this is my sample midterm questions. you can write on the paper or typing. I want to get every right answers. Thanks.

Page 1 of 7 Midterm Examination -- CE 502 Wednesday, October 11, 2006 This is a closed book exam. No reference materials allowed. TIME ALLOTMENT: You are allowed 2hours and 40 minutes for the exam. (160 minutes). Hints to Writing a Good Exam: 1. Put your Student I.D. on the front and back of your BLUE BOOK. Do NOT write your name on your exam. Your exam will be graded blind (I do not want to know your name.) 2. Be Neat and Highly Organized so that it is easy for me to read your exam. 3. Refer me to all of your backup calculations. Show all of your work. Show formulas where it will help me read your exam. 4. State All of Your Assumptions and Show Formulas as Necessary. 5. Spend Extra Time on the Discussion/Explanation Portions of the Exam. 6. KEEP ALL OF YOUR WORK WITHIN THE BLUE BOOKS. USE ADDITIONAL BLUE BOOKS IF YOU MUST. NO ADDITIONAL OR SEPARATE SHEETS. 7. Note the points allocated to each problem and spend your time prudently to maximize your score. CE 502 Midterm Exam October 11, 2006 Page 2 of 7 Melissa Mann graduated with a Masters Degree in Construction Management from USC in the spring of 2005. She came to USC from Northern California in 2003 and was passionate about construction. No one in the technology rich Bay Area could convince her to pursue another career. After graduating from USC she moved to Berkeley, California where she found a small woman-owned construction company called Traja Construction Company (TCC) that performed seismic upgrades and renovations of old residential buildings. After several breakfasts at Henry's on Durant Avenue in Berkeley, Melissa had accepted a job position as \"Project Manager\" paying $60,000 per year. Traja Construction Company had been started by a USC Trojan alumna named Traja Antigrowth in 1964. Ms. Antigrowth owned 100% of the shares in the company. Traja took Melissa under her wing and spent a good percentage of her time teaching and training Melissa. As is the case of many small businesses, the two socialized outside of business. Melissa went over to Traja's house to watch the college football games on Saturday, October 7. Melissa had become a Trojan football fan during her studies at USC. A number of USC and Cal alumni attended the Saturday afternoon and evening television fiesta. USC, ranked #2 in the country, barely scraped by the Washington Huskies. The Bears of the local University of California \"Cal\" smashed the Oregon Ducks by a large margin boosting their own Rose Bowl hopes. Melissa began looking forward to what was becoming a big football game between USC and Cal later in the season. At the party, Traja pulled Melissa aside and told her that she was interested in selling Traja Construction Company. As USC scored its third touchdown of the afternoon, Traja told Melissa that she would like to have Melissa consider buying TCC and handed Melissa a brown envelope marked \"confidential\" and Melissa Mann. Between the end of the USC football game and the beginning of the Cal game, Melissa snuck a smoking break outside where she opened the envelope and read the contents while she enjoyed a filter less Camel. Inside the envelope she found the following letter: CE 502 Midterm Exam October 11, 2006 Page 3 of 7 PERSONAL AND CONFIDENTIAL Date: Friday, October 6, 2006 To: Melissa Mann From: Traja Antigrowth Dear Melissa, I have been working very hard in this business for more than 40 years. Since you started working for Traja Construction Company in the summer of 2005, I have found someone who reminds me of myself 40 years ago. You are very intelligent, you are highly motivated, you love our building profession, and you work for me as if you are an owner. It was very difficult to be womanowned business in 1964, but I think the Berkeley environment here allowed my firm to blossom. Let's cut to the chase. I'd like to retire and sell you the business. Please find enclosed with this letter some historical financial information about TCC. Please hold it in confidence. If you choose not to pursue what I am going to offer, I would like you to return the information and not share it with anyone else. As some background, please note that I have paid myself a nice salary over the years because I have been able to maintain high