V's set #3 s86

The ERZATZ Corporation has made a decision to expand its business in order to increase sales. The company intends to issue $5,000,000 face value bonds at a 6% coupon in order to finance this expansion. In this illustration, we will ignore the effects of taxation, selling expenses, and discounts to maturity. When the bonds are issued, the corporation must pay $300,000 in interest expense each year. Let's assume that the underwriting syndicate charged a 2.0% spread for distributing the bonds. The other expenses will be ignored for illustration purposes. The cost of capital on the debt issue is now:

$300,000/$4,900,000 = 6.12%

If next year's estimated net income is $70 million and the P/E ratio is 9.5, what is the equity value?

$665 million = $70 million x 9.5 P/E ratio

Relevant information on the Trident Company to answer this question is found next. Enterprise value of $370 million Debt of $30 million Revenue of $300 million Profit margin of 10% Cash of $10 million Minority interest of $20 million If the market yield is equal to 6.7%, what is the Trident's relative P/E? A) .91 B) .70 C) .73 D) 1.36

.73 The term market yield refers to the earnings yield of an index (S&P 500) used in the equity markets. The earnings yield is the inverse of the P/E ratio. Therefore, if the market yield is 6.7%, the P/E ratio for the market is, rounded off, 15 (1.00 / .067). The relative P/E is found by dividing a company's P/E ratio by the market P/E. Trident's P/E can be found as follows. Step 1. Calculate the Market Cap or equity value. EV + cash - debt - minority interest = Market Cap$370 + $10 - $30 - $20 = $330 Step 2. Calculate the net income. Revenue x profit margin = net income$300 x 10 % = $30 Step 3. Calculate P/E. Market Cap / Net Income = P/E$330 / $30 = 11 Trident's Relative P/E = P/E ratio / Mkt. P/E = 11 / 15 = .73

If the price of a product is increased by 10% and the demand for a product decreases by 5%, what's the elasticity coefficient? A) 2 B) 0.5 C) 0 D) 1.5

0.5 INCORRECT ANSWER CHOSEN The formula for the elasticity coefficient is: Percentage Change in Quantity Demanded / Percentage Change in Price. In this question, 5% / 10% = .50.

Percentage of Earnings

1) Dividends Paid/EPS 2) Net Income - Dividends/Net Income

Coincident Economic Indicators

1) Employees on non-agricultural payrolls 2) Personal income less transfer payments (Transfer payments represent aid for individuals in the form of Medicare, Social Security, and veteran's benefits, to list a few.) 3) The Index of Industrial Production 4) Manufacturing and trade sales

Conservative Accounting Methods

1) Low Discount rate that increases service costs 2) An expected return on pension plan assets that is near the discount rate increases the cost of the plan 3) High assumed rate of salary increases 4) Low rate return on pension plan assets

Economic Value Added

1) NOPAT - (WACC x Invested Capital) 2) (ROIC - WACC) x Invested Capital

Lagging Economic Indicators

1) The average duration of unemployment 2) The relationship of inventories to sales, manufacturing, and trade 3) Labor cost per unit of output for manufactured goods 4) The average prime rate charged by banks 5) Commercial and industrial loans outstanding 6) The relationship of consumer installment credit to personal income 7) The consumer price index for services

Leading Economic Indicators

1) The average workweek for production workers in manufacturing 2) The average weekly initial claims for state unemployment insurance 3) New orders for consumer goods and materials 4) Vendor performance (companies receiving slower deliveries from suppliers) 5) Contracts and orders for plant and equipment 6) New building permits for private housing units 7) The prices for the S&P 500 common stocks 8) The Money Supply (M2) 9) The change in credit outstanding for business and consumer borrowing 10) Interest rate spreads, 10-year Treasury bonds less federal funds 11) The index of consumer expectations

Cash Equivalents

1) Treasury Bills 2) Commercial Paper 3) Marketable Securities 4) Money Market Funds 5) Short Term Government Bonds 6) Certificate of Deposit 7) Bankers Acceptance

Aggressive Accounting Methods

1) Using a high discount rate 2) Using an overly optimistic return on plan assets 3) Assuming a low rate of compensation increase

Let's assume that the new issue of stock will be sold to the public at $40 per share and the underwriters are charging a 5% underwriting fee. Using the previous assumptions for earnings, dividends, and growth, the required rate of return can be determined as?

1.2/40(1-.05) = .316%+4% = 7.16

Greenlight Exam 2 61 Relevant financial information to answer the following question is found by using Exhibit 47. The Pear Company has offered to buy LED for $18.00 a share, with 20% of the transaction in cash and 80% in stock. A firm has agreed to lend all of the funds for the acquisition at 5%. If the Pear Company's tax rate is 21%, the deal will be approximately: A) 20% dilutive to EPS B) 24% dilutive to EPS C) 20% accretive to EPS D) 24% accretive to EPS

20% accretive to EPS INCORRECT ANSWER CHOSEN The following steps are needed to calculate the answer. The number of new shares to be issued must be calculated. The exchange ratio for acquisition is found by dividing the offer price for the target company by the acquirer's stock price ($18.00 / $199.50 = .090). However, since only 80% of the transaction is being financed by stock, the exchange ratio for this transaction is .072. The number of new shares issued equals 141.12 million (.072 x 1.96 billion). The total number of shares outstanding for combined company is 1.04 billion (141.12 million + 900.68 million). It is next necessary to calculate the combined net income, including any adjustments. The offer value is $35.28 billion (1.96B x $18.00). 20% of the acquisition is financed by debt. This amounts to $7.056 billion ($35.28 billion x .2). The adjustment to the combined company's net income is found by determining the after-tax cost of interest expense and subtracting it from the net income. The after-tax cost of interest is calculated by multiplying the interest expense by the complement of the tax rate. 7.056 x 5% x .79 = 278.71 million. The net income of the combined company will be approximately $7.89 billion (5.70 billion + 2.47 billion - 278.71 million, which has been rounded off to $7.89 billion). The Pear Company's old EPS is $6.33 ($5.70 billion / 900.68 million). The combined company's EPS is $7.59 ($7.89 billion / 1.04 billion). The deal would be approximately 20% accretive ($7.59 - $6.33 = $1.26 and $1.26 / 6.33 = 19.9%).

The ERZATZ Corporation has made a decision to expand its business in order to increase sales. The company intends to issue $5,000,000 face value bonds at a 6% coupon in order to finance this expansion. In this illustration, we will ignore the effects of taxation, selling expenses, and discounts to maturity. When the bonds are issued, the corporation must pay $300,000 in interest expense each year. To calculate the cost of capital on this debt issue?

300,000/5,000,000 = 6.0%

We will assume that the par value of the preferred stock is $100 and that any dividend to be paid will be fixed as a percentage of its par value. Therefore, if a corporation issues 7% preferred, it's obligated to pay an annual dividend of $7.00 per share.

7/100 = 7%

Once again, if we incorporate flotation costs into the calculation, the cost of capital will be increased. For example, if the underwriting fee on the preferred issue is 5%, the calculation is now?

