Question 1

A common size income statement would typically be prepared by dividing:

Accepted Answer

A)  all items on income statement in Year t by their corresponding value in Year t-1. 
B)  all items on income statement in Year t by their corresponding balance sheet accounts in Year t. 
C)  all items on income statement in Year t by net income in Year t-1. 
D)  all items on income statement in Year t by sales in Year t. 
A)  all items on income statement in Year t by their corresponding value in Year t-1. 
B)  all items on income statement in Year t by their corresponding balance sheet accounts in Year t. 
C)  all items on income statement in Year t by net income in Year t-1. 
D)  all items on income statement in Year t by sales in Year t.

Question 2

Which of the following statements is most correct?

Accepted Answer

A)  Technical analysis concerns itself with determining the intrinsic value of a stock. 
B)  Active investing is defined as buying and selling stock within six months. 
C)  Fundamental analysis attempts to value a company by examining the past prices patterns of a company's stock. 
D)  Individuals who engage in technical analysis by definition do not subscribe to the weak form of the efficient market hypothesis. 
A)  Technical analysis concerns itself with determining the intrinsic value of a stock. 
B)  Active investing is defined as buying and selling stock within six months. 
C)  Fundamental analysis attempts to value a company by examining the past prices patterns of a company's stock. 
D)  Individuals who engage in technical analysis by definition do not subscribe to the weak form of the efficient market hypothesis.

Question 3

A bank with a loan to a company is generally exposed to greater risk than the shareholders of the company.

Accepted Answer

A) True 
 B)False

Question 4

Given the following information, calculate the inventory turnover for ABC Co. for 2006 (pick closest number). $$\begin{array} { | l | r | r | } 
\hline \text { (in thousands of dollars) } & { 2006 } & { 2005 } \
\hline \text { Sales } & \$ 19,535 & \$ 15,470 \
\hline \text { Cost of Goods Sold } & \$ 15,101 & \$ 11,184 \
\hline \text { Inventory } & \$ 2,809 & \$ 2,260 \
\hline
\end{array}$$

Accepted Answer

A)  8.96 
B)  7.22 
C)  6.93 
D)  6.18 
A)  8.96 
B)  7.22 
C)  6.93 
D)  6.18

Question 5

$$\frac { ( 58,900 \times 1.05 \times 0.7 ) / ( .12 - .05 ) } { 25,000 }$$
-What is your estimate of price using the residual income valuation model at 12/31/05?

Accepted Answer

A)  $20.62 
B)  $21.65 
C)  $23.56 
D)  $24.72 
A)  $20.62 
B)  $21.65 
C)  $23.56 
D)  $24.72

Question 6

You have prepared a trend series for Company XYZ for three years, 2004-2006 inclusive, using 2004 as the base year. Below are selected data.
 $$\begin{array} { | l | c | c | c | } 
\hline & 2004 & 2005 & 2006 \
\hline \text { Sales } & 100 & 120 & 135 \
\hline \text { Net Income } & 100 & 118 & 128 \
\hline \text { Total Assets } & 100 & 119 & 130 \
\hline
\end{array}$$
-Which of the following statements concerning financial ratios is incorrect?

Accepted Answer

A)  Accounting principles and methods used by a company will not affect financial ratios. 
B)  The informational value of a ratio in isolation is limited. 
C)  A ratio is one number expressed as a percentage or fraction of another number. 
D)  Calculation of financial ratios is not sufficient for a complete financial analysis of a company. 
A)  Accounting principles and methods used by a company will not affect financial ratios. 
B)  The informational value of a ratio in isolation is limited. 
C)  A ratio is one number expressed as a percentage or fraction of another number. 
D)  Calculation of financial ratios is not sufficient for a complete financial analysis of a company.

Question 7

a. It is January 1, 2006 and you are considering buying $20,000 of Hilever Company's 10% bonds, which come due on December 31, 2015. The bonds pay interest semi-annually on June 30 and December 31 of each year. The prevailing interest rate on bonds of similar risk is 12%. How much would you be prepared to pay for the bond?
b. If coupon rate was 12% on these bonds, how much would you be prepared to pay?
c. If the coupon rate was 10% and the bonds were convertible into common equity (5 shares for every $1,000 face value coupon bond), and common stock is currently trading at $11 per share would this change your answer to part a? Why? Why not?

