Corp Finance Assessment Questions

Denali Limited, a manufacturing company, had the following income statement information: Revenue $4,000,000 Cost of goods sold $3,000,000 Other operating expenses $500,000 Interest expense $100,000 Tax expense $120,000 Denali's gross profit is equal to

1,000,000 & 500,000 is Operating Incone

An investment of $100 generates after-tax cash flows of $40 in Year 1, $80 in Year 2, and $120 in Year 3. The required rate of return is 20 percent. The net present value is closest to:

$58.33.

Brown Corporation had average days of sales outstanding of 19 days in the most recent fiscal year. Brown wants to improve its credit policies and collection practices and decrease its collection period in the next fiscal year to match the industry average of 15 days. Credit sales in the most recent fiscal year were $300 million, and Brown expects credit sales to increase to $390 million in the next fiscal year. To achieve Brown's goal of decreasing the collection period, the change in the average accounts receivable balance that must occur is closest to:

+$0.41 million.

For 2009, Flamingo Products had net income of $1,000,000. At 1 January 2009, there were 1,000,000 shares outstanding. On 1 July 2009, the company issued 100,000 new shares for $20 per share. The company paid $200,000 in dividends to common shareholders. What is Flamingo's basic earnings per share for 2009?

.95

Cell Services Inc. (CSI) had 1,000,000 average shares outstanding during all of 2009. During 2009, CSI also had 10,000 options outstanding with exercise prices of $10 each. The average stock price of CSI during 2009 was $15. For purposes of computing diluted earnings per share, how many shares would be used in the denominator?

1,003,333

Given the following cash flows for a capital project, calculate its payback period and discounted payback period. The required rate of return is 8 percent. Year 0 1 2 3 4 5 Cash flow −50,000 15,000 15,000 20,000 10,000 5,000 The discounted payback period is:

1.01 years longer than the payback period

An investment of $20,000 will create a perpetual after-tax cash flow of $2,000. The required rate of return is 8 percent. What is the investment's profitability index?

1.25

Hermann Corporation is considering an investment of €375 million with expected after-tax cash inflows of €115 million per year for seven years and an additional after-tax salvage value of €50 million in Year 7. The required rate of return is 10 percent. What is the investment's PI?

1.56

An analyst gathered the following information about a private company and its publicly traded competitor: Comparable Companies Private company Tax Rate (%) 30.0 Debt/Equity 1 Equity Beta N.A Public company Tax Rate (%) 35.0 Debt/Equity 0.90 Equity Beta 1.75 Using the pure-play method, the estimated equity beta for the private company is closest to:

1.877

Suppose a company has a current ratio of 2.5 times and a quick ratio of 1.5. If the company's current liabilities are 100 million, the amount of inventory is closest to

100 million

At the beginning of 2009, Glass Manufacturing purchased a new machine for its assembly line at a cost of $600,000. The machine has an estimated useful life of 10 years and estimated residual value of $50,000. How much depreciation would Glass take in 2009 for financial reporting purposes under the double-declining balance method?

120,000

During 2009, Accent Toys Plc., which began business in October of that year, purchased 10,000 units of a toy at a cost of ₤10 per unit in October. The toy sold well in October. In anticipation of heavy December sales, Accent purchased 5,000 additional units in November at a cost of ₤11 per unit. During 2009, Accent sold 12,000 units at a price of ₤15 per unit. Under the first in, first out (FIFO) method, what is Accent's cost of goods sold for 2009?

122,000

During 2009, Accent Toys Plc., which began business in October of that year, purchased 10,000 units of a toy at a cost of ₤10 per unit in October. The toy sold well in October. In anticipation of heavy December sales, Accent purchased 5,000 additional units in November at a cost of ₤11 per unit. During 2009, Accent sold 12,000 units at a price of ₤15 per unit. what would Accent's cost of goods sold be under the weighted average cost method?