7/95 = 7.37%

Free Cash Flow Yield Definition

A financial metric that measures the percentage of free cash flow a company generates relative to its market value. A higher free cash flow yield is generally considered favorable as it indicates a higher return for investors relative to to market price.

Unlevered FCFF

A measure of a company's cash generation that excludes the impact of debt and interest payments. It represents the cash generated by a business before accounting for interest expenses and taxes. UFCF is often used in financial analysis to assess a company's ability to generate cash from its core operations without the influence of its capital structure

Which of the following events is dilutive to the basic earnings per share of a company? A) A stock split B) The exercise of exchange-traded options C) A reverse stock split D) The issuance of convertible bonds

A stock split INCORRECT ANSWER CHOSEN Both stock splits and stock dividends increase the number of shares of common outstanding. Since the earnings available to common stockholders are unaffected by these events, earnings per share will subsequently decrease. In a reverse stock split, the number of shares of common stock outstanding will decline. This is accretive to earnings per share. The issuance of convertible bonds may result in a lower level of earnings per share on a fully diluted basis, but not basic EPS.

A company has reported net income of $200 million in the third quarter, which includes an unrealized loss of $15 million from "available for sale" securities. In the fourth quarter, the value of these securities increases to $110 million and are sold. If the cost basis of these securities is $100 million and assuming no other changes, the company's net income for the fourth quarter is: A) $210 million B) $205 million C) $195 million D) $230 million

A) $210 million CORRECT ANSWER CHOSEN If a company has investments which are classified as "available for sale," this means that the company intends to retain these securities for a period, rather than trade them or hold them to maturity. Any unrealized gain or loss is not recorded on the income statement and any realized gains or losses are reported on the income statement in the accounting period when they're sold. The net income includes the $10 million gain (cost of $100 million, but sold at $110 million); therefore, the net income is $210 million.

A company had net income of $100 million. On the company's cash flow statement, it had a decrease of accounts payable from $100 million to $80 million, an increase in accounts receivable from, $120 million to $150 million, an increase in taxable payable of $15 million, a CAPEX reduction of $20 million, and cash dividend of $10 million. What is the cash flow from operations? A) $65 million B) $75 million C) $135 million D) $145 million

A) $65 million

Use the following information to answer the question: Company A Revenues $100 million COGS $50 million Company B Revenues $80 million COGS $40 million Company A is a customer of Company B and accounts for 40% of Company B's revenues. In order to gain operational efficiencies, Company A acquires Company B. If the combined company has a tax rate of 20%, what is the pro-forma consolidated net income after the acquisition? A) $72 million B) $90 million C) $58 million D) $148 million

A) $72 million INCORRECT ANSWER CHOSEN Since Company A purchases 40% of company B's revenues, Company B will have 40% less revenue after the acquisition. This reduction makes Company B's revenues $48 million ($80m x 60%). Company A will still have $100 million in revenue; therefore, the combined revenue is $148 million ($100 Co. A + $48 Co. B). In addition, Company A will have lower cost of goods sold (COGS) since it acquired a supplier. Specifically, Company A's COGS will fall by $32 million ($80m x 40%) to $18 million. Company B's COGS will not change and the combined COGS will be $58 million ($18m Co. A + $40m Co. B). This makes the combined pre-tax earnings $90 million ($148m combined revenue - $58 million combined COGS) and net income $72 million ($90m pre-tax income x (100% - 20% Tax Rate)).

A company had third quarter net income of $30 million, which included a $20 million pre-tax gain. On its balance sheet, it had investments "available for sale" with a carrying cost of $115 million, but a current market value of $100 million. If the company has a 40% tax rate and the investments "available for sale" are sold at the current market value, what's the BEST estimate for net income for the fourth quarter assuming no other changes from the third quarter? A) $9 million B) $6 million C) $18 million D) $30 million

A) $9 million INCORRECT ANSWER CHOSEN In the third quarter, there was a pre-tax gain of $20 million multiplied by the compliment of the tax rate of 60% (1.00-40% tax rate), which equals a $12 million after-tax gain. If the company reported net income of $30 million and had a one-time after-tax gain of $12 million, it would have adjusted net income in the third quarter of $18 million ($30 million - $12 million). The balance sheet had investments "available for sale" with a carrying cost of $115 million, but a current market value of $100 million. If this asset was sold at its current market value, it would generate a loss of pre-tax loss of $15 million, and an after-tax loss of $9 million ($15 million x 1.00-40%). If there are no changes from the third quarter, the best estimate for net income for the fourth quarter would be $9 million ($18 million - $9 million after-tax loss).

Which of the following events signals sales growth in a company? A) Accounts receivable increase; account receivable turnover increases. B) Account receivables decrease; account receivable turnover increases. C) Inventory turnover increases; accounts payable declines. D) Inventory turnover declines; accounts payable increases.

A) Accounts receivable increase; account receivable turnover increases. INCORRECT ANSWER CHOSEN An increase in accounts receivable is a use of cash by the company. A greater amount of cash is receivable by the company. Growth of the company is indicated by an increase in accounts receivable turnover. If the accounts receivable turnover increases, the company is receiving its payments faster.

A large electronics retailer is anticipating receiving revenue of $60,000,000 over three years. The company wants to record the entire amount this year for tax purposes. If the company's MTR is 21% and its effective tax rate is 19%, it will have a deferred tax: A) Asset of $8,400,000 B) Asset of $7,600,000 C) Liability of $12,600,000 D) Liability of $4,200,000

A) Asset of $8,400,000 CORRECT ANSWER CHOSEN When corporate accounting income and taxable income differ, it may create a deferred tax asset or deferred tax liability on a balance sheet. If taxable income is greater than accounting income, this will create a deferred tax asset. (The opposite result will create a deferred tax liability.) In this example, the company's taxable income exceeds its accounting income. In effect, the company prepaid its taxes on the income. To calculate the deferred tax asset, first find the amount of taxable income that exceeds the accounting income and then multiply this amount by the marginal tax rate (not the effective tax rate). The company should have recorded income of $20,000,000 in each of three years. Taxable income exceeds accounting income by $40,000,000 ($60,000,000 - $20,000,000). The deferred tax asset is $8,400,000 ($40,000,000 x .21).

Within the supply chain of an industry, widget manufacturers sell their product to the XYZ Company. - XYZ sells its product to the ABC Company - XYZ purchases 70% of the widget production output - ABC purchases 90% of the output from XYZ Regulations have previously restricted ABC's capital investment in facilities. It is now unregulated. This will permit ABC to increase capital expenditures within its facilities. What is the initial effect on widget pricing and the demand for widgets? A) Demand for widgets would increase and the prices of widgets would increase B) Demand for widgets would decrease and the prices of widgets would increase C) Demand for widgets would increase and the prices of widgets would decrease D) Demand for widgets would decrease and the prices of widgets would decrease

A) Demand for widgets would increase and the prices of widgets would increase INCORRECT ANSWER CHOSEN Assuming ABC was experiencing sufficient consumer demand and deregulation would allow ABC to increase capacity, ABC's demand for widgets from its suppliers would be expected to increase. This shift in the demand for widgets would permit widget manufacturers such as XYZ to initially raise prices. As the price of widgets rises, new widget manufactures may enter into the widget industry creating additional supply and driving down prices in the long-term. This question asks, about the initial effect on widget pricing not the long-term effect.

