VERSION 1

FAMILY NAME / INI

INITIAL S O L U T I O N S

STUDENT ID #

MIME 310 ENGINEERING ECONOMY – QUIZ #1

May 7, 2007 – 8:30 to 9:15

MULTIPLE-CHOICE QUESTIONS
Circle the correct answer on this test paper and
record it on the computer answer sheet.

PART 1. Multiple-choice Statements and Short Problems – Circle the correct an-
swer on this paper and record it on the computer answer sheet. Questions 1 to 4 are
worth 1 point each, and questions 5 to 9, 2 points each, for a total of 14.
Note: There are no penalties for incorrect answers.

1. A firm with a total asset turnover ratio lower than the industry standard may have:
A) insufficient fixed assets.
B) insufficient sales.
C) excessive cost of goods sold.
D) excessive debt.
E) insuffucient current assets.

2. A firm has a times interest earned ratio of 2.7. This means that:
A) The firm generated enough cash to cover its interest expense 2.7 times.
B) The firm has sufficient EBIT (earnings before interest and taxes) to cover its interest
expense 2.7 times.
C) The interest expense of this firm exceeded earnings before taxes by 2.7 times.
D) The net income of this firm is sufficient to cover its interest expense 2.7 times.
E) The firm earned $1 in EBIT for every $2.70 it paid out in interest.

3. On the balance sheet, net fixed assets represent:

A) fixed assets currently in service at cost minus depreciation expenses for the year.
B) fixed assets currently in service at cost minus accumulated depreciation.
C) fixed assets currently in service at current market value minus depreciation expenses
for the year.
D) fixed assets currently in service at current market value minus accumulated
deprecation.
E) None of the choices given above

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 VERSION 1

4. Consider the following two statements:

I. Whenever a firm’s average variable cost decreases as output increases, its marginal
cost is decreasing as well.
II. Whenever a firm’s average total cost increases as output increases, its average vari-
able cost is increasing as well.
A) I is true and II is false
B) I is false and II is true.
C) I and II are both true.
D) I and II are both false.
E) None of the choices given above are correct.

Use the following information to answer questions 5 and 6

GJ Inc. makes 80 fibreglass truck hoods per day for large truck manufacturers. Each hood sells
for $500 and GJ Inc. sells all of its product to the large truck manufacturers. The supply function
for hoods is [ Qs = -40 + 0.24 P ]. The demand function for hoods is linear and at the sales price
of $500, the price elasticity of demand is 0.4.
If the sales price is $500, then this is the
market equilibrium price.
5. The demand function for hoods is:
At P=500, QS = -40 + 0.24 (500) = 80
A) QD = -40 + 0.24 P ED: -(dQ/dP) / (Q/P) = 0.4
B) QD = 112 - 0.064 P (dQ/dP) = 0.4 (80 / 500) = -0.064
C) QD = -40 - 0.064 P QD = Intercept - 0.064 P
D) QD = 112 + 0.24 P ∴ Intercept = 80 + 0.064 (500) = 112
E) None of the choices given above are correct

6. If the local government imposes a tax of $25 per hood manufactured, what would be the
new equilibrium price given a demand function of [ QD = 112 - 0.064 P ].
A) $525.00
Translation of supply curve on P axis: +25
B) $505.26
P = (Q + 40) / 0.24 + 25
C) $519.74 P = [Q + 40 + 25 (0.24)] / 0.24
D) $500.00 P = (Q + 46) / 0.24
E) None of the choices given above are correct ∴ New supply function: Q = -46 + 0.24 P

7. The point price elasticity of demand is 0.5 at a price of $1 If the price of the product in-
creases from $1.00 to $1.10, then the quantity demanded will decrease by approximately:
A) 5 units.
B) 5 percent. ED: -(dQ/Q) / (dP/P) = 0.5
C) 10 units. -(dQ/Q) / (0.10 / 1.00) = 0.5
D) 10 percent. (dQ/Q) = 0.5 (0.1) = -0.05
E) None of the choices given above are correct.

8. Candy Corporation has before-tax profits of $1.2 million and is subject to a 34 percent in-
come tax rate. The firm will pay $50 000 in preferred dividends. If the corporation has
100 000 common shares outstanding and no interest expenses, its earnings per share are:
A) $7.59
B) $4.52 After-tax profits : 1.2 (1 - 0.34) = 0.792
C) $3.91 EPS: (792 000 - 50 000) / 100 000 = 7.42
D) $7.42
E) None of the choices given above are correct
At market equilibrium,
112 - 0.064 P = -46 + 0.24 P
0.304 P = 158
2 P=519.74
 VERSION 1

9. A corporation has year-end retained earnings balances of $320 000 and $400 000, in
2001 and 2002, respectively. Given that the firm reported a net after-tax income of
$100 000 in 2002, the dividends paid in 2002 were:
A) $20 000
Increase in RE: 400 000 - 320 000 = 80 000
B) $0
∆ RE = Net income - dividends
C) $100 000 ∴ dividends = 100 000 - 80 000 = 20 000
D) $80 000
E) None of the choices given above are correct

PART 2. Financial Statements with Multiple-choice Answers – Circle the correct

answer on this paper and record it on the computer answer sheet. Questions 10 to 13
are worth 2 points each for a total of 8 points.
Note: There are no penalties for incorrect answers.

