MBA800X21 - PleasePrintName MBA800 ExamII Summer2004...

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_____________________________ Please Print Name            MBA 800 Exam II Summer 2004 Instructions: 1. Read  each  question  carefully  and  answer fully.      All  firms  use a  calendar year.  Not all parts of each problem are equally weighted. 2. Problems (other than multiple choice) not supported by relevant and  readable computations are subject to point loss.  Where appropriate,  terms like   A net income, @   A net loss, @   etc. must be included with  number answers. 3. Budget your time carefully.  It is generally better to finish half of each  problem than to complete all of half the problems.   Students who  continue to work on exams after instructed to stop will receive a zero  on this exam. 4. It is the student's responsibility to verify that all the listed problems  and   pages   are   contained   is   this   booklet.     Unanswered   questions  receive zero points regardless of reason. Problem Pages Approximate Points Approximate Time I 2-3 30 19 – 23 minutes II 4 20 12 – 15 minutes III 5 15 10 – 12 minutes IV After 5 75 48 – 58 minutes Total 140 89 - 108 minutes
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Problem I The Jensen Company had the following balance sheet on 1 Jan 2005: Cash $8000 Common Stock $8000     Total Assets $8000     Total Liabilities & Equity $8000 An asset exists that has a 50% of paying $4,000 and a 50% chance of paying $2,000 on 31  Dec 2005.  There will also be a final payment on 31 Dec 2006 of either $4,000 or $2,000.  If  earnings are high in 2005, there is a 75% chance of high earnings in 2006.  If earnings are  low in 2005, there is a 75% chance of low earnings in 2006.  The interest rate is 10%. REQUIRED:  Answer each part A through H.  Round to nearest dollar for dollar answers. A.  Jensen purchased the asset for its “proper” market value on 1 Jan 2005.  Show the 1  Jan 2005 balance sheet after the purchase. B.  Assume Jensen properly uses a mark-to-market approach for this asset, and earnings  are “high” in 2005.  Show the 31 Dec 2005 balance sheet after all transactions are recorded. C.  What are the abnormal earnings in dollars and  percentage from B? 2
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Problem I  (continued) D.  Assume GAAP dictates the asset’s cost should be amortized evenly over its life, and  earnings are “high” in 2005.  Show the 31 Dec 2005 balance sheet after all transactions are  recorded. E.  What is Jensen’s market-to-book ratio from D? F.  What are the economic earnings in dollars and percentages? G.  What are the accounting earnings in dollars and percentages from D?
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