Of the choices listed, the term "percentage of earnings" can be found by using which of the following formulas? A) Dividends per share/earnings per share B) Net income - dividends/ number of shares outstanding C) Dividends paid/retained earnings D) Net income/common equity

A) Dividends per share/earnings per share INCORRECT ANSWER CHOSEN The term "percentage of earnings" typically has two meanings: (1) the percentage of earnings (or net income) retained or (2) the percentage of earnings (or net income) paid out in the form of dividends.

A research analyst is reviewing a press release which discloses a positive settlement of litigation for a company, thereby resulting in an after-tax gain for the next accounting period. What's the MOST concerning aspect of the press release for the research analyst? A) Earnings estimates B) Sales growth C) Implication of the litigation D) Dilution

A) Earnings estimates CORRECT ANSWER CHOSEN One-time events, such as the settlement of a lawsuit, will impact a company's net income and earnings per share, but only in one accounting period. When projecting earnings for future periods, research analysts will need to adjust their estimates for one-time events. A gain from a litigation settlement is not dilutive and, while it affects net income, it's not included in sales.

Q15 Final Exam 4 A) Precedent merger of equals analysis using companies of similar size that have merged, but are in different industries B) A comparable company analysis using companies which have radio divisions C) An anti-trust end-around analysis D) A sum-of-the-parts analysis

A) Precedent merger of equals analysis using companies of similar size that have merged, but are in different industries CORRECT ANSWER CHOSEN Based on the information in the question, using a precedent transaction of a merger of equals is the best choice. The term merger of equals refers to the merger of two companies of similar size, and there's no designated acquirer or target. The boards of the combined company are split relatively evenly, the combined ownership is as close to 50/50 as possible, and there may be a sharing arrangement among the senior management and CEOs. Most transactions are executed as an exchange of stock, and the new name would be a combination of the companies' names prior to the merger. Merger of equals analysis would examine the premiums paid (if any) of other mergers in which the industries and businesses may be different. For example, a comparison could be made using the merger of equals analysis in the banking, media, or telecommunications sector despite the fact that two satellite radio companies are merging. In some cases, one of the biggest concerns is whether the merger will pass an antitrust review. Using comparable companies that have radio divisions would not be a suitable method since their primary source of revenue (advertising) is different from the satellite radio companies (subscription fees). Since the two satellite companies operate only one main business, using a sum-of-the-parts analysis would not be recommended.

Sudsy's Car Cleaners, Inc. is issuing a 5% stock dividend. The common stock price is $25. There are 5,000,000 shares of common outstanding ($1 par). Which of the following statements is NOT TRUE regarding changes to the balance sheet? A) Retained earnings will decline by $250,000 B) The common stock account will increase by $250,000 C) Additional paid-in capital will increase by $6,000,000 D) Net worth is unchanged

A) Retained earnings will decline by $250,000 Accounting for stock dividends requires an adjustment to the common stock account (based on par value), additional paid-in capital (for the market value in excess of par), and retained earnings. A 5% stock dividend will require issuing 250,000 additional shares, increasing the common stock account by $250,000. (The additional paid-in capital will increase by $6,000,000: $24 x 250,000.) Retained earnings will decline by $6,250,000 (the market value of the additional shares issued: $25 x 250,000). Alternatively, retained earnings are reduced by the market value of the additional shares issued ($6,250,000). The common stock account increases by the (par) value of the additional shares issued ($250,000). The difference ($6,000,000) is the increase to additional paid-in capital. Net worth is unaffected by these balance sheet changes.

Which of the following events is dilutive to the EPS of a company? A) Stock splits B) A tax loss carryforward C) Payment of a cash dividend D) The exercise of exchange-traded stock options

A) Stock splits INCORRECT ANSWER CHOSEN Stock splits will increase the number of shares of common stock outstanding without changing the earnings available to common shareholders. As a result, earnings per share will decrease. Net operating loss (NOL) represents loss in excess of pre-tax income and can be carried forward indefinitely to reduce taxable income in the future. When carried forward, it's referred to as a tax-loss carryforward, but doesn't change the income statement or EPS. Cash dividends that are paid to the common shareholders don't impact earnings available to the common shareholders or EPS. The exercise of employee stock options is dilutive since new shares are being issued. Companies themselves (i.e., issuers) don't create exchange-traded options on their stock and don't create new shares when exchange-traded options are exercised.

Which of the following provides the BEST explanation for an increase in EPS estimates for the next year? A) Switching from a LIFO inventory recognition method to FIFO during an inflationary period. B) Writing down inventory due to the market value of the inventory falling below the book value in the current assets section of the balance sheet. C) Producing patents for 75% of a business' products for 10 years, despite the fact that the industry average patent production is 40%. D) Depreciation expense that's greater than CAPEX indefinitely, thereby leading to increased cash flow for share repurchases.

A) Switching from a LIFO inventory recognition method to FIFO during an inflationary period. INCORRECT ANSWER CHOSEN Switching from a last-in, first-out (LIFO) to a first-in, first-out inventory method when prices are rising will reduce cost of goods sold (COGS) and will increase both net income and earnings per share (EPS). Inventory write-downs are an expense, which will decrease EPS. Since patents need to be depreciated every year, producing more patents leads to higher expenses and lower EPS. Since depreciation is a non-cash expense, depreciation being larger than capital expenditures will not lead to additional cash flows for stock repurchases.

Retained Earnings

Are the amount of net income left over for the business after it has paid out dividends to its shareholders.

Quadrangle Corporation has $50 million in sales, a 7% profit margin, and earnings per share of $2. The company issues 100,000 shares of $2.70 preferred. Sales increase by 10% and the net profit margin remains the same. What is the earnings per share after the preferred dividend is paid? A) $2.20 B) $2.05 C) $1.77 D) $ .66

B) $2.05

Relevant financial information to answer the following question is found by using Exhibit 22. You have been asked about the value of Shoe Leather Express and intend to use the company's growth rate and FCFE per share to determine the price. What's a fair price for each share of Shoe Leather Express? A) $15.00 B) $20.00 C) $30.00 D) $40.00

B) $20.00 =4+.75-2-.75 = 2.00 Earnings per share $4.00 + Depreciation and amortization .75 - Projected capital expenditures: 2.00 - Increase in working capital .75 2.00 FCFE FCFE / (Expected Rate of Return - Expected Growth Rate)= Current Target Stock Price = ($2.00 / [14% - 4%])= $20.00.

What is the implied value of a stock for a company that has a projected dividend for next year of $1.25, a cost of capital of 9% and a projected growth rate of 4%? A) $13.89 B) $25 C) $26 D) $31.25

B) $25 INCORRECT ANSWER CHOSEN To find the implied value with the information given, the expected dividend is divided by the cost of capital minus the growth rate. $1.25 divided by 5% (9% - 4%) equals $25.