124,000

Trumpit Resorts Company currently has 1.2 million common shares of stock outstanding and the stock has a beta of 2.2. It also has $10 million face value of bonds that have five years remaining to maturity and 8 percent coupon with semi-annual payments, and are priced to yield 13.65 percent. If Trumpit issues up to $2.5 million of new bonds, the bonds will be priced at par and have a yield of 13.65 percent; if it issues bonds beyond $2.5 million, the expected yield on the entire issuance will be 16 percent. Trumpit has learned that it can issue new common stock at $10 a share. The current risk-free rate of interest is 3 percent and the expected market return is 10 percent. Trumpit's marginal tax rate is 30 percent. If Trumpit raises $7.5 million of new capital while maintaining the same debt-to-equity ratio, its weighted average cost of capital is closest to: 14.5 percent. 15.5 percent. 16.5 percent.

15.5%

An analyst gathered the following information about a company and the market: Current market price per share of common stock $28.00 Most recent dividend per share paid on common stock (D0) $2.00 Expected dividend payout rate 40% Expected return on equity (ROE) 15% Beta for the common stock 1.3 Expected rate of return on the market portfolio 13% Risk-free rate of return 4% Using the Capital Asset Pricing Model (CAPM) approach, the cost of retained earnings for the company is closest to:

15.7%

An analyst gathered the following information about a company and the market: Current market price per share of common stock $28.00 Most recent dividend per share paid on common stock (D0) $2.00 Expected dividend payout rate 40% Expected return on equity (ROE) 15% Beta for the common stock 1.3 Expected rate of return on the market portfolio 13% Risk-free rate of return 4%

16.8%

Based on Exhibit 1, the financial leverage ratio for Company B is closest to:

2.22.

Suppose a company uses trade credit with the terms of 2/10, net 50. If the company pays its account on the 50th day, the effective borrowing cost of skipping the discount on day 10 is closest to:

20.2%

An investment of $150,000 is expected to generate an after-tax cash flow of $100,000 in one year and another $120,000 in two years. The cost of capital is 10 percent. What is the internal rate of return?

28.79

Given the following financial statement data, calculate the net operating cycle for this company. In Millions ($) Credit sales 40,000 Cost of goods sold 30,000 Accounts receivable 3,000 Inventory—Beginning balance 1,500 Inventory—Ending balance 2,000 Accounts payable 4,000 The net operating cycle of this company is closest to:

3.8 days

The current ROA of a firm is 13% and it has an Equity Multiplier of 3.0. The resulting ROE will be approximately

39%

Selected year-end financial statement data for Workhard are shown below. $ millions Beginning shareholders' equity 475 Ending shareholders' equity 493 Unrealized gain on available-for-sale securities 5 Unrealized loss on derivatives accounted for as hedges -3 Foreign currency translation gain on consolidation 2 Dividends paid 1 Net income 15 Workhard's comprehensive income for the year:

4

Two years ago, a company issued $20 million in long-term bonds at par value with a coupon rate of 9 percent. The company has decided to issue an additional $20 million in bonds and expects the new issue to be priced at par value with a coupon rate of 7 percent. The company has no other debt outstanding and has a tax rate of 40 percent. To compute the company's weighted average cost of capital, the appropriate after-tax cost of debt is closest to:

4.2%

Kim Corporation is considering an investment of 750 million won with expected after-tax cash inflows of 175 million won per year for seven years. The required rate of return is 10 percent. Expressed in years, the project's payback period and discounted payback period, respectively, are closest to:

4.3 years and 5.9 year

For its fiscal year-end, Calvan Water Corporation (CWC) reported net income of $12 million and a weighted average of 2,000,000 common shares outstanding. The company paid $800,000 in preferred dividends and had 100,000 options outstanding with an average exercise price of $20. CWC's market price over the year averaged $25 per share. CWC's diluted EPS is closest to:

5.54

Apex Consignment sells items over the internet for individuals on a consignment basis. Apex receives the items from the owner, lists them for sale on the internet, and receives a 25 percent commission for any items sold. Apex collects the full amount from the buyer and pays the net amount after commission to the owner. Unsold items are returned to the owner after 90 days. During 2009, Apex had the following information: · Total sales price of items sold during 2009 on consignment was €2,000,000. Total commissions retained by Apex during 2009 for these items was €500,000. How much revenue should Apex report on its 2009 income statement?

