Haas School of Business

Haas School of Business

Haas School of Business
University of California, Berkeley
BA 202AReuven Lehavy
Fall 1999Franco Wong
Midterm Examination







Show all your work to receive partial credit

Problem 1

Please refer to the consolidated balance sheets of the good guys! given on the last page.

(Round your answers to three decimal points)

a)What are the (i) return on equity (earnings/total owners' equity) and (ii) current ratio (current assets/current liabilities) of the good guys! in 1998? Assume that no dividends were declared or paid in 1998.

Consider each of the following actions by itself that the good guys! might take on the last day of fiscal 1998. What would be the (i) return on equity and (ii) current ratio of the good guys! if each of the actions was taken by itself? Assume that the firm's tax rate is zero.

b)Enter into a new labor contract with the employees’ union that calls for a $10,000 increases in wages, effective October 1, 1998.

c)Collect an additional $8,000 in accounts receivable.

d)Borrow $50,000 from its bank. The loan is due in its entirety in two years and carries an interest rate of 12% per annum.

e)Make additional $5,000 credit sales. The cost of the merchandise is $2,000.

f)Pay September payroll totaled $9,000, instead of paying it on the 5th day of next month.

g)Purchase an additional $20,000 of merchandise on account.

h)Declare and pay $10,000 cash dividend.

i)Purchase and receive new store furniture for $6,000 on account, payable in 60 days. The company’s accountant decides that no additional depreciation expense is needed for fiscal 1998.

j)Issue $12,000 of new common shares to a venture capital firm; the good guys! will receive the cash today.

Problem 2 (Note: This Problem is independent of Problem 1)

Suppose the good guys! completed the following transactions during the month of October 1998. Using these information and the balance sheets of the good guys! (given on the last page), fill out the missing numbers in the company’s balance sheet as of October 31, 1998.

(An incomplete balance sheet is attached. Please put your answers in the shaded areas.)

1)Paid office rent for October 1 – December 31, $2,000.

2)September payroll paid, $10,630.

3)Issued 1,000 shares of $0.001-par value common stock for $5,001.

4)Net Sales for the month, $40,000 credit and $10,000 cash (Note: you can ignore allowance for doubtful accounts).

5)Payroll for October, payable on November 5, $11,000.

6)Depreciation expense for October – Furniture, fixtures, and equipment, $11,000.

7)Pre-paid advertising, insurance, and rent used up for October, $2,445.

8)Purchased $14,000 merchandise, $10,000 on account and $4,000 cash.

9)Merchandise inventory on hand as of October 31, 1998 was valued at $129,072.

The good guys, Inc

Consolidated Balance Sheet

As of October 31, 1998


Current Assets:
Cash and cash equivalents
Accounts receivable, less allowance for doubtful accounts
Merchandise inventories
Prepaid expenses
Total current assets
Property and Equipment:
Leasehold improvements / 63,818
Furniture, fixture, and equipment / 59,284
Construction in progress / 12,684
Total property and equipment / 135,786
Less accumulated depreciation and amortization
Property and equipment – net
Other assets / 7,421
Total Assets

Liabilities and Shareholders’ Equity

Current Liabilities:
Accounts payable
Accrued expenses and other liabilities: / ---
Sales taxes / 5,940
Other / 25,764
Total current liabilities

Shareholders’ Equity

Preferred Stock, 0.001 par value / ---
Common Stock, $0.001 par value
Additional paid-in capital
Retained earnings
Total Shareholders’ equity
Total Liabilities and Shareholders’ Equity

Problem 3:

The following information relates to the manufacturing activities of Thunder Industries Corp. for the year ended December 31, 2005:

Balance: Jan. 1, 2005Balance: Dec. 31, 2005

Raw Material Inventory$42,300$40,600

Factory Supplies Inventory 9,600 9,800

Work-in-Process Inventory102,200103,100

Finished goods Inventory 48,700 47,300

During the year, Thunder Industries incurred the following manufacturing costs:

  1. Raw materials purchased$83,500
  2. Supplies purchased 14,300
  3. Wages186,800
  4. Utilities 1,250
  5. Insurance 550
  6. Depreciation 3,100
  7. Rent 4,400


Compute Thunder Industries' cost of goods sold for the year ended December 31, 2005.

Problem 4:

Suppose that you are a partner in an online consulting company called iCookBooks.com. On January 1, 2008 (the start of the fiscal year), Sylvia, the manger of the CookMyROA Company, contacts you and asks for your advice. Here is the information she provides you: her compensation for the year 2008 is based on the firm's return on assets (defined as net income divided by end-of-year total assets) for this year. Sylvia is forecasting that, in the absence of taking any of the actions listed below, the firm's net income for 2008 will be $8,000, its end-of-year 2008 total assets will be $64,000, and its end-of-year 2008 total equity will be $40,000.

Sylvia asks you to help her deciding if taking the following actions will increase the firm's return on assets for the current year, 2008 (and accordingly increase her compensation):

Purchase a new assembly line for the firm's product for $x. The assembly line would be paid for in cash this year. Having the new assembly line will allow the manager to reduce the number of employees, resulting in a savings in wages (and in cash outflows) of $1,600 this year and for each of the next four years.

The new assembly line will also results in higher quality products leading to $3,200 more in sales for this year and for each of the next four years. Of the $3,200 additional sales this year, $2,400 would be for cash. The remainder would be on account and would be paid off next year. The cost of goods sold associated with each year's additional sales will be $1,920. All of the additional items sold this year would come from the firm's inventory. (That is, the firm would not have to buy additional inventory this year.) Finally, the depreciation on the new assembly line would be $x/5 for this year and for each of the next four years.


(1)What is the maximum value of x for which Sylvia would find it worthwhile to purchase the new assembly line?

(2)Suppose that Sylvia purchases the new assembly line for $10,000 (that is, x=$10,000). She then realizes that her actions (i.e., the purchase of the new equipment and the effects mentioned above) also change the firm's return on equity (ROE). Since this change has no benefit to her, she decides to take an action that will bring the new value of the firm's ROE back to its original value. Specifically, she decides to change the amount of dividend for 2008 (the dividend will be paid in cash next year). Find the change in dividend necessary to bring the new value of the firm's ROE back to its original value. (ROE is defined as net income divided by end-of-year total equity.)