Use the following exhibit to answer this question. Company Q Company shares outstanding: 75,000,000 Market value of common: $32 Convertible Preferred Stock* (6% dividend, $100 par): $250,000,000 Bond Interest Expense: $150,000,000 Cash and equivalents: $50,000,000 EBIT: $620,000,000 Corporate Tax Rate -- 34% * Conversion price $25 What is the fully diluted EPS for Company Q? A) $3.38 B) $3.65 C) $3.94 D) $4.04

B) $3.65 INCORRECT ANSWER CHOSEN The fully diluted EPS assumes that all convertible instruments are converted. Company Q has $250,000,000 of preferred stock convertible @ $25. The additional shares of common stock outstanding based on conversion would be 10,000,000 ($250,000,000 / $25). The number of shares outstanding based on the conversion would become 85,000,000 (75,000,000 + 10,000,000). Since there is no preferred dividend, the net income represents the earnings available to common shareholders. The fully diluted EPS calculation is: EBIT: $620,000,000 - Bond interest expense: 150,000,000 Income from continuing operations: 470,000,000 - Tax: 159,800,000 Net income: 310,200,000 EPS = [Earnings available to common] / [common shares outstanding]EPS = $310,200,000 / 85,000,000EPS = $3.65

Relevant financial information to answer the following question is found by using Exhibit 29. What is the Borgward Company's intrinsic value per share? A) $34.88 B) $39.53 C) $52.55 D) $62.50

B) $39.53 CORRECT ANSWER CHOSEN The intrinsic value of the Borgward Company would be based on its price as determined by using the Gordon Growth Model. To determine the intrinsic value of the company, it is first necessary to determine the company's growth rate using the formula: g = b x ROE Where:g = the dividend growth rateb = the earnings retention rate (the complement of the dividend payout ratio)ROE = the return on equity The dividend payout ratio is 60% ($1.50 / $2.50).The retention rate is 40%. g = 40% x 9.5%g = 3.8% Next, the price can be determined by using the Gordon Growth Model: P0 = d1 / (k - g) Where:P0 = present priced1 = the dividend in the next periodk = the equity cost of capitalg = the growth rate To determine the equity cost of capital, it is necessary to apply the Capital Asset Pricing Model, where: The expected return of the market = the return on the S&P 500 Index The risk-free rate of return = the yield on the Treasury bill Cost of equity = [(Expected return of the S&P 500 minus the T-bill yield) multiplied by beta] plus the T-bill rate. [(8.5% - 4.5%) x .9] + 4.5% = 8.1%[4.0% x .9] + 4.5% = 8.1%3.6% + 4.5% = 8.1% P0 = $1.70 / (8.1% - 3.8%)P0 = $1.70 / 4.3%P0 = $39.53

You are a research analyst evaluating an M&A transaction. The current stock price of the target is $94.58. There are 47.49 million shares outstanding. The company has been offered $115 per share. If the acquirer's stock price is $87.50 per share, and the offer is 80% stock and 20% in cash, what is the exchange ratio? A) 1.314 B) 1.051 C) 1.081 D) 0.761

B) 1.051 CORRECT ANSWER CHOSEN The exchange ratio is found by dividing the offer price for the target company by the acquirer's stock price. $115 / $87.50 = 1.314. However, since only 80% of the transaction is being financed by stock, the exchange ratio for this transaction is 1.051 (1.314 x .80).

A corporation has had a consistent earnings record, but does not meet current expectations in either revenue or earnings. Which items on the balance sheet could BEST explain the shortfall? A) Retained earnings and intangible assets B) Accounts receivable and inventory C) Accounts payable and marketable securities D) Leases and equipment

B) Accounts receivable and inventory CORRECT ANSWER CHOSEN Accounts receivable and inventory most likely provide insight into the near-term problems that a company faces. Price competition could presently indicate lower selling prices, lower sales, or higher inventories. This may continue in subsequent quarters, thereby implying lower revenue, lower margins, and lower receivables. Accounts receivable balances tend to track revenue gains or shortfalls (assuming most sales are on credit). On occasion, accounts receivable increase as companies take aggressive steps to promote sales, only to fall dramatically in the next accounting period as a product cycle or economic cycle reaches its latter stages. An analyst is not going to uncover specific reasons for any revenue or earnings shortfall by reviewing the retained earnings account. Accounts payable include a variety of accruals that would be difficult to pinpoint. Fixed and intangible assets are also unlikely to provide insight into the current accounting period's shortfalls.

Which the following statements is TRUE regarding accounts receivable and inventories, when the company recognizes revenue sooner than permitted under accrual accounting? A) Accounts receivable is overstated, and inventory is overstated B) Accounts receivable is overstated, and inventory is understated C) Accounts receivable is understated and inventory is overstated D) Accounts receivable is understated and inventory is understated

B) Accounts receivable is overstated, and inventory is understated INCORRECT ANSWER CHOSEN Accounts receivable will be overstated because sales are recognized earlier and inventory will be understated because inventories are charged earlier than permitted.

A company markets a product to bank branches. The widgets it sells are disposable and do not last long. Which of the following factors would cause a decline in the long-term growth rate of the widget industry? A) A decrease in FDIC insurance premiums for large money-center banks B) An increase in the use of automatic teller machines (ATMs) C) A price war among the banks on car loans D) A cut in the Prime Rate

B) An increase in the use of automatic teller machines (ATMs) CORRECT ANSWER CHOSEN Based on the information given in this question, widgets are used by the bank branches in their day-to-day business. The only plausible choice is increased ATM use, which implies less client interaction within the bank branch and less widget use. The other choices address policy of regulators (FDIC insurance premiums), competition for customers (car loans), and broader economics (prime rate). These choices would have little or no impact on a disposable widget used by bank branches.

Which of the following statements is TRUE regarding interest rates? A) Long-term rates are more volatile than short-term rates. B) Economic expansions typically results in higher interest rates. C) As interest rates rise, equity prices also rise. D) A sources and uses of funds statement illustrates an imbalance in the supply and demand for money.

B) Economic expansions typically results in higher interest rates. CORRECT ANSWER CHOSEN As the economy expands, the demand for money increases and drives up interest rates. Short-term rates tend to be more volatile than long-term rates. Equity prices tend to react inversely to changes in short-term interest rates. A sources and uses of funds statement is always in balance.

Which of the following will an analyst MOST likely review when analyzing a healthcare REIT? A) Zoning regulation B) Enrollment at healthcare facilities C) Medicare reimbursements D) Rents in the multi-family housing market

B) Enrollment at healthcare facilities

Within the supply chain of an industry, widget manufacturers sell their product to the XYZ Company. - XYZ sells its product to the ABC Company - XYZ purchases 70% of the widget production output - ABC purchases 90% of the output from XYZR Regulations have previously restricted ABC's capital investment in facilities. It is now unregulated. This will permit ABC to increase capital expenditures within its facilities. The widget industry has low barriers to entry. What are the short-term and long-term pricing effects of the deregulation of ABC on the widget industry? A) Widget prices would decline in the short term and over the long term B) In the short term, widget prices would rise and over the longer term, prices would decline C) In the short term, widget prices would decline and over the longer term, prices would rise D) Widget prices would not be affected

B) In the short term, widget prices would rise and over the longer term, prices would decline INCORRECT ANSWER CHOSEN The output of ABC is expected to rise, due to deregulation. Widgets are part of the supply chain for ABC. The price of widgets would go up initially, due to higher demand. Since there are low entry barriers to the widget industry, competition will soon begin to erode the market share of widget manufacturers as new companies enter the industry. Over the long term, a decline in revenues and profit margins would be expected since (i) competition will take market share from existing manufacturers and (ii) competitive pricing pressures will force prices lower.

