Question 1

Given Birdchip's beta of 1.25 and a risk free rate of 6%, what is the expected rate of return assuming a 12% market return?

Accepted Answer

A)  1% 
B)  10% 
C)  11% 
D)  12% 
E)  31% 
A)  1% 
B)  10% 
C)  11% 
D)  12% 
E)  31%

Question 2

According to Peter Lynch a favourable attribute of a firm that may result in favourable stock performance is when a firm's product is the latest craze.

Accepted Answer

A) True 
 B)False

Question 3

Present value of free cash flow to equity resembles the present value of earnings concept except that it includes the capital expenditures required to maintain and grow the firm and the change in working capital required for a growing firm.

Accepted Answer

A) True 
 B)False

Question 4

Peter Lynch identified a number of attributes of firms that may result in favourable stock market performances, including

Accepted Answer

A)  Products that are faddish, people like change. 
B)  Firms that have competitive advantages over their rivals. 
C)  Firms that can benefit from cost reductions. 
D)  Choices b and c 
E)  All of the above. 
A)  Products that are faddish, people like change. 
B)  Firms that have competitive advantages over their rivals. 
C)  Firms that can benefit from cost reductions. 
D)  Choices b and c 
E)  All of the above.

Question 5

Exhibit 9-8
USE THE FOLLOWING INFORMATION IS FOR THE NEXT PROBLEM(S)
At the end of the year 2009 the CKL Corporation had operating free cash flow (OFCF) of $300,000 and shares outstanding of 100,000. Total debt is currently $10,000,000. The company projects the following annual growth rates in OFCF $$\begin{array} { c c } 
\text { Year } & \text { Grawth Rate } \
\hline 2010 & 25 \% \
2011 & 20 \% \
2012 & 15 \% \
2013 & 10 \% \
2014 & 12 \% \
2015 & 14 \% \
2016 & 16 \% \
2017 & 198
\end{array}$$ 
From year 2018 onward growth in OFCF is expected to remain constant at 5% per year. The stock has a beta of 1.1 and the current market price is $80. Currently the yield on 10-year Treasury notes is 5% and the equity risk premium is 4%. The firm can raise debt at a pre-tax cost of 9%. The tax rate is 25%. The proportion of equity is 55% and the proportion of debt is 45%.
-Refer to Exhibit 9-8. Calculate the present value now (Year 2009) of OFCF during the period of declining growth (that is for years 2014 to 2017).

Accepted Answer

A)  $1,044,612 
B)  $1,554,823 
C)  $1,898,096 
D)  $1,327,547 
E)  $1,579,326 
A)  $1,044,612 
B)  $1,554,823 
C)  $1,898,096 
D)  $1,327,547 
E)  $1,579,326

Question 6

Exhibit 9-6
USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT QUESTION(S)
You are provided with the following information on Kayray Corporation. Your ultimate objective is to calculate the EVA for the firm. $\begin{array}{llcc}
  \text {LIFO reserve  } & 60 \
 \text { Net plant, property, and equipment  } & 1325 \
  \text { Other assets  } &30  \
 \text {Goodwill  } &325  \
  \text {  Accumulated Goodwill amortized  } &  65\
 \text { PV of Operating leases } & 140 \
  \text { Tax benefit from interest on expenses   } &  10\
 \text {Tax benefit from interest on leases   } &5  \
  \text { Taxes on non-operating income  } &2  \
 \text {Implied interest on op. lease  } & 9.5 \
  \text {   Increase in LIFO reserve  } & 12 \
 \text { Goodwill amortization  } & 15 \
  \text { Operating profit   } &  550\
 \text { Income tax expense  } & 215 \
  \text {  Net working capital  } & 440 \
 \text { WACC } &  0.12\
\end{array}$

-Refer to Exhibit 9-6. Calculate the firm's EVA.

Accepted Answer

A)  85.2 
B)  72.3 
C)  65.8 
D)  89.5 
E)  78.2 
A)  85.2 
B)  72.3 
C)  65.8 
D)  89.5 
E)  78.2

Question 7

Which of the following is a market tenet of Warren Buffett?

Accepted Answer

A)  Long term prospects. 
B)  Resistance to institutional imperative. 
C)  Creation of one dollar of market value for every dollar retained. 
D)  Purchase at discount to intrinsic value. 
E)  Product is not faddish 
A)  Long term prospects. 
B)  Resistance to institutional imperative. 
C)  Creation of one dollar of market value for every dollar retained. 
D)  Purchase at discount to intrinsic value. 
E)  Product is not faddish

Question 8

Which of the following is a financial tenet of Warren Buffett?

