/4th of Inventory. cash 20% A/P 10% A/R 10% Notes Payable 20% Inventory 40% Current liability 30% Current Assets 70% fixed assets 30% long term debt 15% Total assets 100% total liabilities 45% total equity 55% total liabilities and equity 100% Q3.(4 pts) What is the NPV of a \$1 million investment made on Jan. 1, 2009 which produces \$300,000 per year beginning Jan 1, 2010, and growing at 6% per year forever if the project has a 12% cost of capital? million g R D P o 5 06 . 0 12 . 0 000 , 300 1 = - = - = NPV = 5 – 1 = 4 million
3 Q4.(3 pts) Write the DuPont formula (identity) and state three things that the DuPont formula tells you for a given firm? Dupont formula: ROS x TO x LEV = ROE 1. operating efficiency: measured by profit margin—how much profit it takes per dollar of sales. 2. asset use efficiency: measured by the total asset turnover—how much sales are generated per dollar of assets. 3. financial leverage: measured by equity multiplier—how many assets can be supported by each dollar of equity. Q5.(3 pts) In two or three sentences state what are agency problems, and why do they exist within a corporation? How can they be reduced? Agency problems are caused by a misalignment of interests between principals and agents. Agency problems exit when agents (financial managers) and principals (shareholders) do not share the same interest for the company. They can be reduced if the principals design compensation and contracts for agents to align their interests, such as stock options or profit sharing plans. The threat of a takeover of the company helps

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Engr_111_Midterm_Exam_Winter_09_Version_A_SOLUTIONS-1 -...

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