Valuation Final Exam
Course Introduction
This course explores the fundamental principles and techniques used for valuing assets, businesses, and investment opportunities. Students will learn various valuation models including discounted cash flow analysis, comparable company analysis, precedent transactions, and asset-based approaches. The course also examines how market conditions, financial statements, and industry dynamics impact valuation outcomes. Through practical case studies and hands-on exercises, students will develop the skills necessary to assess value in various real-world contexts, supporting sound financial decision-making in corporate finance, investment banking, and equity analysis.
Recommended Textbook
Financial Reporting Financial Statement Analysis and Valuation 8th Edition by James
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Page 2
M. Wahlen
Chapter 1: Overview of Financial Reporting, financial
Statement Analysis, and Valuation
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Sample Questions
Q1) On the statement of cash flows,depreciation would be classified as?
A) A financing activity.
B) An operating activity.
C) An investing activity.
D) A noncash activity.
Answer: B
Q2) Which financial statement for a business would you look at to determine the company's earnings performance during an accounting period?
A) Balance sheet.
B) Income statement.
C) Statement of cash flows.
D) The Management Assessment.
Answer: B
Q3) Which of the following is not considered to be a liability?
A) Wages payable.
B) Accounts payable.
C) Notes payable.
D) Cost of goods sold.
Answer: D
Page 3
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Chapter 2: Asset and Liability Valuation and Income
Measurement
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Q1) Future tax deductions
A) result in deferred tax assets.
B) result in deferred tax liabilities.
C) occur where the tax basis of liabilities is more than the financial reporting basis.
D) occur where the tax basis of assets is less than financial reporting basis.
Answer: A
Q2) U.S.GAAP,IFRS,and other major accounting standards are best characterized as
A) historical accounting models.
B) current value accounting models.
C) acquisition cost accounting models.
D) mixed attribute accounting models.
Answer: D
Q3) The application of GAAP requires firms to write down assets whose fair values decrease below their book values,but does not allow firms to revalue upward the values of assets whose fair values have increased.This asymmetric treatment rests on the ________________________________________.
Answer: conservatism convention.
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Page 4
Chapter 3: Income Flows Versus Cash Flows:
Understanding the Statement of Cash Flows
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Q1) When net income is low relative to operating cash flows,we describe the firm as having recorded
A) income-decreasing accruals.
B) income-increasing accruals.
C) income neutral accruals.
D) abnormal accruals.
Answer: A
Q2) Toro Company recognized $655,000 of cost of goods sold in 2010,in addition its implementation of a just-in-time inventory system allowed it to reduce its inventory from $325,000 at the beginning of the year to $230,000 at the end of 2010.How much cash did Toro spend for inventory in 2010?
A) $655,000
B) $980,000
C) $560,000
D) $620,000
Answer: C
Q3) Cash flows from ____________________ activities will normally be negative during the introduction and growth phase of the product life cycle.
Answer: investing
Page 5
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Chapter 4: Profitability Analysis
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Sample Questions
Q1) Refer to the information for Ramos Company.In a common size income statement for 2011,the operating expenses are expressed as:
A) 30.3%
B) 28.0%
C) 43.8%
D) 100%
Q2) Asset turnover represents
A) The ability of the firm to generate income from operations for a particular level of sales.
B) The ability to generate sales from a particular investment in assets.
C) The ability to manage the level of investment in assets for a particular level of assets.
D) The number of days, on average, it takes management to turnover assets.
Q3) Discuss how the following three elements of risk help us understand return on assets differs across firms and changes over time:1.Operating leverage
2.Cyclicality of sales
3.Product life cycle
Q4) When calculating Basic earnings per share net income is adjusted by____________
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6
Chapter 5: Risk Analysis
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Q1) The beta coefficient measures the ____________________ of a firm's returns with those of all shares traded in the market (in excess of the risk-free interest rate).
Q2) All of the following are common industry risks faced by companies except:
A) litigation
B) technology
C) regulation
D) competition
Q3) All of the following are common domestic risks faced by companies except:
A) recessions
B) technology
C) inflation
D) demographic shifts
Q4) Large current ratios indicate the availability of cash and near cash assets to repay ____________________ coming due within the next year.