Accepted Answer

A)  Long term prospects. 
B)  Resistance to institutional imperative. 
C)  Creation of one dollar of market value for every dollar retained. 
D)  Purchase at discount to intrinsic value. 
E)  Product is not faddish. 
A)  Long term prospects. 
B)  Resistance to institutional imperative. 
C)  Creation of one dollar of market value for every dollar retained. 
D)  Purchase at discount to intrinsic value. 
E)  Product is not faddish.

Question 9

Which of the following is a management tenet of Warren Buffett?

Accepted Answer

A)  Long term prospects. 
B)  Resistance to institutional imperative. 
C)  Creation of one dollar of market value for every dollar retained. 
D)  Purchase at discount to intrinsic value. 
E)  Product is not faddish 
A)  Long term prospects. 
B)  Resistance to institutional imperative. 
C)  Creation of one dollar of market value for every dollar retained. 
D)  Purchase at discount to intrinsic value. 
E)  Product is not faddish

Question 10

Exhibit 9-7
USE THE FOLLOWING INFORMATION IS FOR THE NEXT PROBLEM(S)
At the end of the year 2009 the BRK Corporation had free cash flow to equity (FCFE) of $250,000 and shares outstanding of 200,000. The company projects the following annual growth rates in FCFE. $$\begin{array} { c c } 
\text { Year } & \text { Grawth Rate } \
\hline 2010 & 10 \% \
2011 & 15 \% \
2012 & 20 \% \
2013 & 25 \% \
2014 & 20 \% \
2015 & 15 \% \
2016 & 10 \% \
2017 & 7 \%
\end{array}$$ 
From year 2018 onward growth in FCFE is expected to remain constant at 5% per year. The stock has a beta of 1.3 and the current market price is $55. Currently the yield on 10-year Treasury notes is 5% and the equity risk premium is 4%.
-Refer to Exhibit 9-7. Calculate the intrinsic value of the stock now (Year 2009).

Accepted Answer

A)  $55 
B)  $48.52 
C)  $77.79 
D)  $35.77 
E)  $62.34 
A)  $55 
B)  $48.52 
C)  $77.79 
D)  $35.77 
E)  $62.34

Question 11

Exhibit 9-5
USE THE FOLLOWING INFORMATION FOR THE NEXT QUESTION(S) $\begin{array}{lcc} 
& \text { Wal-Blue } & \text { Industry } \
\hline   \text { DPS } & 1.00 & 1.50 \
\text { Total Asset Turnover } & 3.20 & 2.50 \
\text { Net Profit Margin } & 3.50 \% & 3.00 \% \
\text { EPS } & 4.00 & 3.00 \
\text { Total Assets/Equity } & 3.00 & 4.00
\end{array}$
-Refer to Exhibit 9-5. What are the ROEs for Wal-Blue and its industry?

Accepted Answer

A)  24.3% and 27.0% 
B)  29.7% and 27.0% 
C)  29.7% and 30.0% 
D)  33.6% and 30.0% 
E)  34.5% and 31.5% 
A)  24.3% and 27.0% 
B)  29.7% and 27.0% 
C)  29.7% and 30.0% 
D)  33.6% and 30.0% 
E)  34.5% and 31.5%

Question 12

Exhibit 9-3
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
Harcourt Industries currently has an 18% annual growth rate while the market average is 8%. The market multiple is 12.
-Refer to Exhibit 9-3. Determine the justified P/E ratio for Harcourt Industries assuming Harcourt can maintain its superior growth rate for the next 9 years.

Accepted Answer

A)  5.98 
B)  13.13 
C)  21.20 
D)  58.68 
E)  26.65 
A)  5.98 
B)  13.13 
C)  21.20 
D)  58.68 
E)  26.65

Question 13

Exhibit 9-9
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
The Rollerball Corporation's industry averages are as follows:
Net Profit Margin = 7.5%; Total Asset Turnover = 2.2; Total Assets/ Equity = 2.0
Rollerball Corporation has the following financial statements for year ending 12/31/2009.
(000s omitted) 
$\begin{array}{lr}
 \text { Sales } &5,450 \
 \text { Cost of Goods Sold } &\underline {3,250 }\
 \text { Gross Profit } & 2,200 \
 \text {Depreciation  } &820 \
 \text {Operating Expenses  } &470 \
 \text { Administration Exp. } &\underline {115 }\
 \text {Operating Profit  } & 795 \
 \text { Interest Expense } &\underline {88} \
 \text { Profit Before Taxes } & 707 \
 \text {Taxes  } &\underline {247} \
 \text { Net Income } & 460 \
 \text {Dividende   } &250
\end{array}$ $\begin{array}{lrlr}
\text { Assets } &&  {\text { Liabilities }} \
\hline \text { Cash } & 100 & \text { Notes Payable } & 850 \
\text { Accounts Receivable } & 1,250 & \text { Accounts Payable } &  \underline{1,550} \
\text { Inventory } &  \underline{1,125} & \text { Total Current Liab. } & {2,400}\
\text { Total Current Assets } &  {2,475}&{\text { Long Term Debt }} & 425 \
\text { Net Fixed Assets } &  \underline{1,450} & \text { Common Stock } &400 \
 {\text { Total Assets }} &{3,925} & \text { Retained Earnings } & \underline{700 }\
&&(\text { Total Liab \& Earnings }&3,925\
\end{array}$
-Refer to Exhibit 9-9. Calculate Rollerball Corporation's Total Asset Turnover.