Which of the following is not considered to be a leading economic indicator? A) Plant and equipment orders B) Industrial production C) Housing starts D) Sensitive material prices

B) Industrial production

Company X's earnings have risen by 15%, while the earnings of the suppliers used by Company X have declined by 5%. Which of the following is the most relevant to the forward earnings projections of Company X? A) Review Company X's Form 10-K. B) Interview the distributors of Company X's product. C) Interview the suppliers to Company X. D) Interview the companies with the largest market share in the same sector as Company X.

B) Interview the distributors of Company X's product. CORRECT ANSWER CHOSEN Interviews with the distributors will provide an idea of where the company will be in sub- sequent quarters. This will help to determine if the distributors are experiencing shrinking margins and/or if costs are increasing. Interviewing suppliers would only allow an analyst to determine potential costs to be passed on to Company X. Interviewing the companies with largest market share in the same sector is somewhat limited. It's an overview of the sector perceptions. Lastly, a review of Company X's financial statements will only provide the historic results of the company. It doesn't provide the best gauge to project future results.

The Hammer Court Company currently has a P/E ratio of 34. The company normally trades at a premium of 150% to the S&P 500 Index. The historic range of Hammer Court's P/E is 20 to 35 . If the S&P 500 Index has an average P/E of 18, which of the following descriptions BEST characterizes the company? A) It appears to be underpriced B) It is a growth company with accelerated earnings C) It is in a mature, cyclical industry D) It is expected that the earnings of the company are decelerating

B) It is a growth company with accelerated earnings CORRECT ANSWER CHOSEN A P/E that is significantly higher than the S&P 500 Index is indicative of a growth company. The company is trading at a 189% P/E premium to the S&P 500 Index, although the expected premium is 150%. This indicates accelerated growth.

A corporation is considering raising capital by issuing new securities. Issuing debt securities as opposed to issuing preferred stock will result in which of the following? A) Higher taxes, but higher EPS B) Lower taxes and higher EPS C) Higher taxes and lower EPS D) Lower taxes, but lower EPS

B) Lower taxes and higher EPS INCORRECT ANSWER CHOSEN The interest on debt securities is a pre-tax expense; however, the dividend on preferred stock is paid after-tax. For that reason, the issuance of debt securities will result in higher taxable deductions and then lower taxes than the issuance of preferred stock. The lower tax expense will result in a higher EPS if debt is issued, rather than issuing preferred stock.

If a company's total assets increased and the total liabilities remained constant, which of the following statements is TRUE? A) The value of the treasury stock increased B) Retained earnings increased C) The par value of the common stock increased D) The par value of the common stock decreased

B) Retained earnings increased INCORRECT ANSWER CHOSEN If a company's total assets increased and the total liabilities remained the same, the value of a company's shareholders' equity must have increased. An increase in retained earnings would cause shareholders' equity to increase. Treasury stock is a negative entry in the equity section of the balance sheet. It is created when a company engages in a stock buyback. Changes in the share price after the purchase do not change the entry. Changes in the par value are the result of a stock split and do not have any effect on a company's shareholders' equity.

The Motus Company leases mass transit vehicles and regularly issues commercial paper. The company has reached a terminal growth rate of 3.0%. What would an analyst expect if the rate on the T-bill increases by 50 basis points? A) The company's WACC would decline. B) The FCFF would not change. C) The weighted average cost of equity would decline. D) The company's cost of debt would decrease.

B) The FCFF would not change. INCORRECT ANSWER CHOSEN A discount rate is applied to determine the present value of a company's future cash flows. The weighted average cost of capital is used when determining the discount rate applicable to the projected free cash flow to the firm (FCFF). An increase in the WACC is expected, given the increase in interest rates and the short-term funding requirements of the company. An increase in short-term interest rates would not be expected to reduce the weighted average cost of equity or cost of debt. Free cash flow to the firm describes the cash flow available to all providers of capital. It begins by examining the tax effect on earnings before interest and taxes, adding depreciation and amortization, and subtracting capital expenditures and increases in working capital. Since FCFF begins with EBIT (i.e., income before interest is paid), the additional interest expense associated with higher short-term interest rates would not reduce the FCFF.

Use the information in the table to answer the question: The Big Bank Corporation Earnings per share: $3.27 Price/Earnings ratio: 10.3 The Retail Broker Company Earnings per share: $2.62 Price/Earnings ratio: 6.5 The Big Bank has proposed the acquisition of the Retail Broker Company. The acquisition will be funded using Big Bank common stock. If Big Bank's offer is $29.00 per share, which of the following statements is TRUE? A) This represents a premium of 58% to the price of the Retail Broker Company. B) This represents a premium of 70% to the price of the Retail Broker Company. C) The exchange ratio is .5053. D) The exchange ratio is 1.7029.

B) This represents a premium of 70% to the price of the Retail Broker Company. The acquisition offer of $29.00 per share to the Retail Broker Company (using Big Bank stock) equals a 70% premium above the current market price of the Retail Broker Company ($29.00 - $17.03 = 11.97 / 17.03). The exchange ratio is .8610 shares of Big Bank stock ($29.00 / $33.68) for every one share of the Retail Broker Company stock.

Based on the above exhibit, Company G: A) Was overvalued and is now undervalued B) Was undervalued and is now overvalued C) Appears to be fairly valued D) Has been consistently overvalued

B) Was undervalued and is now overvalued INCORRECT ANSWER CHOSEN A low EV / EBITDA ratio is an indication that a company is undervalued compared to its peer group or industry. A high EV / EBITDA ratio is an indication that a company is overvalued. In year 1, Company G appeared to be overvalued. In years 2 and 3, Company G appeared to be undervalued. In year 4, Company G appeared to be overvalued.

A company currently has 28,350,000 shares of common stock outstanding and net debt of $45,500,000. In addition, the company has employee stock option contracts for 550,000 shares at a strike price of $46, and 550,000 shares at a strike price of $50. If the current stock price is $42 and a potential acquirer offers $48 a share for the company, what would be the enterprise value of the company? A) $1,361,900,016 B) $1,236,200,000 C) $1,407,400,016 D) $1,373,845,818

C) $1,407,400,016 CORRECT ANSWER CHOSEN In order to determine the enterprise value, the first step is to calculate the expected exercise of employee stock options. This is limited to those that have intrinsic value (i.e., the market value exceeds the strike price). The options that have a strike price of $46.00 would be exercised. Using the treasury method, the options with a strike price of $50.00 would not be exercised. Therefore, the exercised options would generate proceeds to the company of $25,300,000 (550,000 x $46.00). This would permit the company to repurchase 527,083 shares from the market ($25,300,000 / $48.00). The differential between the number of shares repurchased, and the number of shares granted through the exercise of the options, totals22,917 shares (550,000 − 527,083). The additional shares would be issued from the company's treasury stock account, bringing the number of shares outstanding to 28,372,917 (28,350,000 previously outstanding + 22,917 shares from treasury stock). Enterprise value includes the market capitalization of equity value. For the common stock, this totals $1,361,900,016 (28,372,917 x $48.00). The enterprise value would be found by adding the net debt. The enterprise value is $1,407,400,016 ($1,361,900,016 + $45,500,000).

