FA 7 - Forecasting and Valuation
c)
7.2.1 Question on the third mark 1 Metropolis had net sales of ₹120 million in 2003 related to pathology services. They expect sales of pathology services to grow by 75% in 2004. Metropolis also plans to introduce a new service, Home Healthcare Blood Draws, which will generate sales of ₹10 million in 2004. What will be the forecasted net sales for 2004? a) ₹120 b) ₹10 c) ₹220 d) ₹75
d)
7.2.1 Question on the third mark 2 Metropolis expects sales of pathology services to grow by 75% in 2005. Home Healthcare Blood Draws will generate sales of ₹20 million in 2005. What will be the forecasted net sales for 2005? HINT: You must compound the 2003 sales (₹120 million) twice rather than simply multiplying the 2004 revenue by 175% because the 2004 revenue includes ₹10 million of Home Healthcare Blood Draws revenue. a) ₹20 b) ₹220 c) ₹75 d) ₹387.5
a)
7 Practice Question 1 A project has an initial cost of $25,000. Expected cash flows as a result of this project are as follows: $6,000 in 2015 $6,000 in 2016 $8,000 in 2017 $10,000 in 2018 What is the payback period for this project? a) 3.5 b) 3.0 c) 2.5 d) 2.0
a)
7 Practice Question 10 Bob's Burgers had the following account balances as of December 31, 2014: Accounts Receivable $1,825 Accumulated Depreciation $200 Inventory $750 Building $2,000 Equipment $500 Accounts Payable $400 Salaries/Wages Payable$925 Which of the following represents the Net Working Capital for the business? a) $1,250 b) $3,950 c) $1,325 d) $2,575
d)
7 Practice Question 2 Metafacturing Inc. rented a new piece of equipment on January 1st and agreed to pay an annual rental fee of $24,000 at the end of each of the next 10 years. The weighted average cost of capital of the company is 8%. The present value of $1 for 10 years at 8% is 0.46319 The present value of an ordinary annuity of $1 for 10 years at 8% is 6.71008 What is the Present Value of the rental payments over 10 years? a) $180,000 b) $55,945 c) $8,337 d) $161,042
c)
7 Practice Question 5 The primary costs that make up the cost of sales for Medtronic Inc. are employee costs, chemical costs, and supplies costs. Employee costs are forecast to be 15% of revenue, chemical costs are forecast to be 10% of revenue, and supplies costs are forecast to be 5% of revenue, for a total of 30%. With forecasted sales revenue of $175 million for 2015, what will be the forecasted cost of sales for 2015? a) $26.25 million b) $17.5 million c) $52.5 million d) $8.75 million
c)
7 Practice Question 6 Donegan's Deli had the following account balances as of December 31, 2014: Accounts Receivable $550 Inventory $1,275 Accounts Payable $200 Salaries/Wages Payable $250 and the following account balances as of December 31, 2015: Accounts Receivable $1,225 Inventory $1,100 Accounts Payable $625 Salaries/Wages Payable $100 Which of the following represents the Change in Net Working Capital from 2014 to 2015? a) 1,600 b) 1,375 c) 225 d) 100
c)
7.2.1 Question on the fifth mark The primary costs that make up the cost of sales for Metropolis are employee costs, chemical costs, and supplies costs. Employee costs are forecast to be 20% of revenue, chemical costs are forecast to be 20% of revenue, and supplies costs are forecast to be 5% of revenue, for a total of 45%. With forecasted sales revenue of ₹220 for 2004, what will be the forecasted cost of sales for 2004? a) ₹220 b) ₹45 c)₹99 d) ₹20
d)
7.2.1 Question on the seventh mark For Metropolis, sales & marketing expenses are expected to be 12% of revenue. With forecasted sales revenue of ₹220 for 2004, what will be the forecasted sales & marketing expenses for 2004? a) ₹10.2 b) ₹12.1 c) ₹22.2 d) ₹26.4
b)
7.2.1 Question on the third mark 3 Metropolis expects sales of pathology services to grow by 50% in 2006. Home Healthcare Blood Draws will generate sales of ₹30 million in 2006. Metropolis also plans to introduce a new service, Preventive Healthcare Screening, which will generate sales of ₹30 million in 2006. What will be the forecasted net sales for 2006? HINT: You must compound the 2003 revenue three times (twice by 75% and once by 50%) rather than simply multiplying the 2005 revenue by 150%. a) ₹387.5 b) ₹611.3 c) ₹50 d) ₹30
- EBIAT re-applies the tax rate to a pretax amount that excludes the cost of interest.