Accepted Answer

A)  0.72 
B)  0.85 
C)  1.39 
D)  1.65 
E)  2.31 
A)  0.72 
B)  0.85 
C)  1.39 
D)  1.65 
E)  2.31

Question 14

A stock with low systematic risk is considered to be a defensive stock.

Accepted Answer

A) True 
 B)False

Question 15

What is the implied growth duration of Jones Industries given the following: $\begin{array}{lcc} 
& \text { S\&P/TSX Industrials } & \text { Jones Industries } \
\hline   \text { P/E Ratios } & 12 & 15 \
\text { Average Growth }(\%) & 6.0 & 10.0 \
\text { Dividend Yield } & 05 & 03
\end{array}$

Accepted Answer

A)  7.2 years 
B)  10.9 years 
C)  12.5 years 
D)  13.9 years 
E)  15.2 years 
A)  7.2 years 
B)  10.9 years 
C)  12.5 years 
D)  13.9 years 
E)  15.2 years

Question 16

A ____ stock possesses a high probability of low or negative rates of return and a low probability of normal or high rates of return.

Accepted Answer

A)  Growth 
B)  Defensive 
C)  Cyclical 
D)  Speculative 
E)  Value 
A)  Growth 
B)  Defensive 
C)  Cyclical 
D)  Speculative 
E)  Value

Question 17

According to Peter Lynch a favourable attribute of a firm that may result in favourable stock performance is when a firm buys back its shares.

Accepted Answer

A) True 
 B)False

Question 18

A growth company is a firm that has the opportunities and ability to invest capital in projects that generate rates of return greater than the firm's cost of debt.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following is not a determinant of the capital gain component?

Accepted Answer

A)  The percentage of earnings retained for reinvestment. 
B)  The relative rate of return earned on the funds retained. 
C)  The time period for these growth investments. 
D)  The amount of capital invested in growth investments. 
E)  All of the above are determinants of the capital gain component. 
A)  The percentage of earnings retained for reinvestment. 
B)  The relative rate of return earned on the funds retained. 
C)  The time period for these growth investments. 
D)  The amount of capital invested in growth investments. 
E)  All of the above are determinants of the capital gain component.

Question 20

Exhibit 9-9
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
The Rollerball Corporation's industry averages are as follows:
Net Profit Margin = 7.5%; Total Asset Turnover = 2.2; Total Assets/ Equity = 2.0
Rollerball Corporation has the following financial statements for year ending 12/31/2009.
(000s omitted) 
$\begin{array}{lr}
 \text { Sales } &5,450 \
 \text { Cost of Goods Sold } &\underline {3,250 }\
 \text { Gross Profit } & 2,200 \
 \text {Depreciation  } &820 \
 \text {Operating Expenses  } &470 \
 \text { Administration Exp. } &\underline {115 }\
 \text {Operating Profit  } & 795 \
 \text { Interest Expense } &\underline {88} \
 \text { Profit Before Taxes } & 707 \
 \text {Taxes  } &\underline {247} \
 \text { Net Income } & 460 \
 \text {Dividende   } &250
\end{array}$ $\begin{array}{lrlr}
\text { Assets } &&  {\text { Liabilities }} \
\hline \text { Cash } & 100 & \text { Notes Payable } & 850 \
\text { Accounts Receivable } & 1,250 & \text { Accounts Payable } &  \underline{1,550} \
\text { Inventory } &  \underline{1,125} & \text { Total Current Liab. } & {2,400}\
\text { Total Current Assets } &  {2,475}&{\text { Long Term Debt }} & 425 \
\text { Net Fixed Assets } &  \underline{1,450} & \text { Common Stock } &400 \
 {\text { Total Assets }} &{3,925} & \text { Retained Earnings } & \underline{700 }\
&&(\text { Total Liab \& Earnings }&3,925\
\end{array}$
-Refer to Exhibit 9-9. Calculate Rollerball Corporation's Total Assets/Equity ratio.

Accepted Answer

A)  3.57 
B)  4.28 
C)  5.61 
D)  7.35 
E)  9.81 
A)  3.57 
B)  4.28 
C)  5.61 
D)  7.35 
E)  9.81

Given Birdchip's beta of 1.25 and a risk free rate of 6%, what is the expected rate of return assuming a 12% market return?

