Which of the following statements regarding the intrinsic value of a company is
correct?
A. It can be calculated as book value plus the present value of future expected
dividends, discounted at the cost of equity capital.
B. It can be calculated as present value of future expected dividends, discounted at the
cost of debt.
C. It can be calculated as present value of future expected residual income, discounted
at the cost of equity capital.
D. It can be calculated as book value plus the present value of future expected residual
income, discounted at the cost of equity capital.
The following information can be found in Manufacturer Company’s financial
statements.
If Manufacturer used FIFO, its retained earnings as of the end of fiscal 2006 would be:
A. $540,000.
B. $440,000.
C. $524,000.
D. $506,000.
What is net cash flow from financing?
A. $6,000
B. $3,000
C. ($14,000)
D. ($17,000)
When preparing a projected income statement, which of the following additional
information, other than the financial statements would probably not be relevant?
A. The competitive environment
B. New versus old store mix
C. Expected capital expenditure
D. Expected level of macroeconomic activity
The following information is given for Building Inc.:
During 2005 new assets were purchased for of $78,000, and plant assets were sold at a
$10,000 loss.
What was the book value of the sold assets?
A. $38,000
B. $18,000
C. $10,000
D. $8,000
When considering defined benefit pension plans, which of the following will not
increase the projected benefit obligation (PBO)?
A. A decrease in the discount rate
B. An increase in estimated compensation growth
C. An increase in expected average length of lives of employees
D. A decrease in the expected rate of return on plan assets
If a firm capitalizes a lease instead of treating the lease as an operating lease, the effect
on the current ratio and the debt-to-equity ratio will be:
A. Option A
B. Option B
C. Option C
D. Option D
Which of the following will affect observed price-to-book ratio?
I. Expected ROCE
II. Business risk
III. Risk free rate of interest
IV. Expected growth
A. I, II, III, and IV
B. II, III, and IV
C. II and IV
D. I, II, and IV
What is Yutter’s sustainable equity growth rate?
A. 9.12%
B. 9.88%
C. 11.4%
D. 12.0%
Which of the following statements could explain the difference in observed tax rates?
A. Widget uses straight-line depreciation and Tool uses MACRS.
B. Widget uses LIFO and Tool uses FIFO.
C. Tool has foreign subsidiaries in countries with much lower tax rates.
D. Widget has significant amounts of interest income from municipal bonds.
A common-size income statement would typically be prepared by dividing:
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.
The cash flow from operations and cash flow from investing are both positive. Which
of the following best describes the situation of Georgey?
A. The cash flow statement would indicate there are no reasons for concern.
B. Repayment of long-term debt indicates the company is becoming more profitable.
C. Georgey appears to be liquidating assets of the company that may affect future
profitability.
D. Increased operating and investing cash flows in 2005, relative to 2004 indicate
increased profitability of Georgey in 2005.
Which of the following is a benefit of securitization through the use of a properly
structured SPE to a company?
I. Remove receivables from the balance sheet
II. Remove debt from the balance sheet
III. Lower financing costs
IV. Recognize gains on the sale of assets to the SPE
A. I, II, III, and IV
B. I, II, and III
C. I and IV
D. II and III
Pension Expense
Werter Inc. has a defined benefit pension plan. Information related to this plan as of the
end of 2006 is as follows:
a. Estimate pension expense for 2006 assuming that the pension plan assumptions
remain unchanged from 2006, service cost is 10% of beginning of year PBO and that
the prior service costs and transition assets are being amortized over 20 years.
b. Calculate the liability to be recorded in the balance sheet at the end of fiscal 2006.
Which of the following industries would you expect to have the highest inventory
turnover?