500,000

At the beginning of 2009, Glass Manufacturing purchased a new machine for its assembly line at a cost of $600,000. The machine has an estimated useful life of 10 years and estimated residual value of $50,000. Under the straight-line method, how much depreciation would Glass take in 2010 for financial reporting purposes?

55,000

During 2009, Argo Company sold 10 acres of prime commercial zoned land to a builder for $5,000,000. The builder gave Argo a $1,000,000 down payment and will pay the remaining balance of $4,000,000 to Argo in 2010. Argo purchased the land in 2002 for $2,000,000. Using the installment method, how much profit will Argo report for 2009?

600,000

Fairplay had the following information related to the sale of its products during 2009, which was its first year of business: Revenue $1,000,000 Returns of goods sold $100,000 Cash collected $800,000 Cost of goods sold $700,000 Under the accrual basis of accounting, how much net revenue would be reported on Fairplay's 2009 income statement?

900,000

When preparing an income statement, which of the following items would most likely be classified as other comprehensive income?

A foreign currency translation adjustment

Consider the two projects below. The cash flows as well as the NPV and IRR for the two projects are given. For both projects, the required rate of return is 10 percent. Cash Flows Year 0 1 2 3 4 NPV IRR (%) Project 1 −100 36 36 36 36 14.12 16.37 Project 2 −100 0 0 0 175 19.53 15.02 What discount rate would result in the same NPV for both projects?

A rate between 10.00 percent and 15.02 percent.

Assuming no changes in other variables, which of the following would decrease ROA?

An increase in average assets.

Within the Dupont Analysis

An increase in financial leverage is met with an increase in the use of debt.

Which of the following would an analyst most likely be able to determine from a common-size analysis of a company's balance sheet over several periods?

An increase or decrease in financial leverage.

The price-earnings (P/E) ratio is considered to be a price multiple. Which of the following is a true statement?

An increasing P/E implies that the price of the stock is becoming more expensive.

The three factor DuPont Analysis is comprised of

Asset turnover, profit margin, financial leverage

Equity equals:

Assets = Liabilities + Equity and, therefore, Assets - Liabilities = Equity.

Morgan Insurance Ltd. issued a fixed-rate perpetual preferred stock three years ago and placed it privately with institutional investors. The stock was issued at $25 per share with a $1.75 dividend. If the company were to issue preferred stock today, the yield would be 6.5 percent. The stock's current value is: $25.00. $26.92. $37.31.

B is correct. The company can issue preferred stock at 6.5%. Pp = $1.75/0.065 = $26.92

The Gearing Company has an after-tax cost of debt capital of 4 percent, a cost of preferred stock of 8 percent, a cost of equity capital of 10 percent, and a weighted average cost of capital of 7 percent. Gearing intends to maintain its current capital structure as it raises additional capital. In making its capital-budgeting decisions for the average-risk project, the relevant cost of capital is: 4 percent. 7 percent. 8 percent.

B. 7 %

A financial anAlyst at Buckco. Ltd. want to compute the company's weighted average cost of capital (WACC) using the dividend discount model. The analyst has gathered the following information Before tax cost of new debt 8% Tax rate 40% Target debt-to-equity .8033 Stock Price $30 Next Years Dividend $1.5 Eat growth rate 7%

B. 9% Cost of Equity = D1/P0 + g D/(D+E) = 0.8033/1.8033 = 0.445 WACC = 0.445*0.08*0.6 + 0.555*0.12 = 8.8%

Super long chart no way of you remembering Fixed assets y10 3,510 y11 3,667 y12 4,758 y13 10,431 y14 11,483 Current asset investments, cash at bank and in hand 316 218 290 561 682 Other current assets 558 514 643 1,258 1,634 Total assets 4,384 4,399 5,691 12,250 13,799 Interest bearing debt (long term) -602 -1,053 -1,535 -3,523 -3,707 Other creditors and provisions (current) -1,223 -1,054 -1,102 -2,377 -3,108 Total liabilities -1,825 -2,107 -2,637 -5,900 -6,815 Net assets 2,559 2,292 3,054 6,350 6,984 Shareholders' funds 2,161 2,006 2,309 5,572 6,165 Equity minority interests 398 286 745 778 819 Capital employed 2,559 2,292 3,054 6,350 6,984 Cash flow Working capital movements -53 5 71 85 107 Net cash inflow from operating activities 864 859 975 1,568 2,292 Which of the following choices best describes reasonable conclusions an analyst might make about the company's profitability?