Weslake has agreed to acquire BRM for $17,000,000. The terms of the acquisition are: $4,000,000 Weslake common stock (based on a market value of $20 per share); $3,000,000 of newly issued Weslake 7.0% debentures; $10,000,000 cash to BRM shareholders obtained from Weslake's revolving credit line; and $10,000,000 in assumed debt of BRM. After the acquisition, Weslake's common stock is trading for $22.25. What is the new EV of Weslake? A) $91,350,000 B) $101,350,000 C) $111,350,000 D) $115,900,000

C) $111,350,000 INCORRECT ANSWER CHOSEN Step 1: Take common shares outstanding and multiply by current price. Weslake's 2.4 million shares plus 200,000 additional shares issued for the transaction. Step 2: Take debt from Weslake plus debt from BRM and add the $3,000,000 of newly issued debt plus $10,000,000 of debt incurred from the use of the revolving credit line. Step 3: Subtract the total cash and equivalents of Weslake and BRM: $16,500,000 and $5,000,000 totaling $21,500,000. The following table illustrates the effects of the transaction.

You have been asked to analyze an M&A transaction involving Bergen Labs, the target company in an acquisition. The company's current stock price is $97.53. There are 27.48 million shares outstanding, and the offer price for Bergen Labs is $110.00 per share. How much goodwill will be created based on the offer price of the acquisition? Final Exam 82 A) $490.3 million B) $2,189.8 million C) $2,532.5 million D) $3,022.8 million

C) $2,532.5 million INCORRECT ANSWER CHOSEN To calculate the amount of goodwill created after the acquisition, the company's net tangible assets are subtracted from the offer value. The net tangible assets are determined by subtracting the company's liabilities, existing goodwill, and intangibles from the total assets. The net tangible assets are $490.3 million (2,037,264 - [996,533 + 321,820 + 228,590]). The offer value is $3,022.8 million (27.48 million x $110.00). The amount of goodwill created is equal to $2,532.5 million (3,022.8 - 490.3).

Use the following data to calculate the compound annual growth rate. 2012 2013 2014 2015 2016 2017 2018 Sales 100 120 115 110 125 130 120 A) -2.99% B) 2.64% C) 3.09% D) 3.57%

C) 3.09%

Final Exam 2 Q23 What is the percentage change in price per unit from Year 1 to Year 4? A) An increase of 17.5% B) A decline of 10.8% C) A decline of 24% D) A decline of 32%

C) A decline of 24% The change (decline) in price is 24%.($2,500 - $1,897 = $603 / $2,500 = .241)

An analyst is valuing a company which is a target in an M&A transaction and is given the following information on a company. Current stock price: $45.50 Outstanding shares: 240,450,000 EBITDA: $1.65 billion Cash: $1.58 billion Debt: $1.60 billion If the appropriate transaction multiple is 9 times EBITDA and the target is offered this value, which of the following statements is TRUE? A) The company's current EV / EBITDA is higher than the implied offer price B) An offer of a 30% premium above the current stock price may be too high C) An offer of a 20% premium above the current stock price may be too low D) An offer at the current stock price would be appropriate based on the transaction multiple

C) An offer of a 20% premium above the current stock price may be too low INCORRECT ANSWER CHOSEN The enterprise value, or implied value based on the transactional multiple, is $14.85 billion ($1.65 billion x 9). To find the equity value of the transaction, subtract the company's debt and add its cash. The equity value is $14.83 billion ($14.85 billion − $1.60 billion + $1.58 billion). The implied offer price is $61.67 ($14.83 billion / 240.45 million). An offer at a 20% premium above the current price of $45.50 may be too low ($45.5 x 1.20 = $54.60), since the appropriate transactional multiple

Which of the following sectors would tend to derive the greatest benefit from a declining interest-rate environment? A) Biotech B) Semiconductor C) Home builder D) Apparel

C) Home builder CORRECT ANSWER CHOSEN Since the bulk of a home's purchase price is financed, lower rates benefit home builders more than other sectors.

A company's cash flow will increase as a result of which of the following balance sheet changes? A) Inventory and accounts payable both increase B) Accounts receivable increases and inventory declines C) Inventory declines and accounts payable increases D) Inventory increases and accounts payable declines

C) Inventory declines and accounts payable increases INCORRECT ANSWER CHOSEN When inventory falls, we anticipate receiving cash for disposing of the inventory. This is a source of cash. When accounts payable rises, we are delaying the payment on a liability. This is also viewed as a source of cash. Changes in balance sheet items affect cash flows and are summarized as follows. Inventory falls—Source of Cash Inventory rises—Use of Cash Accounts receivable falls—Source of Cash Accounts receivable rises—Use of Cash Accounts payable rises—Source of Cash Accounts payable falls—Use of Cash

What is the frequency of an SEC reporting company's 10-Q filing? A) Every three months B) Annually C) It is filed three times and dated as of the fiscal quarter D) When there is a material event

C) It is filed three times and dated as of the fiscal quarter INCORRECT ANSWER CHOSEN The 10-Q of an SEC reporting company is required to be filed after the end of each of the first three fiscal quarters of each fiscal year. The last quarter results are included in the annual results, reported through the company's 10-K. Form 10-Q states in its instructions that no report need be filed for the fourth quarter of any fiscal year.

Companies A and B are merging to realize synergies. They are the 2 largest customers of Company Y. What is likely to happen to Company Y's stock price on the day following the merger announcement? A) Nothing will happen until Company Y comments on the merger B) It will increase since Companies A and B can now increase capital spending C) It will decline since the capital spending of Companies A and B will be reduced D) Company Y's stock price is likely to be unaffected until it releases earnings

C) It will decline since the capital spending of Companies A and B will be reduced

Which of the following descriptions BEST defines the fair value of an asset? A) Its acquisition cost less depreciation B) Its fair market value C) Its sale or purchase price in the absence of incentives D) Its sale or purchase price including market discounts

C) Its sale or purchase price in the absence of incentives INCORRECT ANSWER CHOSEN The fair value of an asset is defined as what a buyer would pay or a seller would accept without any necessity to do so. Fair value is sometimes used as a standard for comparing various asset classes.