Accepted Answer

a. Semi-annual interest equals $1,000 ($

Question 8

Problem Two: Identify Industries
Below are selected ratios for three companies which operate in three different industries: Discount Retail Store, Drug and Utility. $$\begin{array}{l}
\begin{array} { l c c c } 
\text { Industry } & \mathbf { A } & \mathbf { B } & \mathbf { C } \
\text { COGS/Sales } & 80 \% & 58 \% & \text { n/a } \
\text { R\&D/Sales } & 0 \% & 7 \% & 0.1 \% \
\text { Advertising/Sales } & \text { not defined } & 3 \% & 0.1 \% \
\text { Interest/Sales } & 0.9 \% & 1 \% & 6 \% \
\text { Net Income/Sales } & 2.5 \% & 10 \% & 10 \% \
\text { Return on Assets } & 8.5 \% & 10.6 \% & 7.2 \% \
\text { Inventory Turnover } & 5.5 & 4 & \mathbf { n } / \mathrm { a } \
\text { Accounts Receivable Turnover } & 100 & 6 & 9 \
\text { Long-term Debt/Equity } & 60 \% & 50 \% & 92 \%
\end{array}\\
\mathrm { n } / \mathbf { a } = \text { not applicable }
\end{array}$$ 
Identify which industry each of the companies A, B and C operate in. Give two reasons for each of your selections.

Accepted Answer

The answer of Problem Two: Identify Industries
Below are selected ratios...

Question 9

Two popular techniques of comparative analysis are year-to-year change analysis and index-number trend analysis.

Accepted Answer

A) True 
 B)False

Question 10

If a company receives an unqualified audit opinion it means the auditors:

Accepted Answer

A)  did not complete a full audit and therefore do not feel qualified to give an opinion on financial statements. 
B)  are providing assurance that the company will remain financially viable for at least the next year. 
C)  are providing assurance that the company's financial statements fairly present company's financial performance and position. 
D)  are providing assurance that the company's financial statements are free from misstatement, fraudulent accounting and fairly indicate future performance. 
A)  did not complete a full audit and therefore do not feel qualified to give an opinion on financial statements. 
B)  are providing assurance that the company will remain financially viable for at least the next year. 
C)  are providing assurance that the company's financial statements fairly present company's financial performance and position. 
D)  are providing assurance that the company's financial statements are free from misstatement, fraudulent accounting and fairly indicate future performance.

Question 11

The statement of cash flows is separated into four parts: operating, investing, financing and planning.

Accepted Answer

A) True 
 B)False

Question 12

You have been provided the following information about Wert Inc. $$\begin{array} { | l | c | r | } 
\hline \text { (in thousands of dollars) } & 2005 & 2006 \
\hline \text { Sales } & \$ 2,456 & \$ 3,778 \
\hline \text { Net Income } & \$ 172 & \$ 202 \
\hline \text { Interest expense } & \$ 50 & \$ 55 \
\hline \text { Total Assets } & \$ 1,800 & \$ 1,950 \
\hline \text { Tax Rate } & 35 \% & 35 \% \
\hline
\end{array}$$ Return on Assets for 2006 is:

Accepted Answer

A)  13.71% 
B)  12.68% 
C)  10.77% 
D)  13.21% 
A)  13.71% 
B)  12.68% 
C)  10.77% 
D)  13.21%

Question 13

In a common size balance sheet total assets are expressed as 100 percent.

Accepted Answer

A) True 
 B)False

Question 14

Theoretically the value of a stock should equal the sum of the present value of future expected dividends, discounted at the cost of equity.

Accepted Answer

A) True 
 B)False

Question 15

The explanatory notes (footnotes) accompanying the financial statements are generally of little value in aiding the financial analyst when interpreting the financial statements.

Accepted Answer

A) True 
 B)False

Question 16

Details of compensation paid to officers and directors can be found in proxy statement.

Accepted Answer

A) True 
 B)False

Question 17

Common size statements are useful for inter-company comparisons.

Accepted Answer

A) True 
 B)False

Question 18

Liquidity of a company is generally defined as a measure of:

Accepted Answer

A)  the ability of a company to pay its employees in a timely manner. 
B)  the ability to pay interest and principal on all debt. 
C)  the ability to pay dividends. 
D)  the ability to pay current liabilities. 
A)  the ability of a company to pay its employees in a timely manner. 
B)  the ability to pay interest and principal on all debt. 
C)  the ability to pay dividends. 
D)  the ability to pay current liabilities.

Question 19

A friend tells you that you should buy Leclerc Company stock as it is a "great deal". It is January 1, 2006 and the stock is trading at $25 per share. You obtain the financial statements for Leclerc and determine the following:
1. Book value is $12 per share as of December 31, 2005
2. Earnings for 2005 were $4.0 per share
3. Earnings are expected to grow at 20% for the next four years
4. Dividend payout is 40%
5. Residual income is expected to be zero from 2007 onwards
6. Cost of equity capital is 15%
Determine, using the residual income method, whether you should buy Leclerc stock as of January 1, 2006.

Accepted Answer

You should not buy L

Question 20

Prospective analysis is the forecasting of future payoffs-typically earnings and cash flows, or both.

Accepted Answer

A) True 
 B)False

A common size income statement would typically be prepared by dividing:

Which of the following statements is most correct?

A bank with a loan to a company is generally exposed to greater risk than the shareholders of the company.