Q5) When calculating the quick ratio,an analyst would include in the numerator cash,________________________________________,and receivables.
Q6) A.What are the three measures that are used to analyze long term solvency risk?
B- describe each measure briefly
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Chapter 6: Accounting Quality
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Q1) Some firms attempt to maximize the amount of restructuring charge in a particular year,analysts refer to this as the _________________________ approach.
Q2) A ____________________ of operations differs from a discontinuation of operations because the firm continues to operate in the business segment.
Q3) The assessment of earnings quality is best accomplished through the use of which one of the following?
A) Balance sheet and cash flow statement.
B) Single-step financial statements.
C) Single-step income statement, balance sheet, and cash flow statement.
D) Multi-step income statement, balance sheet, and cash flow statement.
Q4) When a company makes a change in an estimate that it has used in its financial statements,it should account for the change by A) retroactively restating all prior financial statements
B) treat the change as a cumulative effect change in accounting estimate
C) spread the effect of the change over the current and future periods
D) companies are not allowed to make changes to estimates
Q5) On the income statement the disposal of a segment of a business should be shown _________ .
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Chapter 7: Financing Activities
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Sample Questions
Q1) Discuss the method of accounting for employee stock options.In your answer discuss the how the accounting has changed during recent years.
Q2) Where in the financial statements are changes in the fair value of cash flow hedges reported
A) On the Balance Sheet as part of retained earnings
B) On the Income Statement as other gains.losses
C) As other comprehensive income and accumulated in other comprehensive income on the Balance Sheet.
D) On the Statement of Stockholder's Equity
Q3) Under IFRS,cash payments for purchase of treasury stock
A) operating cash outflow
B) investing cash outflow
C) financing cash outflow
D) Both A and C are correct.
Q4) Under an operating lease agreement the lessee recognizes ______________________________ each period that the leased asset is used.
Q5) __________ means that a company will buy back those receivables that are not collected by the company they are factored to.
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Chapter 8: Investing Activities
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Sample Questions
Q1) A company would need to record an impairment loss for its equipment when A) the original cost of the equipment exceeds its fair value and is deemed not recoverable.
B) management determines that the equipment will no longer be used.
C) the carrying amount of the equipment exceeds its fair value and is deemed not recoverable.
D) the cash flows from the equipment are less than its fair value.
Q2) Ownership of 50% or more of the voting stock of another company implies an ability to ____________________ the company and _________________ should be prepared
Q3) Goodwill represents
A) the synergies that will be achieved through the acquisition.
B) the difference between the acquisition cost and the market value of the identifiable assets and liabilities.
C) the difference between the acquisition cost and the book value of the identifiable assets and liabilities.
D) the merger premium.
Q4) Unrealized holding gains and losses from investments classified as trading are reported in the ___________________________________.
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Chapter 9: Operating Activities
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Sample Questions
Q1) Typical U.S.GAAP disclosures for deferred income taxes include all of the following except:
A) Components of income tax expense
B) Components of income before taxes
C) Reconciliation of income taxes at statutory rate with income tax expense
D) Components of permanent tax differences
Q2) Derivative instruments acquired to hedge exposure to changes in the fair value of an asset or liability are ______________________________ hedges.
Q3) A company that uses FIFO will find that its ___________________________________ account tends to be somewhat out of date.
Q4) Many firms use derivative instruments to hedge exposure to changes in the fair value an asset or liability or to hedge exposure to variability in expected future cash flows.As an analyst examining the financial reports of a company that uses derivative instruments to hedge,what questions should be asked when thinking about derivatives and accounting quality?
Q5) Explain the difference between a temporary and a permanent timing difference for income tax purposes"
Q6) What are the foiur disclosures required by US.GAAP relating to income taxes?
Page 11
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Chapter 10: Forecasting Financial Statements
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Sample Questions
Q1) Sparky's forecasts that sales will grow by 25% in 2013 and that its cost of goods sold to sales ratio will be the same in 2013 as it was in 2012.If these assumptions prove correct and Sparky's inventory turnover ratio for 2013 is 4.5 what will be the level of inventory at the end of 2013?