According to Peter Lynch a favourable attribute of a firm that may result in favourable stock performance is when a firm's product is the latest craze.

Present value of free cash flow to equity resembles the present value of earnings concept except that it includes the capital expenditures required to maintain and grow the firm and the change in working capital required for a growing firm.

Peter Lynch identified a number of attributes of firms that may result in favourable stock market performances, including

Which of the following is a market tenet of Warren Buffett?

Which of the following is a financial tenet of Warren Buffett?

Which of the following is a management tenet of Warren Buffett?

Exhibit 9-5 USE THE FOLLOWING INFORMATION FOR THE NEXT QUESTION(S) Wal-Blue Industry DPS 1.00 1.50 Total Asset Turnover 3.20 2.50 Net Profit Margin 3.50\% 3.00\% EPS 4.00 3.00 Total Assets/Equity 3.00 4.00 -Refer to Exhibit 9-5. What are the ROEs for Wal-Blue and its industry?

A stock with low systematic risk is considered to be a defensive stock.

What is the implied growth duration of Jones Industries given the following: S\&P/TSX Industrials Jones Industries P/E Ratios 12 15 Average Growth (\%) 6.0 10.0 Dividend Yield 05 03

A ____ stock possesses a high probability of low or negative rates of return and a low probability of normal or high rates of return.

According to Peter Lynch a favourable attribute of a firm that may result in favourable stock performance is when a firm buys back its shares.

A growth company is a firm that has the opportunities and ability to invest capital in projects that generate rates of return greater than the firm's cost of debt.

Which of the following is not a determinant of the capital gain component?

The Investment Setting

The Asset Allocation Decision

Selecting Investments in a Global Market

Securities Markets and the Economy

Efficient Capital Markets

An Introduction to Portfolio Management

Asset Pricing Models: Capm and Apt

Economic and Industry Analysis

Technical Analysis

Bond Fundamentals

The Analysis and Valuation of Bonds

An Introduction to Derivative Markets and Securities

Derivatives: Analysis and Valuation

Equity Portfolio Management Strategies

Bond Portfolio Management Strategies

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Analysis of Financial Statements

An Introduction to Security Valuation

Web Appendix: A Review of Statistics and the Security Market Line

Web Appendix: A Review of Statistics and the Security Market Line

Appendix: Objectives and Constraints of Institutional Investors

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Exam 9: Company Analysis and Stock Valuation

Given Birdchip's beta of 1.25 and a risk free rate of 6%, what is the expected rate of return assuming a 12% market return?

According to Peter Lynch a favourable attribute of a firm that may result in favourable stock performance is when a firm's product is the latest craze.

Present value of free cash flow to equity resembles the present value of earnings concept except that it includes the capital expenditures required to maintain and grow the firm and the change in working capital required for a growing firm.

Peter Lynch identified a number of attributes of firms that may result in favourable stock market performances, including

Which of the following is a market tenet of Warren Buffett?

Which of the following is a financial tenet of Warren Buffett?

Which of the following is a management tenet of Warren Buffett?

Exhibit 9-5 USE THE FOLLOWING INFORMATION FOR THE NEXT QUESTION(S) Wal-Blue Industry DPS 1.00 1.50 Total Asset Turnover 3.20 2.50 Net Profit Margin 3.50\% 3.00\% EPS 4.00 3.00 Total Assets/Equity 3.00 4.00 -Refer to Exhibit 9-5. What are the ROEs for Wal-Blue and its industry?

A stock with low systematic risk is considered to be a defensive stock.

What is the implied growth duration of Jones Industries given the following: S\&P/TSX Industrials Jones Industries P/E Ratios 12 15 Average Growth (\%) 6.0 10.0 Dividend Yield 05 03

A ____ stock possesses a high probability of low or negative rates of return and a low probability of normal or high rates of return.

According to Peter Lynch a favourable attribute of a firm that may result in favourable stock performance is when a firm buys back its shares.

A growth company is a firm that has the opportunities and ability to invest capital in projects that generate rates of return greater than the firm's cost of debt.

Which of the following is not a determinant of the capital gain component?

The Investment Setting

The Asset Allocation Decision

Selecting Investments in a Global Market

Securities Markets and the Economy

Efficient Capital Markets

An Introduction to Portfolio Management

Asset Pricing Models: Capm and Apt

Economic and Industry Analysis

Technical Analysis

Bond Fundamentals

The Analysis and Valuation of Bonds

An Introduction to Derivative Markets and Securities

Derivatives: Analysis and Valuation

Equity Portfolio Management Strategies

Bond Portfolio Management Strategies

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Analysis of Financial Statements

An Introduction to Security Valuation

Web Appendix: A Review of Statistics and the Security Market Line

Web Appendix: A Review of Statistics and the Security Market Line

Appendix: Objectives and Constraints of Institutional Investors

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