Question 1

Which of the following is not an equity valuation model?

Accepted Answer

A)  Residual income model 
B)  Dividend discount model 
C)  Free cash flow to equity model 
D)  Terminal value model

Question 2

Which of the following statements is correct?

Accepted Answer

A)  The more efficiently a company utilizes its assets, the greater its return on investment, all other things being equal. 
B)  If return on equity increases, the return on assets must have also increased. 
C)  If the number of days inventory is held increases, the return on assets will increase, all other things being equal. 
D)  If the gross margin decreases, the inventory turnover must have increased, all other things being equal.

Question 3

As of December 31, 2005, two otherwise identical companies in the same industry, East Co. and West Co., have dividend payouts of 20% and 40%, respectively. Looking forward one year, which outcomes are least likely?
I. East Co. requires debt financing.
II. West Co. increases its dividend payout.
III. West Co.'s share price is twice that of East Co.
IV. East Co. repurchases outstanding shares.

Accepted Answer

A)  I and II 
B)  II and IV 
C)  I, II and III 
D)  II, III and IV

Question 4

The current ratio will always be greater than or equal to the acid test ratio.

Accepted Answer

A) True 
 B)False

Question 5

Following is some financial information for Dell Inc.
 $$\begin{array} { | l | r | r | } 
\hline & { 2006 } & { 2005 } \
\hline \text { Revenues } & \$ 49,205 & \$ 41,444 \
\hline \text { Net income } & 3,043 & 2,645 \
\hline \text { Total assets } & 23,215 & 19,311 \
\hline \text { Shareholder's equity } & 6,485 & 6,280 \
\hline \text { Cash flow from operations } & 5,310 & 3,670 \
\hline \text { Basic earnings per share } & 1.21 & 1.03 \
\hline \text { Book value per share } & 2.61 & 2.46 \
\hline \text { Closing stock price } & 33.44 & 23.86 \
\hline
\end{array}$$
-What is Dell's profit margin for 2006?

Accepted Answer

A)  6.27% 
B)  6.18% 
C)  6.38% 
D)  6.86%

Question 6

Dividend yield is defined as dividends divided by shareholders' equity.

Accepted Answer

A) True 
 B)False

Question 7

Problem Five: Equity Valuation
In the table below is selected information for Sprigue Company.
All figures are in thousands and represent expectations of the future. $\begin{array}{|l|r|r|r|r|r|}
\hline \text { Year } & {2005} & 2006 & {2007} & 2008 & 2009 \
\hline \text { Net Income } & \$ 5,175 & \$ 6,210 & \$ 7,462 & \$ 8,570 & \$ 8,998 \
\hline \text { Dividends } & 773 & 932 & 1,118 & 1,285 & 2,250 \
\hline \text { Depreciation } & 621 & 702 & 793 & 896 & 1,013 \
\hline \text { Increase in working capital } & 675 & 1,035 & 1,242 & 1,118 & 428 \
\hline \text { Capital expenditures } & 5,625 & 8,625 & 10,350 & 9,315 & 3,571 \
\hline \text { New Debt issued } & 900 & 4,500 & 5,500 & 3,900 & 0 \
\hline \text { Old Debt retired } & 987 & 750 & 990 & 2,000 & 2,000 \
\hline \text { New Equity issued } & 1,823 & 0 & 0 & 0 & 0\
\hline
\end{array}$ 
a. Calculate the expected free cash flow to equity for the years 2005 to 2009.
b. Explain the expected changes in debt levels over the five years

Accepted Answer

The answer of Problem Five: Equity Valuation
In the table below...

Question 8

Problem Four: Valuation of Equity
Assets and liabilities at the end of 2005 for Tripod Inc. are $4,970K and $2,220K respectively. Net income and dividends for fiscal 2005 were $ 500K and $200K, respectively. Tripod has 100 shares outstanding as of 12/31/05.
Net income is expected to grow at 10% for the next three years (2006 - 2008). The dividend payout ratio is expected to remain at 2005 level for next three years. After 2005 abnormal earnings are expected to be zero. Cost of debt is 8% and cost of equity is 15%.
What would you be prepared to pay per share for Tripod stock at the end of fiscal 2005, using the accounting based equity valuation formula?

Accepted Answer

The answer of Problem Four: Valuation of Equity
Assets and liabilities...

Question 9

In a common size income statement net income is expressed as 100 percent.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following would not be considered a source of financing?

