Exam 1: Overview of Financial Statement Analysis

You wish to compare the performance of two companies. Which of the following statements is most likely to be incorrect?

Return on Common Equity for 2006 is:

$371,700 + ( 58,900 \times 1.05 - ( .12 \times 371,700 ) )$ / $( .12 - .05 )$ _______________________________________________________________ $25,000$ -Which of the following is not a common tool used in financial statement analysis?

Which of the following statements is incorrect?

The semistrong efficiency of market implies that:

Rivaz Corporation 2005 Net Income \ 3,000 Dividends \ 1,000 Total Assets -12/31/05 \ 35,000 Total Liabilities -12/31/05 \ 21,225 Number of shares outstanding 1,000 Cost of Equity 12\% -Assuming total assets grew by $5,000 from 2004 to 2005, what is the return on assets of Rivaz Corporation for 2005?

A creditor's risk is said to be asymmetric because the downside is limited to the required interest payments.

A security can be under or overvalued, depending on the extent of an incorrect interpretation or faulty evaluation of available information by the aggregate market.

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 -While determining the most profitable company from the given number of companies, which of the following would be the best indicator of relative profitability?

You have been provided the following information about High Inc. in thousands of dollars) 2005 2006 Current Assets \ 158 \ 163 Long Term Assets \ 453 \ 502 Current Liabilities \ 102 \ 143 Long Term Liabilities \ 302 \3 48 Net Income \ 32 \ 42 -Current Ratio for 2005 is:

You have been provided the following information about High Inc. in thousands of dollars) 2005 2006 Current Assets \ 158 \ 163 Long Term Assets \ 453 \ 502 Current Liabilities \ 102 \ 143 Long Term Liabilities \ 302 \3 48 Net Income \ 32 \ 42 -Owner's Equity for 2006 is:

If a company has no liabilities its return on equity will equal its return on assets.

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 -From the above information, you can infer that:

Rivaz Corporation 2005 Net Income \ 3,000 Dividends \ 1,000 Total Assets -12/31/05 \ 35,000 Total Liabilities -12/31/05 \ 21,225 Number of shares outstanding 1,000 Cost of Equity 12\% -Net income is expected to increase by 10% for the next year, and dividend payout ratio is expected to remain constant. After 2006, retained earnings are expected to decrease to zero. Using the residual income method what is the value per share of Rivaz stock as of 12/31/05?

The income statement is the only one of the four basic financial statements that does not contain balances at a specific point in time.

What is your estimate of price per share using the dividend discount model at 12/31/05?

Which of the following ratios does not relate to market price of a company under analysis?

Rivaz Corporation 2005 Net Income \ 3,000 Dividends \ 1,000 Total Assets -12/31/05 \ 35,000 Total Liabilities -12/31/05 \ 21,225 Number of shares outstanding 1,000 Cost of Equity 12\% -Using the dividend discount model, assuming dividends grow at 10% per year for the next two years and at 5% thereafter, what is the value per share of Rivaz Corporation at 12/31/05?

The SEC requires that Management Discussion and Analysis found in the annual report (10K) contains, among other things, a discussion about the company's liquidity, capital resources and results of operations.