B. Comparing FY14 with FY10, the company's profitability deteriorated, as indicated by a decrease in its net profit margin from 11.0 percent to 5.7 percent.

The cost of equity is equal to the

B. Rate of return required by stockholders

Wang Securities had a long-term stable debt-to-equity ratio of 0.65. Recent bank borrowing for expansion into South America raised the ratio to 0.75. The increased leverage has what effect on the asset beta and equity beta of the company? The asset beta and the equity beta will both rise. The asset beta will remain the same and the equity beta will rise. The asset beta will remain the same and the equity beta will decline.

B. The asset beta will remain the same and the equity beta will rise Asset risk doesn't change based on financial leverage but equity risk raises with higher debt

Brandon Wiene is a financial analyst covering the beverage industry. He is evaluating the impact of DEF Beverage's new product line of flavored waters. DEF currently has a debt-to-equity ratio of 0.6. The new product line would be financed with $50 million of debt and $100 million of equity. In estimating the valuation impact of this new product line on DEF's value, Wiene has estimated the equity beta and asset beta of comparable companies. In calculating the equity beta for the product line, Wiene is intending to use DEF's existing capital structure when converting the asset beta into a project beta. Which of the following statements is correct? Using DEF's debt-to-equity ratio of 0.6 is appropriate in calculating the new product line's equity beta. Using DEF's debt-to-equity ratio of 0.6 is not appropriate, but rather the debt-to-equity ratio of the new product, 0.5, is appropriate to use in calculating the new product line's equity beta. Wiene should use the new debt-to-equity ratio of DEF that would result from the additional $50 million debt and $100 million equity in calculating the new product line's equity beta.

B. Using DEF's debt-to-equity ratio of 0.6 is not appropriate, but rather the debt-to-equity ratio of the new product, 0.5, is appropriate to use in calculating the new product line's equity beta.

A company with no debt or convertible securities issued publicly traded common stock three times during the current fiscal year. Under both IFRS and US GAAP, the company's:

Basic EPS equals its diluted EPS

Based on Exhibit 1, which ratio indicates lower liquidity risk for Company A compared with Company B?

Cash ratio

A creditor most likely would consider a decrease in which of the following ratios to be positive news?

Debt-to-total assets.

Using the dividend discount model, what is the cost of equity for Zeller Mining if the company will pay a dividend of $2.30 next year, has a payout ratio of 30%, a return on equity of 15% and a stock price of $45

C. 15.61% Use Formula re=( D1/P0(1-F) ) + gL

Dot.Com has determined that it could issue $1,000 face value bonds with an 8 percent coupon paid semi-annually and a five-year maturity at $900 per bond. If Dot.Com's marginal tax rate is 38 percent, its after-tax cost of debt is closest to: 6.2 percent. 6.4 percent. 6.6 percent.

C. 6.6%

Fran McClure of Alba Advisers is estimating the cost of capital of Frontier Corporation as part of her valuation analysis of Frontier. McClure will be using this estimate, along with projected cash flows from Frontier's new projects, to estimate the effect of these new projects on the value of Frontier. McClure has gathered the following information on Frontier Corporation: Current Year ($) Forecasted for Next Year ($) Book value of debt 50 50 Market value of debt 62 63 Book value of shareholders' equity 55 58 Market value of shareholders' equity 210 220 The weights that McClure should apply in estimating Frontier's cost of capital for debt and equity are, respectively: wd = 0.200; we = 0.800. wd = 0.185; we = 0.815. wd = 0.223; we = 0.777.

C. wd = 0.223 Use current market value

Based on Exhibit 1, which statement is most likely correct?

Company A has made one or more acquisitions.