Accepted Answer

A)  Notes receivable 
B)  Common stockholders' equity 
C)  Retained earnings 
D)  Debentures

Question 11

Fluno Corporation has 1 million shares outstanding at the end of fiscal 2005. Its stock is trading at $15 per share. It issued $0.6 million in dividends, and had net income of $1million in fiscal 2005. At the end of 2005, its total assets, liabilities and retained earnings were $25 million, $15 million and $7.5 million, respectively. Fluno's price to book ratio and dividend yield ratios for 2005 are: $\begin{array}{|c|c|c|}
\hline 
&\text { Price to Book } & \text { Dividend Yield } \
\hline A)&2 & 60 \% \
\hline B)&1.5 & 60 \% \
\hline C)&1.5 & 4 \% \
\hline D)&2 & 4 \% \
\hline
\end{array}$

Accepted Answer

A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D

Question 12

Which of the following, if increased by 10%, results in a 10% higher stock price?

Accepted Answer

A)  Dividend yield 
B)  Earnings yield 
C)  Net profit margin 
D)  None of the above

Question 13

Earnings Yield is the reciprocal of the price/earnings ratio.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following statements is incorrect?

Accepted Answer

A)  It is possible for some markets to be more efficient than others. 
B)  It is possible for markets to be efficient with respect to some information and inefficient with respect to other information. 
C)  The market is likely to be more efficient with respect to companies where there is greater analyst following. 
D)  The market is totally efficient with respect to companies providing regular dividends to investors.

Question 15

Following is some financial information for Dell Inc.
 $$\begin{array} { | l | r | r | } 
\hline & { 2006 } & { 2005 } \
\hline \text { Revenues } & \$ 49,205 & \$ 41,444 \
\hline \text { Net income } & 3,043 & 2,645 \
\hline \text { Total assets } & 23,215 & 19,311 \
\hline \text { Shareholder's equity } & 6,485 & 6,280 \
\hline \text { Cash flow from operations } & 5,310 & 3,670 \
\hline \text { Basic earnings per share } & 1.21 & 1.03 \
\hline \text { Book value per share } & 2.61 & 2.46 \
\hline \text { Closing stock price } & 33.44 & 23.86 \
\hline
\end{array}$$
-What is Dell's P/E ratio for 2006?

Accepted Answer

A)  27.63 
B)  12.81 
C)  23.65 
D)  9.70

Question 16

Which of the following is likely to be the most informative source if you were interested in a company's business plan or strategy?

Accepted Answer

A)  Auditor's letter 
B)  Management discussion and analysis 
C)  Proxy statement 
D)  Footnotes

Question 17

Financial statement analysis is an exact science.

Accepted Answer

A) True 
 B)False

Question 18

Two otherwise equal companies have significantly different dividend payout ratios. Which of the following statements is most likely to be correct? The company with higher the dividend payout ratio:

Accepted Answer

A)  will have a higher inventory turnover ratio. 
B)  will have a lower inventory turnover ratio. 
C)  will have higher earnings growth. 
D)  will have lower earnings growth.

Question 19

You have been provided the following information about High Inc.
 $\begin{array}{|l|l|l|}
\hline {\text { in thousands of dollars) }} & {2005}  &{2006} \
\hline \text { Current Assets } & \$ 158 & \$ 163 \
\hline \text { Long Term Assets } & \$ 453 & \$ 502 \
\hline \text { Current Liabilities } & \$ 102 & \$ 143 \
\hline \text { Long Term Liabilities } & \$ 302 & \$348 \
\hline \text { Net Income } & \$ 32 & \$ 42 \
\hline
\end{array}$
-Working Capital for 2005 is:

Accepted Answer

A)  $56,000 
B)  $20,000 
C)  $151,000 
D)  $207,000

Question 20

The value of a bond is equal to the sum of the present value of future expected interest and principal payments, discounted at the coupon rate.

Accepted Answer

A) True 
 B)False

Exam 1: Overview of Financial Statement Analysis

Which of the following is not an equity valuation model?

Which of the following statements is correct?

The current ratio will always be greater than or equal to the acid test ratio.

Dividend yield is defined as dividends divided by shareholders' equity.

In a common size income statement net income is expressed as 100 percent.

Which of the following would not be considered a source of financing?

Which of the following, if increased by 10%, results in a 10% higher stock price?

Earnings Yield is the reciprocal of the price/earnings ratio.

Which of the following statements is incorrect?

Which of the following is likely to be the most informative source if you were interested in a company's business plan or strategy?

Financial statement analysis is an exact science.

Two otherwise equal companies have significantly different dividend payout ratios. Which of the following statements is most likely to be correct? The company with higher the dividend payout ratio:

The value of a bond is equal to the sum of the present value of future expected interest and principal payments, discounted at the coupon rate.