gross margins for the specialty construction work we perform. My high salary has impacted our profitability, but that is the balance I have had to strike while running this business -- keeping the profits in the company or paying myself salary. TCC has been able to thrive despite my high salary and I think in your hands it will have a bright future. I have saved enough money and purchased enough real estate here in California to retire comfortably. I'm getting tired running the business. I don't have the desire I had in years past to focus on collecting moneys due to us and the other financial aspects of our business just no longer appeal to me. The Balance Sheets of TCC show these lackluster trends. I've had to borrow $260,000 from our Bank Credit Line for nearly two years now. On the positive side, I believe the market value of the Inventory in TCC is understated on the Balance Sheet by about $720,000. I think the true market value of the PP&E is $960,000 and I think you could get away with selling two-thirds of the Inventory and still be able to perform our projects. In fact, that is part of my plan over the next three months. Here's what I am prepared to offer to you. I would like you to buy the company by having you promise to pay me $150,000 each year for the next ten years beginning in 2007. I would like to sell $160,000 of Inventory that appears as book value in the company's balance sheet for $ CE 502 Midterm Exam October 11, 2006 Page 4 of 7 $640,000 cash which will net me $480,000 by the end of this year. I believe you will be able to continue the volume of business we expect at a reduced level of Inventory. Also, I will stay around the company for three years to help transition all the clients to your control. By the way, here is how I feel we will finish 2006: 1. In the next 45 days, we can expect to collect $490,000 of Accounts Receivable. 2. I have already paid the SG&A costs for the entire year in cash. No more SG&A will be incurred in the next three months except as shown in item #5 and item #10below. 3. I expect us to bill $2,000,000 more to our clients by the end of 2006, making our total billings/ accrued revenues for the year 2006 equal to $6,800,000. 4. The vendor, labor and subcontractor costs we will incur as accounts payable on the $2,000,000 worth of additional projects will be 80% of billings or $1,600,000. These billings will net us a gross margin of $400,000. Remember that TCC accounts for all these costs as \"cost of goods sold.\" The only costs in the SG&A are my salary, our rent, and our insurance. 5. I will pay myself $250,000 cash to close out my pay for the year and bring my pay level to the $750,000 I paid myself the previous two years. 6. Before the end of the year, we will collect nearly $1,000,000 of the $2,000,000 in billings. 7. We will pay $800,000 of vendor costs in cash. 8. I will sell two-thirds of the Inventory ($160,000) for $640,000 for cash. 9. I will declare and pay a cash dividend to myself of $500,000. 10. Our lease on our office space is expiring. I have already pre-paid all the rent through the end of the year. We will have to recognize the expiration of the rent at the end of the year. 11. The homebuilding market is moderating severely right now after years of growth. I believe more people will remodel their older homes and that will generate good business for us in the first quarter of 2007. I expect to sign nearly $3,000,000 in new contracts by the end of the year. 12. Before you buy the company, I would like to settle the single lawsuit we have pending. I believe I can settle the lawsuit and pay out only $150,000 before the end of the year. If we lack the cash necessary to pay the settlement, I recommend we borrow the necessary funds from our credit line (which is $1,000,000) so that we maintain $50,000 cash in our CE 502 Midterm Exam October 11, 2006 Page 5 of 7 bank account. Let's not consider this transaction in the end of year accounting. But know that it is possible we could get hit with a charge. By the way, the additional capital I contributed to TCC over the years was as follows: 1964 2003 2004 2005 50,000 shares 25,000 shares 5,000 shares 20,000 shares $50,000 (I inherited from my grandfather) $150,000 (from my savings) $50,000 (from my savings) $50,000 (from my savings) Totals: 100,000 shares outstanding and $300,000 