A. Restaurant
B. Car dealer
C. Jewelry store
D. Department store
For a going concern, company value can be expressed by:
A. dividing permanent income by the cost of capital.
B. multiplying permanent income by the cost of capital.
C. dividing permanent income by the market value per share.
D. multiplying permanent income by the market value per share.
Differences in taxable income and pretax accounting income that will not be offset by
corresponding differences or “turn around” in future periods are called:
A. timing differences.
B. circular differences.
C. permanent differences.
D. reverse differences.
The book value per share of preferred stock is:
A. $22.
B. $20.
C. $11.
D. $10.
Which of the following statements is incorrect?
A. Employee stock options are not recorded as an expense when granted if they are
out-of-the money under the intrinsic value method.
B. Employee stock options will not affect the share price of a company when exercised.
C. Employee stock options may reduce agency costs by more closely aligning interests
of stockholders and managers.
D. Employee stock options may increase the risk propensity of managers.
If Brierton used cash accounting to account for this project, what would they have
reported as profit (loss) in year 2?
A. $0
B. $1.33 million
C. $(2 million)
D. $(4 million)
Firms report payments for capital leases in the cash flow statement:
A. only as financing cash flows.
B. only as investing cash flows.
C. partly as operating cash flows and partly as investing cash flows.
D. partly as operating cash flows and partly as financing cash flows.
Which of the following statements about accruals is true?
A. Accrual income is less relevant than cash flow.
B. Accruals cannot be manipulated.
C. Accruals are less reliable than cash flows.
D. All accrual accounting adjustments are value irrelevant.
Which of the following statements is incorrect?
A. Net income in 2006 increased by 29.29% compared to 2004.
B. XYZ’s net income to sales (return on sales) is higher in 2006 as compared to 2004.
C. XYZ’s net income to sales (return on sales) is lower in 2005 as compared to 2004.
D. Assets have increased over time.
Which of the following measures of accounting income is typically reported in an
income statement?
A. Net income
B. Comprehensive income
C. Continuing income
D. All of the above
Which of the following is true of debt covenants?
I. Limit the issuance of additional debt senior to the obligation.
II. Specify minimum levels of selected financial ratios.
III. Specify minimum levels of earnings coverage.
IV. Prohibit excessive dividends or stock repurchases.
A. II and III
B. II and IV
C. I, III, and IV
D. I, II, III, and IV
If a company fails to record a material amount of depreciation in a previous year, this is
considered:
A. a change in accounting principle.
B. an unusual item.
C. an accounting error.
D. a change in estimate.
Which of the following is not a component of pension expense?
A. Service cost
B. Interest cost
C. Actual return on plan assets
D. Expected return on plan assets
Which of the following is least likely to increase the overall risk of a company?
A. Increased sales variability
B. Increased debt levels
C. Increased variable costs while decreasing fixed costs
D. Increased interest rates
One way for a company to increase its book value per share is to:
A. issue long-term debt.
B. retire long-term debt.
C. increase dividend payout ratio.
D. buy back shares at market prices below their book value.
If a company that leases equipment from another company records these leases as
operating leases rather than capital leases, its:
I. recorded liabilities will be lower.
II. recorded assets will be higher.
III. total cash flows will be higher.
IV. leverage ratios will be higher.
A. I and III
B. II and IV
C. I only
D. II, III, and IV
Below is selected information taken from the balance sheet of Huy Corporation as of
12/31/06.
The average total life span of Huy’s depreciable assets as of 2006 is:
A. 2 years.
B. 7 years.
C. 14 years.
D. 34 years.
Which of the following would require an adjustment in the computation of cash flow
from operations using the indirect method?
I. Depreciation expense
II. Loss on sale of asset
III. Sale of services to customers for cash
IV. Utility bill received and paid in cash
A. I
B. I and II
C. I and III
D. IV
Cash Flow from Operations
a. Is it possible to have a positive net income and negative cash flow from operations?
If your answer is no, explain fully. If your answer is yes, provide two examples when
one might find this.
b. Is it possible to have a negative net income and positive cash flow from operations?
If your answer is no, explain fully. If your answer is yes, provide two examples when
one might find this.