7.3.2 Question on the second mark 1 Which of the following statements are true? Select all that apply. - EBIT equals EBIAT if there is no interest expense. - EBIAT eliminates the impact of interest and taxes from the net income. - EBIAT re-applies the tax rate to a pretax amount that excludes the cost of interest. - The term Free Cash Flow means that no outside entity has any claim on these funds.
a)
7.3.2 Question on the second mark 2 Suppose a company has a piece of machinery and the company spends money on maintenance to extend the useful life of the machine. The company is considering the decision of whether to capitalize the cost of maintenance to increase the asset's book value, or to record the cost of maintenance immediately as an expense. Does this decision affect free cash flow? a) Yes b) No
a)
7.3.5 Question on the second mark 1 Adele's Deli had the following account balances as of December 31, 2004: Accounts Receivable $1,200 Accumulated Depreciation$200 Inventory $500 Building $2,000 Equipment $500 Accounts Payable $300 Salaries/Wages Payable$900 Which of the following represents the Net Working Capital for the business? a) $500 b) $1,300 c) $1,100 d) $1,500
c)
7.3.5 Question on the second mark 2 Adele's Deli had the following account balances as of December 31, 2006: Accounts Receivable $500 Inventory $1,250 Accounts Payable $200 Salaries/Wages Payable $225 and the following account balances as of December 31, 2007: Accounts Receivable $900 Inventory $1,000 Accounts Payable $400 Salaries/Wages Payable $100 Which of the following represents the Change in Net Working Capital from 2006 to 2007? a) 1,325 b) 1,250 c) 75 d) 100
c)
7.4.2 Question on the third mark 1 Which of the following statements is NOT true regarding the calculation of Terminal Value under the Gordon Growth model? a) Terminal Value is the present value of cash flows expected in the indefinite future. b) A major assumption of Terminal Value model is that the growth rate will remain fixed. c) The higher the discount rate, the greater the Terminal Value is. d) The higher the growth rate, the greater the Terminal Value is.
d)
7.4.2 Question on the third mark 2 A company is considering investing in a new project with an infinite life. The estimated cash flows of first five years of the project are shown as below: 2014 = $650 / 2015 = $1,240 /2016 = $2,250/ 2017 = $3,670/ 2018 = $4,200 After 2018, annual cash flow of the project is expected to stabilize at about 3% growth. The discount rate is 7%. What is the Terminal Value of the project on January 1, 2019? a) $60,000 b) $64,200 c) $105,000 d) $108,150
b)
7.4.2 Question on the third mark 3 A company is considering investing in a new project with an infinite life. The estimated cash flows of first three years of the project are shown as below: 2014 = $12,000/ 2015 = $15,000 /2016 = $21,000 After 2016, annual cash flow of the project is expected to stabilize at about 1% growth. The discount rate is 6%. What is the Present Value of the project on January 1, 2014? Present value of $1 for 1 year at 6% is 0.94340 Present value of $1 for 2 years at 6% is 0.89000 Present value of $1 for 3 years at 6% is 0.83962 a) $373,799 b) $398,470 c) $416,102 d) $487,503
b)
7.4.3 Question on the fourth mark 1 Company X is considering investing in a new project. The new project requires an initial investment of $180,000, and is expected to generate annual after-tax net cash inflow of $25,000 for 15 years. The discount rate is 8%. What is the Net Present Value of the project? Present value of $1 for 15 years at 8% is 0.31524 Present value of an annuity of $1 for 15 years at 8% is 8.55948 a) $61,785 b) $33,987 c) $195,000 d) $213,987
b)
7.4.3 Question on the fourth mark 2 A project's estimated net cash flows are shown as below. The discount rate is 6%. 0 = ($40,000) / 1 to 6 = $12,000 /7= $18,000 What is the Net Present Value of the project? Present value of $1 for 7 years at 6% is 0.66506 Present value of an annuity of $1 for 6 years at 6% is 4.91732 Present value of an annuity of $1 for 7 years at 6% is 5.58238 a) $22,998 b) $30,979 c) $38,960 d) $70,979
a)
7.4.4 Question on the fourth mark 1 Which of the following would NOT have an impact on the IRR of a project? a) Weighted average cost of capital b) Project Life span c) Relevant cash flows d) Initial investment
c)
7.4.4 Question on the fourth mark 2 Which of the following statements is NOT true regarding Payback Period? a) Payback Period is the length of time required to recover the cost of an investment. b) A shorter Payback Period is preferable to longer Payback Period. c) Payback Period is impacted by cash flows that occur after the initial cost is recovered. d) Payback Period ignores the time value of money.