total capital contributed. My accountants tell me that the company should be valued as follows: 1. Total the profits from each of the past three years (2003, 2004, and 2005), add back the salaries I paid myself over the three years, divide the resulting total value by three to find the average and multiply by six. ( (Profits + Traja Salary) for three years)/3 * 6 = MV 2. Six times the book value at the end of the year. Please get back to me by Thursday morning, October 12, 2006 with any questions you may have. Respectfully, TRAJA CONSTRUCTION COMPANY a California corporation by: Traja Antigrowth President Attachment: Financial Results CE 502 Midterm Exam October 11, 2006 Page 6 of 7 Attachment to Letter: Financial Results of TCC Note #1 to Financial Statements: 3Q2006 means Results as of the End of the Third Quarter 2006 (September 30, 2006) Income Statement Results are cumulative through the nine months ending 9/30/06. The Balance Sheet also reflects balances as of 9/30/2006. Be careful how you calculate income statement and balance sheet ratios because the income statement presented for 2006 below is only for three quarters () of a year. Note #2: The sale of PPE will be recognized in the R/E but will be shown below profit on the I/S. The lawsuit settlement is also part of R/E and is also shown below profit. The sale of PPE and the lawsuit are extraordinary items that are shown below profit. TCC Income Statement (000's omitted) Thru 9/06 Revenues Cost of Goods Sold Gross Margin Traja Antigrowth's Salary SG&A Profit (Loss) 2002 2003 2004 2005 3Q2006 5,000 (3,500) -----1,500 (300) (400) -----800 5,500 (4,500) -----1,000 (400) (500) -----100 4,500 (3,200) -----1,300 (750) (500) -----50 6,000 (4,500) -----1,500 (750) (600) -----150 4,800 (4,000) -----800 (500) (600) -----(300) TCC Balance Sheet (000's omitted) Periods Ending: (9/30/2006) Cash Accounts Receivable Inventory Pre-Paid Rent Property/Plant/Equipment Total Assets Accounts Payable Credit Line at Bank Paid in Capital Retained Earnings Total L & E 2002 10 540 200 0 100 -----850 2003 10 550 200 0 150 -----910 2004 10 450 100 0 200 -----760 2005 10 1,200 200 0 250 -----1,660 3Q2006 10 960 240 15 300 -----1,525 350 0 50 450 -----850 160 0 200 550 -----910 10 0 250 500 -----760 450 260 300 650 -----1,660 600 275 300 350 -----1,525 CE 502 Midterm Exam October 11, 2006 Page 7 of 7 Problem #1: Complete the bookkeeping balance sheet financial transactions for TCC for the last three months of 2006 based on Traja's expectations as stated in her letter. There are twelve transactions listed. Please number the transactions using the number sequence described in the problem statement above so the professor can easily grade it. (24 points total, 2 points each) Problem #2: There is NO problem #2. It does not exist. Problem #3: Create a nicely organized Balance Sheet for December 30, 2006 (5 points) Problem #4 Create a clear and concise Full Year Income Statement for 2006. Remember that the complete year will have revenues of $6.8 million and that the first nine months of income statement items are additive to the last three months. (5 points) Problem #5 Create an easy to read Statement of Retained Earnings for 2006. (5 points) Problem #6 Create three Statements of Cash Flows for the year end periods 2004, 2005, and 2006. (10 points) (If you can, lay them side by side for ease of reading.) Problem #7 Perform a quantitative historical financial analysis of TCC using the ratios that you think are important and reflect key aspects of TCC that you feel are important to Melissa's evaluation of the acquisition. (13 points) Problem #8 Discuss (explain) in words the quantitative analysis from your answers to Problems #6 (Cash Flow) and #7 (Financial Analysis). What is happening at TCC that you find interesting and would help you evaluate your acquisition if you were Melissa? (13 points) Problem #9 Please comment the market valuations Traja Antigrowth's accountant has proposed for TCC. (5 points) Problem #10 What is the primary reason that TCC has had to use its bank credit line the past two years? (5 points) Problem #11 BREAK-EVEN PROBLEM: If you were Melissa Mann, how might you use break-even analysis to determine if you want to purchase Traja Construction Company? Use the Break Even Formula, figures or calculations to support your discussion. (15 points)