Use the following information to answer questions 11 to 14.

Cole Eagan Products Incorporated

BALANCE SHEET
December 31, 2002
Current Assets Current Liabilities
Cash 4 500 Accounts payable 10 000
Accounts receivable Notes payable
Inventories Accrued expenses 1 000
Total current assets Total current liabilities

Fixed Assets at Cost Long-term Debt

Less accumulated depreciation 15 000 Shareholders’ Equity
Net Fixed Assets Common Shares
Retained Earnings
Total Shareholders’ Equity
Total Assets Total Liab. & Shar. Equity

Information for 2002

Net Sales (all credit sales) $110 000
Gross Profit Margin* 0.25
Inventory turnover Ratio (360 days/year) 3.0
Average collection period 65 days
Current Ratio 2.4
Total Asset Turnover Ratio 1.13
Debt Ratio 0.538
* (Net Sales - Cost of Goods Sold) / Net Sales

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 VERSION 1

10. Accounts receivable for CEE Inc. in 2002 were:

A) $14 056
B) $14 895 ACP: Accounts receivable (360) / Sales = 65
C) $19 861 Receivables: 65 (110 000) / 360 = 19 861
D) $18 333

11. Inventories for CEE Inc. in 2002 were:

A) $9167
B) $36 667 Cost of goods sold: 110 000 (1 - 0.25) = 82 500
ITR: Cost of goods sold / Inventory = 3
C) $32 448
∴ Inventory: 82 500 / 3 = 27 500
D) $27 500

12. Notes payable for CEE Inc. in 2002 were:

A) $10 609
Total current assets: 4500 + 19 861 + 27 500 = 51 861
B) $113 466
CR : Total current assets / Total current liabilities = 2.4
C) $52 372 ∴ Total current liabilities: 51 861 / 2.4 = 21 609
D) $41 372 ∴ Notes payable: 21 609 - 10 000 - 1000 = 10 609

13. Total assets for CEE Inc. in 2002 were:

A) $45 895
B) $124 300 ATR: Sales / Total assets = 1.13
C) $97 345 ∴ Total assets: 110 000 / 1.13 = 97 345
D) $58 603

THIS IS THE LAST PAGE OF THE QUIZ PAPER

4
 VERSION 2

MULTIPLE-CHOICE QUESTIONS
Circle the correct answer on this test paper and
record it on the computer answer sheet.

PART 1. Multiple-choice Statements and Short Problems – Circle the correct an-
swer on this paper and record it on the computer answer sheet. Questions 1 to 4 are
worth 1 point each, and questions 5 to 9, 2 points each, for a total of 14.
Note: There are no penalties for incorrect answers.

1. A firm has a times interest earned ratio of 2.7. This means that:
A) The firm generated enough cash to cover its interest expense 2.7 times.
B) The firm has sufficient EBIT (earnings before interest and taxes) to cover its interest
expense 2.7 times.
C) The interest expense of this firm exceeded earnings before taxes by 2.7 times.
D) The net income of this firm is sufficient to cover its interest expense 2.7 times.
E) The firm earned $1 in EBIT for every $2.70 it paid out in interest.

2. On the balance sheet, net fixed assets represent:

A) fixed assets currently in service at cost minus depreciation expenses for the year.
B) fixed assets currently in service at cost minus accumulated depreciation.
C) fixed assets currently in service at current market value minus depreciation expenses
for the year.
D) fixed assets currently in service at current market value minus accumulated
deprecation.
E) None of the choices given above

3. Consider the following two statements:

III. Whenever a firm’s average variable cost decreases as output increases, its marginal
cost is decreasing as well.
IV. Whenever a firm’s average total cost increases as output increases, its average vari-
able cost is increasing as well.
A) I is true and II is false
B) I is false and II is true.
C) I and II are both true.
D) I and II are both false.
E) None of the choices given above are correct.

4. A firm with a total asset turnover ratio lower than the industry standard may have:
A) insufficient fixed assets.
B) insufficient sales.
C) excessive cost of goods sold.
D) excessive debt.
E) insuffucient current assets.