An analyst observes the following data for two companies: Company A ($) Company B ($) Revenue 4,500 6,000 Net income 50 1,000 Current assets 40,000 60,000 Total assets 100,000 700,000 Current liabilities 10,000 50,000 Total debt 60,000 150,000 Shareholders' equity 30,000 500,000 Which of the following choices best describes reasonable conclusions that the analyst might make about the two companies' ability to pay their current and long-term obligations?

Company A's current ratio of 4.0 indicates it is more liquid than Company B, whose current ratio is only 1.2, but Company B is more solvent, as indicated by its lower debt-to-equity ratio.

Which of the companies had the highest number of days of receivables for the year 20X1?

Company B

Which of the companies has the lowest accounts receivable turnover in the year 20X2?

Company B

Which of the companies reduced the average time it took to collect on accounts receivable from 20X1 to 20X2?

Company B

Super long chart no way of you remembering Fixed assets y10 3,510 y11 3,667 y12 4,758 y13 10,431 y14 11,483 Current asset investments, cash at bank and in hand 316 218 290 561 682 Other current assets 558 514 643 1,258 1,634 Total assets 4,384 4,399 5,691 12,250 13,799 Interest bearing debt (long term) -602 -1,053 -1,535 -3,523 -3,707 Other creditors and provisions (current) -1,223 -1,054 -1,102 -2,377 -3,108 Total liabilities -1,825 -2,107 -2,637 -5,900 -6,815 Net assets 2,559 2,292 3,054 6,350 6,984 Shareholders' funds 2,161 2,006 2,309 5,572 6,165 Equity minority interests 398 286 745 778 819 Capital employed 2,559 2,292 3,054 6,350 6,984 Cash flow Working capital movements -53 5 71 85 107 Net cash inflow from operating activities 864 859 975 1,568 2,292 The company's total assets at year-end FY9 were GBP 3,500 million. Which of the following choices best describes reasonable conclusions an analyst might make about the company's efficiency?

Comparing FY14 with FY10, the company's efficiency deteriorated due to asset growth faster than turnover revenue growth.

Super long chart no way of you remembering Fixed assets y10 3,510 y11 3,667 y12 4,758 y13 10,431 y14 11,483 Current asset investments, cash at bank and in hand 316 218 290 561 682 Other current assets 558 514 643 1,258 1,634 Total assets 4,384 4,399 5,691 12,250 13,799 Interest bearing debt (long term) -602 -1,053 -1,535 -3,523 -3,707 Other creditors and provisions (current) -1,223 -1,054 -1,102 -2,377 -3,108 Total liabilities -1,825 -2,107 -2,637 -5,900 -6,815 Net assets 2,559 2,292 3,054 6,350 6,984 Shareholders' funds 2,161 2,006 2,309 5,572 6,165 Equity minority interests 398 286 745 778 819 Capital employed 2,559 2,292 3,054 6,350 6,984 Cash flow Working capital movements -53 5 71 85 107 Net cash inflow from operating activities 864 859 975 1,568 2,292 Which of the following choices best describes reasonable conclusions an analyst might make about the company's liquidity?

Comparing FY14 with FY10, the company's liquidity improved, as indicated by an increase in its current ratio from 0.71 to 0.75.

Super long chart no way of you remembering Fixed assets y10 3,510 y11 3,667 y12 4,758 y13 10,431 y14 11,483 Current asset investments, cash at bank and in hand 316 218 290 561 682 Other current assets 558 514 643 1,258 1,634 Total assets 4,384 4,399 5,691 12,250 13,799 Interest bearing debt (long term) -602 -1,053 -1,535 -3,523 -3,707 Other creditors and provisions (current) -1,223 -1,054 -1,102 -2,377 -3,108 Total liabilities -1,825 -2,107 -2,637 -5,900 -6,815 Net assets 2,559 2,292 3,054 6,350 6,984 Shareholders' funds 2,161 2,006 2,309 5,572 6,165 Equity minority interests 398 286 745 778 819 Capital employed 2,559 2,292 3,054 6,350 6,984 Cash flow Working capital movements -53 5 71 85 107 Net cash inflow from operating activities 864 859 975 1,568 2,292 Which of the following choices best describes reasonable conclusions an analyst might make about the company's solvency?

