ORIE 3150 Prelim II Answers (1)

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Please do not unstaple the exam ORIE 3150 Name________________________________________________ Prelim II, Fall 2010 120 minutes There are 10 problems, 20 points each. All problems count towards your score. Budget your time. Please hand in your exam and leave the room quietly when you are done so as to not disturb the other test takers. 1 2 3 4 5 6 7 8 9 10 Total 1. Time Value of Money A i i c = ( 29 n i 1 PV FV + = single payment ordinary annuities: - + = i 1 ) i 1 ( A FV n + - = - i ) i 1 ( 1 A PV n annuities due: n 1 (1 i) 1 FV A A i + + - = - ( 29 n 1 (1 i) PV A 1 i i - - + = + ______________________________________________________________ 2. Bonds ( 29 ( 29 n n i 1 FV i i 1 1 A PV + + + - = - The “bond equation” The annual yield for a bond is 2 × i for bonds that pay interest semi-annually. Interest Expense = i × Carrying Value. Carrying value must be updated every 6 months when interest is paid. ______________________________________________________________ 3. Leases - The Lease Checklist: 1. The lease transfers ownership to the lessee at the end of the lease term. 2. The lease contains a bargain purchase option 3. The lease term is equal to 75% or more of the estimated economic life of the asset 4. The present value of the lease payments amounts to 90% or more of the fair value of the lease property. If any one is true, it is a capital lease! If none are true, it is an operating lease. For #1 or #2 is true, depreciate over the useful life. For other capital leases, depreciate over the lease term. Interest Expense = i × Lease Obligation Sale-leaseback arrangements may result in a gain or loss. If there is a gain, this is usually amortized over the life of the lease. Losses (very rare) are recognized immediately.

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4. Inventory Impairment Net realizable value (NRV) – equals the estimated selling price in the ordinary course of business less costs of repair, preparation and disposal Net adjusted cost (NAC) – equals the NRV less a normal profit margin (NPM). NAC = NRV – NPM Replacement cost (RC) – replacement of inventory by purchase or reproduction. _______________________________________________________________________ 5. Depreciation (straight line) Historical Cost - Salvage Value Annual Depreciation = Useful Life 6a. Return on Assets ( 29 Assets Total Rate Tax Interest Income Net ROA - + = 1 6b. Return on Invested Capital ( 29 Equity s r Stockholde s Liabilitie Term Long Rate Tax Interest Income Net ROIC ' 1 + - - + = 6c. Return on Owner’s Equity Equity s r Stockholde Income Net ROE ' = 6d. Price/Earnings Ratio share per Income Net share per price Market E P = / 6e. Gross margin percentage = Gross margin / Net Sales
1. GMI Industries plans to lease a new Chevrolet truck. The terms for the four-year lease are delivery on March 1, 2009, 48 payments of \$550 made at the end of each month, a nominal annual interest rate of 6%, and the option to purchase the truck at lease

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