Given the following information, calculate the inventory turnover for ABC Co. for 2006 (pick closest number). (in thousands of dollars) 2006 2005 Sales \ 19,535 \ 15,470 Cost of Goods Sold \ 15,101 \ 11,184 Inventory \ 2,809 \ 2,260

$\frac { ( 58,900 \times 1.05 \times 0.7 ) / ( .12 - .05 ) } { 25,000 }$ -What is your estimate of price using the residual income valuation model at 12/31/05?

You have prepared a trend series for Company XYZ for three years, 2004-2006 inclusive, using 2004 as the base year. Below are selected data. 2004 2005 2006 Sales 100 120 135 Net Income 100 118 128 Total Assets 100 119 130 -Which of the following statements concerning financial ratios is incorrect?

Two popular techniques of comparative analysis are year-to-year change analysis and index-number trend analysis.

If a company receives an unqualified audit opinion it means the auditors:

The statement of cash flows is separated into four parts: operating, investing, financing and planning.

You have been provided the following information about Wert Inc. (in thousands of dollars) 2005 2006 Sales \ 2,456 \ 3,778 Net Income \ 172 \ 202 Interest expense \ 50 \ 55 Total Assets \ 1,800 \ 1,950 Tax Rate 35\% 35\% Return on Assets for 2006 is:

In a common size balance sheet total assets are expressed as 100 percent.

Theoretically the value of a stock should equal the sum of the present value of future expected dividends, discounted at the cost of equity.

The explanatory notes (footnotes) accompanying the financial statements are generally of little value in aiding the financial analyst when interpreting the financial statements.

Details of compensation paid to officers and directors can be found in proxy statement.

Common size statements are useful for inter-company comparisons.

Liquidity of a company is generally defined as a measure of:

Prospective analysis is the forecasting of future payoffs-typically earnings and cash flows, or both.

Financial Reporting and Analysis

Analyzing Financing Activities

Analyzing Investing Activities

Analyzing Investing Activities: Intercorporate Investments

Analyzing Operating Activities

Cash Flow Analysis

Return on Invested Capital and Profitability Analysis

Prospective Analysis

Credit Analysis

Equity Analysis and Valuation

Filters

Exam 1: Overview of Financial Statement Analysis

A common size income statement would typically be prepared by dividing:

Which of the following statements is most correct?

A bank with a loan to a company is generally exposed to greater risk than the shareholders of the company.

Given the following information, calculate the inventory turnover for ABC Co. for 2006 (pick closest number). (in thousands of dollars) 2006 2005 Sales \ 19,535 \ 15,470 Cost of Goods Sold \ 15,101 \ 11,184 Inventory \ 2,809 \ 2,260

(58,900×1.05×0.7)/(.12−.05)25,000\frac { ( 58,900 \times 1.05 \times 0.7 ) / ( .12 - .05 ) } { 25,000 }25,000(58,900×1.05×0.7)/(.12−.05)​ -What is your estimate of price using the residual income valuation model at 12/31/05?

You have prepared a trend series for Company XYZ for three years, 2004-2006 inclusive, using 2004 as the base year. Below are selected data. 2004 2005 2006 Sales 100 120 135 Net Income 100 118 128 Total Assets 100 119 130 -Which of the following statements concerning financial ratios is incorrect?

Two popular techniques of comparative analysis are year-to-year change analysis and index-number trend analysis.

If a company receives an unqualified audit opinion it means the auditors:

The statement of cash flows is separated into four parts: operating, investing, financing and planning.

You have been provided the following information about Wert Inc. (in thousands of dollars) 2005 2006 Sales \ 2,456 \ 3,778 Net Income \ 172 \ 202 Interest expense \ 50 \ 55 Total Assets \ 1,800 \ 1,950 Tax Rate 35\% 35\% Return on Assets for 2006 is:

In a common size balance sheet total assets are expressed as 100 percent.

Theoretically the value of a stock should equal the sum of the present value of future expected dividends, discounted at the cost of equity.

The explanatory notes (footnotes) accompanying the financial statements are generally of little value in aiding the financial analyst when interpreting the financial statements.

Details of compensation paid to officers and directors can be found in proxy statement.

Common size statements are useful for inter-company comparisons.

Liquidity of a company is generally defined as a measure of:

Prospective analysis is the forecasting of future payoffs-typically earnings and cash flows, or both.

Financial Reporting and Analysis

Analyzing Financing Activities

Analyzing Investing Activities

Analyzing Investing Activities: Intercorporate Investments

Analyzing Operating Activities

Cash Flow Analysis

Return on Invested Capital and Profitability Analysis

Prospective Analysis

Credit Analysis

Equity Analysis and Valuation

Filters

$\frac { ( 58,900 \times 1.05 \times 0.7 ) / ( .12 - .05 ) } { 25,000 }$ -What is your estimate of price using the residual income valuation model at 12/31/05?