Comparing FY14 with FY10, the company's solvency deteriorated, as indicated by a decrease in interest coverage from 10.6 to 8.4.

Which ratio would a company most likely use to measure its ability to meet short-term obligations?

Current ratio.

Which combination of depreciation methods and useful lives is most conservative in the year a depreciable asset is acquired?

Declining balance depreciation with a short useful life.

The industry average receivables collection period:

Decreased from 20X1 to 20X2

Which of the following would best explain an increase in receivables turnover?

Due to problems with an error in its old credit scoring system, the company had accumulated a substantial amount of uncollectible accounts and wrote off a large amount of its receivables.

Which of the following ratios would be most useful in determining a company's ability to cover its lease and interest payments?

Fixed charge coverage

Which of the following statements is true?

For a given company, the after tax cost of debt is generally less than both the cost of preferred equity and the cost of common equity.

Projects 1 and 2 have similar outlays, although the patterns of future cash flows are different. The cash flows as well as the NPV and IRR for the two projects are shown below. For both projects, the required rate of return is 10 percent. Cash Flows Year 0 1 2 3 4 NPV IRR (%) Project 1 −50 20 20 20 20 13.40 21.86 Project 2 −50 0 0 0 100 18.30 18.92 The two projects are mutually exclusive. What is the appropriate investment decision?

Invest in Project 1 because it has the higher IRR

Laurelli Builders (LB) reported the following financial data for year-end 31 December: Common shares outstanding, 1 January 2,020,000 Common shares issued as stock dividend, 1 June 380,000 Warrants outstanding, 1 January 500,000 Net income $3,350,000 Preferred stock dividends paid $430,000 Common stock dividends paid $240,000 Which statement about the calculation of LB's EPS is most accurate?

LB's diluted EPS is equal to or less than its basic EPS

Which inventory method is least likely to be used under IFRS?

Last in, First out (LIFO)

An analyst is interested in assessing both the efficiency and liquidity of Spherion PLC. The analyst has collected the following data for Spherion: FY3 FY2 FY1 Days of inventory on hand 32 34 40 Days sales outstanding 28 25 23 Number of days of payables 40 35 35 Based on this data, what is the analyst least likely to conclude?

Management of receivables has contributed to improved liquidity.

Given the following cash flows for a capital project, calculate the NPV and IRR. The required rate of return is 8 percent. Year 0 1 2 3 4 5 Cash flow −50,000 15,000 15,000 20,000 10,000 5,000

NPV $3,379 IRR 10.9%

Kim Corporation is considering an investment of 750 million won with expected after-tax cash inflows of 175 million won per year for seven years. The required rate of return is 10 percent. What is the project's:

NPV = 102 million IRR = 14%

At the beginning of 2009, Florida Road Construction entered into a contract to build a road for the government. Construction will take four years. The following information as of 31 December 2009 is available for the contract: Total revenue according to contract $10,000,000 Total expected cost $8,000,000 Cost incurred during 2009 $1,200,000 Assume that the company estimates percentage complete based on costs incurred as a percentage of total estimated costs. Under the completed contract method, how much revenue will be reported in 2009?

None

During 2009, Argo Company sold 10 acres of prime commercial zoned land to a builder for $5,000,000. The builder gave Argo a $1,000,000 down payment and will pay the remaining balance of $4,000,000 to Argo in 2010. Argo purchased the land in 2002 for $2,000,000. how much profit will Argo report for 2009 using the cost recovery method?

None

When calculating diluted EPS, which of the following securities in the capital structure increases the weighted average number of common shares outstanding without affecting net income available to common shareholders?

Stock Options

What does the P/E ratio measure?

The "multiple" that the stock market places on a company's EPS.

In DuPont Analysis where the financial leverage has consistently increased over the past several years

The ROE will be higher than the ROA

The ACME Company has current sales of $2,340,000 and Total Assets of $990,000. It also has earnings of $250,000, and Total Equity of $750,000. The current inventory is $124,000 and accounts payable is $98,000.

The asset turnover and profit margin are 2.36 and 10.68%

An analyst observes a decrease in a company's inventory turnover. Which of the following would most likely explain this trend?