A) $31,353
B) $26,475
C) $40,000
D) $42,314
Q2) If a company has very low operating leverage (i.e.a low proportion of fixed costs in the cost structure)and no changes are expected in operations
A) percentage change income statement percentages can serve as the basis for projecting operating expenses.
B) using common-size income statement percentages will overstate future projected operating expenses.
C) using common-size income statement percentages will understate future projected operating expenses.
D) using common-size income statement percentages can serve as a reasonable basis for projecting future operating expenses.
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12
Chapter 11: Risk-Adjusted Expected Rates of Return and the Dividends Valuation Approach
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Q1) Assume that Zonk is a potential leveraged buyout candidate.Assume that the buyer intends to put in place a capital structure that has 70 percent debt with a pretax borrowing cost of 14 percent and 30 percent common equity.Compute the revised equity beta for Zonk based on the new capital structure.
A) 4.35
B) 4.77
C) 4.34
D) 3.91
Q2) Dividends measure the cash that ____________________ ultimately receive from investing in an equity share.
Q3) Identify the types of firm-specific factors that increase a firm's nondiversifiable risk (systematic risk).Identify the types of firm-specific factors that increase a firm's diversifiable risk (idiosyncratic risk or nonsystematic risk).Why do models of risk-adjusted expected returns include no expected return premia for diversifiable risk?
Q4) A company with a new Capital structure will increase the __________ and at the same time the __________ risk.
Page 13
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Chapter 12: Valuation: Cash-Flow-Based Approaches
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Q1) When calculating free cash flows to common equity shareholders,financing activities do not include:
A) Debt cash flows
B) Adjustments for capital expenditures
C) Adjustments for Preferred stock cash flows
D) Financial asset cash flows
Q2) If an analyst wants to value a potential investment in the common stock equity of a firm,the analyst should discount the projected free cash flows at the
A) required return on equity capital
B) weighted average cost of capital
C) risk free rate
D) market risk premium
Q3) Starting with free cash flows from operations,discuss how an analyst would measure free cash flows to common equity shareholders.
Q4) Net cash flow from operations -________________ -dividends equals_______________________
Q5) What three elements are needed to value a resource when using cash flows?
Q6) Provide the rationale for using expected free cash flow in valuation.
Q7) What is the purpose of a free cash flow analysis?
Page 14
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Chapter 13: Valuation: Earnings-Based Approaches
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Q1) What are the four components that make up dirty surplus accounting according to the FASB?
.
Q2) What is meant by the term clean surplus accounting?
Q3) Investors have invested $25,000 in common equity in a company.Given the risk inherent in the company the investors expect to earn a 15 percent return.In addition,the investors expect the company to return all income to investors in the form of dividends.The company is forecasted to earn $4,000 the first year,$5,000 the second year,$4,500 the third year and $3,750 each year after the third year.For this company determine the company's residual income valuation
Q4) Explain residual income.What does residual income represent? What does residual income measure?
Q5) Which of the following is probably the least likely reason for acquirers to pay too much in an acquisition?
A) Overbidding.
B) Over optimistic appraisal of market potential.
C) Over estimation of synergies.
D) Overuse of conventional financial statements.
Q6) What is the rationale for using expected earnings as a basis for valuations?
Page 15
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Chapter 14: Valuation: Market-Based Approaches
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Q1) One problem with the price-earnings ratios commonly reported is that
A) it divides share price, which reflects the present value of future earnings by historical earnings.
B) it divides share price, which reflects the present value of book value by historical earnings.
C) it does not take into consideration the present value of future earnings.
D) its based on analysts' expectations.
Q2) All of the following are economic factors that will decrease a firm's value-to-book ratio over time except:
A) decreasing competition that drives the firm's ROCE down
B) increasing systematic risk that increases the firm's equity cost of capital over time
C) a loss of competitive advantage through changes in technology or other factors
D) retaining earnings or issuing equity capital and deploying the capital in activities that generate ROCE levels that are lower than current levels
Q3) The risk of the firm increases the _____________________________________________.
Q4) Explain the analysts' role in making the capital markets efficient.
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