5
 VERSION 2

Use the following information to answer questions 5 and 6

GJ Inc. makes 80 fibreglass truck hoods per day for large truck manufacturers. Each hood sells
for $500 and GJ Inc. sells all of its product to the large truck manufacturers. The supply function
for hoods is [ Qs = -40 + 0.24 P ]. The demand function for hoods is linear and at the sales price
of $500, the price elasticity of demand is 0.4.
If the sales price is $500, then this is the
market equilibrium price.
5. The demand function for hoods is:
At P=500, QS = -40 + 0.24 (500) = 80
A) QD = -40 + 0.24 P ED: -(dQ/dP) / (Q/P) = 0.4
B) QD = 112 + 0.24 P (dQ/dP) = 0.4 (80 / 500) = -0.064
C) QD = -40 - 0.064 P QD = Intercept - 0.064 P
D) QD = 112 - 0.064 P ∴ Intercept = 80 + 0.064 (500) = 112
E) None of the choices given above are correct

6. If the local government imposes a tax of $25 per hood manufactured, what would be the
new equilibrium price given a demand function of [ QD = 112 - 0.064 P ].
A) $525.00
Translation of supply curve on P axis: +25
B) $519.74
P = (Q + 40) / 0.24 + 25
C) $505.26 P = [Q + 40 + 25 (0.24)] / 0.24
D) $500.00 P = (Q + 46) / 0.24
E) None of the choices given above are correct ∴ New supply function: Q = -46 + 0.24 P

7. Candy Corporation has before-tax profits of $1.2 million and is subject to a 34 percent in-
come tax rate. The firm will pay $50 000 in preferred dividends. If the corporation has
100 000 common shares outstanding and no interest expenses, its earnings per share are:
A) $7.59
B) $4.52 After-tax profits : 1.2 (1 - 0.34) = 0.792
C) $3.91 EPS: (792 000 - 50 000) / 100 000 = 7.42
D) $7.42
E) None of the choices given above are correct

8. A corporation has year-end retained earnings balances of $320 000 and $400 000, in
2001 and 2002, respectively. Given that the firm reported a net after-tax income of
$100 000 in 2002, the dividends paid in 2002 were:
A) $20 000
Increase in RE: 400 000 - 320 000 = 80 000
B) $0
∆ RE = Net income - dividends
C) $100 000
∴ dividends = 100 000 - 80 000 = 20 000
D) $80 000
E) None of the choices given above are correct

9. The point price elasticity of demand is 0.5 at a price of $1 If the price of the product in-
creases from $1.00 to $1.10, then the quantity demanded will decrease by approximately:
A) 5 units.
ED: -(dQ/Q) / (dP/P) = 0.5
B) 5 percent.
C) 10 units. -(dQ/Q) / (0.10 / 1.00) = 0.5
D) 10 percent. (dQ/Q) = 0.5 (0.1) = -0.05
E) None of the choices given above are correct.
At market equilibrium,
112 - 0.064 P = -46 + 0.24 P
0.304 P = 158
P=519.74
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 VERSION 2

PART 2. Financial Statements with Multiple-choice Answers – Circle the correct

answer on this paper and record it on the computer answer sheet. Questions 10 to 13
are worth 2 points each for a total of 8 points.
Note: There are no penalties for incorrect answers.

Use the following information to answer questions 11 to 14.

Cole Eagan Products Incorporated

BALANCE SHEET
December 31, 2002
Current Assets Current Liabilities
Cash 4 500 Accounts payable 10 000
Accounts receivable Notes payable
Inventories Accrued expenses 1 000
Total current assets Total current liabilities

Fixed Assets at Cost Long-term Debt

Less accumulated depreciation 15 000 Shareholders’ Equity
Net Fixed Assets Common Shares
Retained Earnings
Total Shareholders’ Equity
Total Assets Total Liab. & Shar. Equity

Information for 2002

Net Sales (all credit sales) $110 000
Gross Profit Margin* 0.25
Inventory turnover Ratio (360 days/year) 3.0
Average collection period 65 days
Current Ratio 2.4
Total Asset Turnover Ratio 1.13
Debt Ratio 0.538
* (Net Sales - Cost of Goods Sold) / Net Sales

10. Inventories for CEE Inc. in 2002 were:

A) $9167
B) $36 667 Cost of goods sold: 110 000 (1 - 0.25) = 82 500
ITR: Cost of goods sold / Inventory = 3
C) $32 448
∴ Inventory: 82 500 / 3 = 27 500
D) $27 500

11. Accounts receivable for CEE Inc. in 2002 were:

A) $14 056
B) $14 895 ACP: Accounts receivable (360) / Sales = 65
C) $19 861 Receivables: 65 (110 000) / 360 = 19 861
D) $18 333

7
 VERSION 2

12. Total assets for CEE Inc. in 2002 were:

A) $45 895
B) $124 300 ATR: Sales / Total assets = 1.13
C) $97 345 ∴ Total assets: 110 000 / 1.13 = 97 345
D) $58 603

13. Notes payable for CEE Inc. in 2002 were:

A) $10 609
Total current assets: 4500 + 19 861 + 27 500 = 51 861
B) $113 466
CR : Total current assets / Total current liabilities = 2.4
C) $52 372 ∴ Total current liabilities: 51 861 / 2.4 = 21 609
D) $41 372 ∴ Notes payable: 21 609 - 10 000 - 1000 = 10 609

THIS IS THE LAST PAGE OF THE QUIZ PAPER