The company installed a new inventory management system but experienced some operational difficulties resulting in duplicate orders being placed with suppliers.

An analyst is evaluating the solvency and liquidity of Apex Manufacturing and has collected the following data (in millions of euro): FY5 (€) FY4 (€) FY3 (€) Total debt 2,000 1,900 1,750 Total equity 4,000 4,500 5,000 Which of the following would be the analyst's most likely conclusion?

The company is becoming increasingly less solvent, as evidenced by the increase in its debt-to -equity ratio from 0.35 to 0.50 from FY3 to FY5.

An analyst is evaluating the solvency and liquidity of Apex Manufacturing and has collected the following data (in millions of euro): FY5 (€) FY4 (€) FY3 (€) Total debt 2,000 1,900 1,750 Total equity 4,000 4,500 5,000 With regard to the data in Problem 6, what would be the most reasonable explanation of the financial data?

The decline in the company's equity indicates that the company may be incurring losses, paying dividends greater than income, and/or repurchasing shares.

An investor concerned whether a company can meet its near-term obligations is most likely to calculate the:

current ratio.

If a stock has a beta of 2.0, which of the following is true?

The stock is considered to be more volatile than the market.

Wilson Flannery is concerned that this project has multiple IRRs. Year 0 1 2 3 Cash flows −50 100 0 −50 How many discount rates produce a zero NPV for this project?

Two, discount rates of 0 percent and 62 percent

Jurgen Knudsen has been hired to provide industry expertise to Henrik Sandell, CFA, an analyst for a pension plan managing a global large-cap fund internally. Sandell is concerned about one of the fund's larger holdings, auto parts manufacturer Kruspa AB. Kruspa currently operates in 80 countries, with the previous year's global revenues at €5.6 billion. Recently, Kruspa's CFO announced plans for expansion into China. Sandell worries that this expansion will change the company's risk profile and wonders if he should recommend a sale of the position. Sandell provides Knudsen with the basic information. Kruspa's global annual free cash flow to the firm is €500 million and earnings are €400 million. Sandell estimates that cash flow will level off at a 2 percent rate of growth. Sandell also estimates that Kruspa's after-tax free cash flow to the firm on the China project for next three years is, respectively, €48 million, €52 million, and €54.4 million. Kruspa recently announced a dividend of €4.00 per share of stock. For the initial analysis, Sandell requests that Knudsen ignore possible currency fluctuations. He expects the Chinese plant to sell only to customers within China for the first three years. Knudsen is asked to evaluate Kruspa's planned financing of the required €100 million with a €80 public offering of 10-year debt in Sweden and the remainder with an equity offering. Additional information: Equity risk premium, Sweden 4.82 percent Risk-free rate of interest, Sweden 4.25 percent Industry debt-to-equity ratio 0.3 Market value of Kruspa's debt €900 million Market value of Kruspa's equity €2.4 billion Kruspa's equity beta 1.3 Kruspa's before-tax cost of debt 9.25 percent China credit A2 country risk premium 1.88 percent Corporate tax rate 37.5 percent Interest payments each year Level 13. Using the capital asset pricing model, Kruspa's cost of equity capital for its typical project is closest to: 14. Sandell is interested in the weighted average cost of capital of Kruspa AB prior to its investing in the China project. This weighted average cost of capital (WACC) isclosest to: 15. In his estimation of the project's cost of capital, Sandell would like to use the asset beta of Kruspa as a base in his calculations. The estimated asset beta of Kruspa prior to the China project is closest to:

Using the capital asset pricing model, Kruspa's cost of equity capital for its typical project is closest to B. 15.52 Sandell is interested in the weighted average cost of capital of Kruspa AB prior to its investing in the China project. This weighted average cost of capital (WACC) isclosest to: 9.23% In his estimation of the project's cost of capital, Sandell would like to use the asset beta of Kruspa as a base in his calculations. The estimated asset beta of Kruspa prior to the China project is closest to: 1.053

Shirley Shea has evaluated an investment proposal and found that its payback period is one year, it has a negative NPV, and it has a positive IRR. Is this combination of results possible?