Geostrom Inc. and Hydrolinx Corporation are the third and fifth largest companies in the machinery drilling services sector. The companies are the two largest customers of Danarobics Incorporated. Geostrom and Hydrolinx have announced a merger, citing a greater opportunity for economies of scale. The combined entity will become the second largest company in the sector. Danarobics has not commented on the merger. What is the most likely reason for the lack of comment by the company? A) Danarobics is bound by Rule FD B) Danarobics' price is likely to decline if it comments on the merger C) Pricing pressure by its customers will reduce Danarobics' operating profit margins D) Danarobics' price is unlikely to be impacted by the merger

C) Pricing pressure by its customers will reduce Danarobics' operating profit margins CORRECT ANSWER CHOSEN The merger of the two largest customers of Danarobics will create a new pricing dynamic for the merged companies. As indicated, the merger cites economies of scale. Geostrom and Hydrolinx would disclose the merger under Reg FD. Danarobics share price is likely to decline whether or not they make an immediate comment on the merger. Maybe they are just postponing an inevitable outcome, as they will have to address this issue in their next earnings conference call and under "Risk Factors" in their SEC filings. An analyst covering Danarobics would be expected to publish a note commenting on the negative impact of the merger on Danarobics' margins

Epsilon, Inc. has just completed an offering of bonds. Assuming no change in the company's revenue or the stock's market price, which of the following statements is TRUE regarding the operating income and P/E ratio? A) Operating income will decline. B) Operating income will increase. C) The P/E ratio will increase. D) The P/E ratio will decline.

C) The P/E ratio will increase. CORRECT ANSWER CHOSEN The operating income represents the earnings before interest and taxes. Interest payments are deducted from the operating income (i.e., after operating income); therefore, operating income is unaffected by interest payments. The increase in the debt service (i.e., principal and interest expense) will cause net income to decline. If the price of the stock remains the same, the price-to-earnings ratio will increase.

The Girtz Corporation is considering the acquisition of the Yellow Company using common stock. Girtz plans to offer a premium of 20% over the market value of Yellow stock. If the price/earnings ratio for the Girtz Corporation stays at 12, what is the approximate market price per share of the surviving company? Q87 Greenlight1 A) $10.00 B) $12.00 C) $24.00 D) $25.00

D) $25.00 INCORRECT ANSWER CHOSEN The number of new shares issued is based on the ratio of exchange. The exchange ratio is $12/$24 or .50, or one-half share of Girtz stock for every share of Yellow stock. The number of new shares issued equals 800,000 shares multiplied by 0.5 which equals 400,000 shares. To calculate the earnings per share for the surviving company, we assume that the profit is cumulative and that total shares outstanding equal two million plus the 400,000 newly issued shares. Surviving company earnings (in thous.)$5,000 Common shares outstanding (in thous.)2,400 Earnings per share$2.08 ($5,000 / 2,400) Using the earnings per share based on the previous calculation and the price/earnings ratio of 12, the market price per share will be $25.00. This is calculated by multiplying the EPS of $2.08 by the price/earnings ratio of 12. $2.08 x 12 = $24.96. This has been approximated to $25.00 in choice (d).

Use the following information on Amalgamated Faucet Corporation to answer this question. Cash Flow — $200 MM Shares — 100 MM Beta — 1.65 Risk Premium — 3.33% Risk-Free Rate — 4.0% Inflation — 3% Long-Term growth rate — 5% What is the intrinsic value of the Amalgamated Faucet Corporation? A) $32.66 B) $44.44 C) $36.72 D) $46.77 D) $46.77

D) $46.77 CORRECT ANSWER CHOSEN The intrinsic value (share price) can be found by using the perpetual growth model, which derives from the Gordon growth model. First calculate the cost of equity using the capital asset pricing model (CAPM). Next, use the perpetual growth model to estimate the aggregate intrinsic value (equity value). Divide the aggregate intrinsic value by the number of shares outstanding to find the value per share. The inflation number can be ignored given that the traditional CAPM does not consider inflation. k = Rf + β(Risk Premium) k = 0.04 + 1.65(0.0333) k = 0.0949 P0 = [CF(1 + g)] / (k - g) P0 = 200(1.05) / (0.0949 - .05) P0 = 210 / 0.0449 P0 = 4,677.06 $4,677MM / 100MM shares = $46.77 per share.

The annual report of Acme Corporation indicates quarterly earnings per share over the past year of $1.20, $1.26, $1.22, and $1.15. However, in the fourth quarter, the company took an extraordinary charge against earnings of $0.06 per share due to a change in inventory valuation. The stock is currently selling for 12.2 times its earnings. The market price of the common stock is: A) $44.90 B) $58.19 C) $58.92 D) $59.66

D) $59.66 INCORRECT ANSWER CHOSEN When calculating the trailing current price to earnings, the earnings per share figure for the prior fiscal year is totaled and the market price of the stock is divided by the total in order to calculate the P/E ratio. Reported Earnings = $1.20 + $1.26 + $1.22 + $1.15 = $4.83 The P/E ratio is based on earnings before extraordinary charges are added to reported earnings. In this example, $4.83 + .06 = $4.89 in earnings multiplied by the P/E ratio of 12.2, or $59.66.

Greenlight Exam 1 Q49 A) Based on the current year's increase in net income and its non-adjusted EPS, the expectation is that this will have a positive impact on the stock price. B) Based on the current year's increase in net income and its non-adjusted EPS, the expectation is that this will have a negative impact on the stock price. C) Based on the current year's increase in net income and the adjusted EPS, the expectation is that this will have a positive impact on the stock price. D) Based on the current year's increase in net income and the adjusted EPS, the expectation is that this will have a negative impact on the stock price.

D) Based on the current year's increase in net income and the adjusted EPS, the expectation is that this will have a negative impact on the stock price. INCORRECT ANSWER CHOSEN Since the company reported $0.40 cents per share one year ago on net income of $12 million, and $0.50 per share in the current year on net income of $15 million, the number of outstanding shares would be 30 million ($15 million / $0.50). Without the one-time $5 million payment from the lawsuit in the current year, net income would have been $10 million, and EPS would have been $0.33 per share ($10 million / 30 million). The lower adjusted EPS would likely have a negative effect on the stock.

The amount of money an issuer receives in a stock offering in excess of the par value is recorded on the balance sheet as: A) Capital gains B) Retained earnings C) Earned surplus D) Capital surplus

D) Capital surplus CORRECT ANSWER CHOSEN Shares are often priced well above par value in an offering. This excess is recorded on the balance sheet as Capital Surplus. For example, if a company prices an IPO at $18 per share and the par value is $10 per share, then $8 is added to the Capital Surplus in the stockholders' equity section of the balance sheet. A more common term for this excess is Additional Paid-in Capital or Capital in Excess of Par. Retained earnings can also be referred to as earned surplus.

Company X is a retailer and has excess inventory near its year end. In order to liquidate some of its inventory, Company X's executives have decided to cut the retail prices of its goods. What effect will this have on Company X's financials? A) Days sales outstanding will increase in the first quarter of the next fiscal year B) Net income for the fiscal year will decrease as it sells its excess inventory C) If the company cannot sell its excess inventory, the current ratio will decrease D) Gross margins will decrease in the fourth quarter of this fiscal year

D) Gross margins will decrease in the fourth quarter of this fiscal year INCORRECT ANSWER CHOSEN If a company sells its goods or services at a reduced price, its gross margin [i.e., (Sales - COGS) ÷ Sales] will decline. If it cannot sell its excess inventory, its current ratio (Current Assets ÷ Current Liabilities) will increase since inventory is a current asset.