c)
7.4.4 Question on the fourth mark 3 Company Y is considering purchasing a new machine. The new machine has a cost of $50,000, and is expected to generate annual after-tax net cash inflow of $10,000. The useful life of the machine is 8 years. NPV at 9% = $5,348 NPV at 10% = $3,349 NPV at 11% = $1,461 NPV at 12% = -$324 NPV at 13% = -$2,012 Which of the following numbers is closest to the Internal Rate of Return? a) 9.5% b) 10.5% c) 11.5% d) 12.5%
d)
7.4.4 Question on the fourth mark 4 A project has a negative Net Present Value. Which of the following statements is true regarding this project? a) The project will not yield any positive cash flows in the future. b) The sum of undiscounted cash flows is negative. c) The IRR of the project is negative. d) The IRR of the project is less than the WACC.
b)
7.4.4 Question on the fourth mark 5 A project has an initial cost of $155,000. The estimated net cash flows of the project are as follows: (The discount rate is 8%.) Y1 Net Cash Flows $30,000 Discount Net Cash $27,778 Y2 Net Cash Flows $30,000 Discount Net Cash $25,720 Y3 Net Cash Flows $28,000 Discount Net Cash $22,227 Y4 Net Cash Flows $28,000 Discount Net Cash $20,581 Y5 Net Cash Flows $28,000 Discount Net Cash $19,056 Y6 Net Cash Flows $22,000 Discount Net Cash $13,864 Y7 Net Cash Flows $22,000 Discount Net Cash $12,837 Y8 Net Cash Flows $22,000 Discount Net Cash $11,886 What is the project's Payback Period? a) 5.0 years b) 5.5 years c) 7.0 years d) 7.7 years
b)
7.4.4 Question on the seventh mark 1 A company is considering which of four mutually exclusive projects it should take. The projects are described as below: Project 1 NPV -$12,600 IRR 8.2% Project 2 NPV $41,500 IRR 13.5% Project 3 NPV $28,960 IRR 11.7% Project 4 NPV $34,900 IRR 12.4% Each project involves an initial investment of $500,000 and has a 10-year life. The company's Weighted Average Cost of Capital (WACC) is 9%. Which project should it select? a) Project 1 b) Project 2 c) Project 3 d) Project 4
d)
7.4.4 Question on the seventh mark 2 A company is considering which of four mutually exclusive projects it should take. The projects are described as below: P 1 NPV $60,800 IRR 25.3% Payback Period 6.5 P2 NPV -$5,000 IRR 9.6% Payback Period 1.8 P3 NPV $29.100 IRR 18.7% Payback Period 2.4 P4 NPV $34,600 IRR 21.8% Payback Period 3.9 The company's maximum acceptable payback period is 6 years. The discount rate is 10%. Which project should it select? a) Project 1 b) Project 2 c) Project 3 d) Project 4
c)
7.4.5 Question on the second mark 1 Which of the following would NOT be considered a relevant cash flow in determining if a company should invest in a new project? a) The revenues expected to be generated by the new project several years after the project begins b) The cost of hiring additional staff to run the new project c) The cost of office space already owned with capacity to house the new project d) The cost of software that needs to be acquired to run the new project
b)
7.4.5 Question on the second mark 2 Which of the following would NOT be considered a relevant cash flow in determining if a company should invest in a new project? a) The travel cost for staff assigned to work on the new project b) The cost already incurred to have a consulting firm do market research c) The cost of research and development still needed to get the project to be feasible d) The cost of marketing to sell the project once it reaches feasibility