Yes

With regard to net present value (NPV) profiles, the point at which a profile crosses the horizontal axis is best described as:

a project's internal rate of return when the project's NPV is equal to zero.

Which statement is most accurate? A common size income statement: restates each line item of the income statement as a percentage of net income. allows an analyst to conduct cross-sectional analysis by removing the effect of company size. standardizes each line item of the income statement but fails to help an analyst identify differences in companies' strategies.

allows an analyst to conduct cross-sectional analysis by removing the effect of company size.

A company increasing its credit terms for customers from 1/10, net 30 to 1/10 net 60 will most likely experience

an increase in the average collection period

Debt due within one year is considered:

current.

When a company buys shares of its own stock to be held in treasury, it records a reduction in:

both assets and shareholders' equity.

Defining total asset turnover as revenue divided by average total assets, all else equal, impairment write-downs of long-lived assets owned by a company will most likelyresult in an increase for that company in:

both the debt-to-equity ratio and the total asset turnover.

The most stringent test of a company's liquidity is its:

cash ratio.

Under IFRS, a loss from the destruction of property in a fire would most likely be classified as:

continuing operations.

An example of an expense classification by function is:

cost of goods sold.

An investor worried about a company's long-term solvency would most likely examine its:

debt-to-equity ratio.

The most likely costs included in both the cost of inventory and property, plant, and equipment are:

delivery costs.Both the cost of inventory and property, plant, and equipment include delivery costs, or costs incurred in bringing them to the location for use or resale.

An analyst compiles the following data for a company: FY13 FY14 FY15 ROE 19.8% 20.0% 22.0% Return on total assets 8.1% 8.0% 7.9% Total asset turnover 2.0 2.0 2.1 Based only on the information above, the most appropriate conclusion is that, over the period FY13 to FY15, the company's:

net profit margin has decreased but its financial leverage has increased.

Expenses on the income statement may be grouped by:

either function or nature.

Under IFRS, income includes increases in economic benefits from:

enhancements of assets not related to owners' contributions.

Accrued expenses (accrued liabilities) are:

expenses that have been reported on the income statement but not yet paid.

All of the following are current assets except:

goodwill.

A company previously expensed the incremental costs of obtaining a contract. All else being equal, adopting the May 2014 IASB and FASB converged accounting standards on revenue recognition makes the company's profitability initially appear:

higher

With regard to capital budgeting, an appropriate estimate of the incremental cash flows from a project is least likely to include:

interest costs.

A company chooses to change an accounting policy. This change requires that, if practical, the company restate its financial statements for:

prior periods shown in a report.

The item "retained earnings" is a component of:

shareholders' equity.

Under IFRS, revenue from barter transactions should be measured based on the fair value of revenue from:

similar non-barter transactions with unrelated parties.

In order to assess a company's ability to fulfill its long-term obligations, an analyst would most likely examine:

solvency ratios.

Shareholders' equity reported on the balance sheet is most likely to differ from the market value of shareholders' equity because:

some factors that affect the generation of future cash flows are excluded.

Erin Chou is reviewing a profitable investment project that has a conventional cash flow pattern. If the cash flows for the project, initial outlay, and future after-tax cash flows all double, Chou would predict that the IRR would:

stay the same and the NPV would increase

The carrying value of inventories reflects:

the lower of historical cost or net realizable value.

If the outcome of a long-term contract can be measured reliably, the preferred accounting method under both IFRS and US GAAP is:

the percentage of completion method

With regard to net present value (NPV) profiles, the point at which a profile crosses the vertical axis is best described as:

the sum of the undiscounted cash flows from a project

With regard to the net present value (NPV) profiles of two projects, the crossover rate is best described as the discount rate at which:

two projects have the same NPV.

An investment has an outlay of 100 and after-tax cash flows of 40 annually for four years. A project enhancement increases the outlay by 15 and the annual after-tax cash flows by 5. As a result, the vertical intercept of the NPV profile of the enhanced project shifts

up and the horizontal intercept shifts left.

When developing forecasts, analysts should most likely:

use the results of financial analysis, analysis of other information, and judgment