Relevant financial information to answer the following question is found by using Exhibit 18. Which of the following choices could describe the activities related to Company H from Year 1 to Year 2? A) It issued common stock B) It called preferred stock C) It retired debt D) It issued debt

D) It issued debt CORRECT ANSWER CHOSEN Between years 1 and 2, Company H has shown an increase in its operating margin, while the EPS, common stock price, and net income remain the same. This indicates that either revenue increased by a greater percentage than operating expenses, or revenue declined by a smaller percentage than the decline in operating expenses. Since the EPS, common stock price, and net income have remained the same, the capital structure of the company has changed. If Company H issued bonds, the additional interest expense borne by the company would impact the income statement below the operating expenses. This could result in identical EPS for the company. If Company H issued common stock, the net income would have had to been higher in Year 2 than in Year 1, to have the same EPS and a higher operating profit margin. Additionally, net income would have had to increase if more shares were outstanding and EPS remained the same. If the company called preferred stock, the higher operating profit margin and reduced dividend expense for the preferred stock would have resulted in higher EPS.

Basic earnings per share can be defined as: A) The amount of earnings for the period available to each share of common and preferred stock outstanding during the reporting period B) The earnings before extraordinary items divided by the number of shares C) The earnings after extraordinary items, before discontinued operations divided by the weighted number of shares D) The amount of earnings for the period available to each share of common stock outstanding during the reporting period

D) The amount of earnings for the period available to each share of common stock outstanding during the reporting period INCORRECT ANSWER CHOSEN Basic earnings per share can be defined as the amount of earnings for the period available to each share of common stock outstanding during the reporting period. (30126)

The difference between FCFF and FCFE is: A) The addition of net borrowings and interest tax shield to derive FCFE from FCFF B) The application of a capital charge to net investment to derive FCFE from FCFF C) The deduction of net borrowing to derive FCFE from FCFF D) The application of unlevered net income to derive FCFF, rather than net income to derive FCFE

D) The application of unlevered net income to derive FCFF, rather than net income to derive FCFE INCORRECT ANSWER CHOSEN A company's free cash flow to the firm (FCFF) differs from free cash flow to equity (FCFE) based on the interest expense of the company and the tax effect of the interest expense (i.e., interest tax shield). FCFF begins with EBIT x (1 - tax rate), while FCFE begins with net income. In the case of an unlevered company, there's no difference between FCFF and FCFE since an unlevered company has no interest expense and the assumed interest tax shield is neutralized. When comparing FCFF to FCFE, net borrowing is added to FCFF to derive FCFE. Net borrowing is new debt issued by a company less interest and principal payments on existing loans. The application of capital charge to net investment compares the return on invested capital (ROIC) to the cost of capital (e.g., WACC). Although this is a valuable measurement to determine the economic significance of an event, it doesn't describe the difference between FCFF and FCFE.

Under the percentage of completion method, first year's income is computed by multiplying the contract price by: A) The ratio of first year's billings to estimated total costs B) The ratio of first year's collections to contract price C) The ratio of first year's billings to contract price D) The ratio of first year's costs to estimated total costs

D) The ratio of first year's costs to estimated total costs CORRECT ANSWER CHOSEN IRS Section 460 requires most long-term contracts to be accounted for under the percentage of completion method. The PCM requires income from the contract to be reported annually over the life of the contract and requires contract expenses to be deducted in the year that they are incurred. The income reported is that amount which is proportionate to the actual costs incurred as a percentage of total estimated costs. At the point when 50% of the estimated costs have been incurred, one should have reported 50% of the estimated income. First year's income, under the percentage of completion method, is computed by multiplying the contract price times the ratio of first year's costs to estimated total costs.

The Zeta Corporation regularly issues commercial paper, and the corporation has reached a terminal growth rate of 4%. If an analyst for Zeta has applied a terminal multiple of 12 for the steady state of cash flows expected, what would the analyst expect if the rate on the T-bill increases by 50 basis points? A) The terminal value would increase. B) The terminal value will not change. C) The terminal multiple would increase. D) The terminal multiple would decline.

D) The terminal multiple would decline. INCORRECT ANSWER CHOSEN The discount rate applied to the cash flows uses a measure of the company's cost of capital, either the WACC (in the case of FCFF), or the equity cost of capital (in the case of FCFE). An increase in the WACC is expected, given the increase in interest rates and the short-term funding requirements of the company. This would reduce the present value of the cash flows and would lower the terminal value of the company. The terminal multiple describes the expected period of steady state cash flows for a company. In general, as interest rates increase, there's a decline in the terminal multiples for industry sectors. (13666)

Greenlight Exam 2 Q77 Relevant financial information to answer the following question is found by using Exhibit 65. Use the information in the table to rank the companies from LEAST to MOST attractive using the PEG ratio? A) V, Y, Z, X, W B) W, X, Y, Z, V C) V, Y, X, Z, W D) W, X, Z, Y, V

D) W, X, Z, Y, V

Free Cash Flow Formula

FCF Per Share/ Market Price Per Share

Equity Value

FCFE/1+Cost of Equity

We will assume that the par value of the preferred stock is $1,000,000 and that any dividend to be paid will be fixed as a percentage of its par value. Therefore, if a corporation issues 7% preferred, it's obligated to pay an annual dividend of $7.00 per share. What's the Pre-Tax of Capital?

In our illustration, the required increase in EBIT is determined by multiplying the proceeds of the issue by the pre-tax cost of capital percentage ($1,000,000 x 10.7692% = $107,692).

What does a sharebuy back do to Stockholders Equity

Its balance sheet will show a decrease in cash and a decrease in shareholders' equity (i.e., it spends cash to retire/get rid of issued stock).

Cost of Equity Created by a New Issue of Stock

K = D/P(1-F) + G

Unlevered Net Income

Known as EBIT and provides perspective on a company's profitability without considering the financial leverage or the cost of debt.

Exchange Ratio

Offer Price of the Target Company/Market Price of Acquiring Company

Pre-Tax Cost of Capital Preferred Stock

Preferred Dividend/(1-Tax Rate%)

DEF 14A

Proxy statement

Earnings Surplus

Retained Earnings

Economic Profit

Revenue - Explicit Costs - Implicit Costs An economic profit is the difference between the revenue received from sales and the explicit costs of producing its goods and services, as well as any opportunity costs.

Keynesian Economics

States that government intervention in the economy is necessary for sustained economic growth and stability

Supply-Side Economics

Supply-side economics places an emphasis on reducing taxes and the size of government to stimulate the economy. Reducing the size of government will allow for lower tax rates. By reducing taxes, individuals and corporations will have more money to invest, thereby stimulating increased economic activity.

Cost of Capital

The required rate of return necessary to enter into and finance corporate projects.

Funds from Operations

Used for REITs

Price/Cash Flow

Used for REITs