Valuation Final Test Solutions
Course Introduction
This course covers the fundamental principles and methodologies of valuing businesses, assets, and securities. Students will explore various valuation approaches including discounted cash flow analysis, comparable company analysis, and precedent transaction methods. Emphasis is placed on understanding the drivers of value, financial modeling, risk assessment, and the application of valuation in real-world scenarios such as mergers and acquisitions, investment analysis, and corporate finance decisions. The course combines theoretical frameworks with practical case studies, equipping students with the analytical tools necessary to make informed financial decisions in diverse business contexts.
Recommended Textbook
Financial Reporting Financial Statement Analysis and Valuation 9th Edition James M. Wahlen
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14 Chapters
1070 Verified Questions
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Page 2
Chapter 1: Overview of Financial Reporting, Financial
Statement Analysis, and Valuation
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101 Verified Questions
101 Flashcards
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Sample Questions
Q1) Which of these would be considered Property,Plant,and Equipment?
A) Trademark
B) Office Building
C) Patent
D) Goodwill
Answer: B
Q2) What is comprehensive income?
Answer: Comprehensive income equals net income for a period plus or minus the changes in shareholders' equity accounts other than from net income and transactions with owners.Items affecting comprehensive income include foreign currency translation adjustments,cash flow hedge accounting,minimum pension liability adjustments and unrealized gains and losses from holding investment securities classified as available for sale.
Q3) The five economic attributes that are normally studied are demand,supply,manufacturing,____________________,and investing and financing.
Answer: marketing
Q4) Most financial statement analysis aims to assess a firm's ____________________ and ____________________.
Answer: profitability,risk
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Chapter 2: Asset and Liability Valuation and Income
Recognition
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Sample Questions
Q1) At origination which of the following temporary differences would create a deferred tax asset?
A) Tax basis of an asset exceeds its financial reporting basis.
B) Tax basis of a liability exceeds its financial reporting basis.
C) Financial reporting basis of an asset is equal to its tax basis.
D) Financial reporting basis of an asset exceeds its tax basis.
Answer: A
Q2) The use of acquisition cost as a valuation method is justified on the basis that acquisition cost is:
A) timely
B) relevant
C) subjective
D) objective
Answer: D
Q3) The amount that a company would have to pay today to acquire an asset it now holds is called ________________________________________.
Answer: current replacement cost
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Page 4
Chapter 3: Income Flows versus Cash Flows: Understanding
the Statement of Cash Flows
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Sample Questions
Q1) Which statement is false regarding the preparation of the indirect method of the statement of cash flows?
A) An increase in merchandise inventory is subtracted from net income.
B) Depreciation expense is added to net income.
C) An increase in accounts receivable is added to net income.
D) An increase in accounts payable is added to net income.
Answer: C
Q2) Which of the following transactions would not create a cash flow?
A) Payment of a cash dividend.
B) The company purchased some of its own stock from a stockholder.
C) Amortization of patent for the period.
D) Sale of equipment at book value (i.e.no gain or loss).
Answer: C
Q3) Which of the following would not be a cash flow from investing activities?
A) Sale of a patent.
B) Collection of interest revenue on a long-term note receivable.
C) Collection of principal of a note receivable.
D) Purchase of long-term investments.
Answer: B
Page 5
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Chapter 4: Profitability Analysis
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Sample Questions
Q1) All else being equal,firms with high levels of ________________________________________ incur more risk in their operations and should earn higher rates of return.
Q2) Refer to the information for Extreme Sports Company and All Sports Corporation. Compute the Asset Turnover for All Sports.
A) 3.2%
B) 2.15
C) 8.9%
D) 1.1%
Q3) When calculating Basic earnings per share net income is adjusted by____________
Q4) Refer to the information for Orca Industries.The return on assets for Orca Industries is:
A) 6.8%
B) 13.5%
C) 10%
D) 12.3%
Q5) The ability of a firm to manage the level of investment in assets for a particular level of sales is measured by the ______________________________.
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Chapter 5: Risk Analysis
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Sample Questions
Q1) By adding the number of days that inventory is held to the number of days that accounts receivable is outstanding an analyst can calculate the number of days of _____________________________________________ the firm requires.
Q2) Below are various states of financial distres s:
1)defaulting on a principal payment on debt
2)restructuring debt
3)liquidating a firm
4)filing for bankruptcy
5)failing to make a required interest payment on time
What is the order of increasing gravity that analysts typically consider when assessing credit risk and bankruptcy risk according to a continuum of financial distress?
A) 5, 1, 2, 3, 4
B) 5, 2, 1, 4, 3
C) 1, 5, 2, 4, 3
D) 1, 5, 2, 3, 4
Q3) When the excess of ROA over the after-tax cost of borrowing declines,additional ________________________________________ begins to reduce the return to common shareholders.
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Chapter 6: Accounting Quality
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Sample Questions
Q1) Which of the following are characteristics of an extraordinary item?
A) Unusual in nature
B) Infrequent in occurrence
C) Material in amount
D) All of the above
Q2) Gains and losses differ from revenues and expenses in that they are produced by ____________________ activities.
Q3) The best measure of a firm's sustainable income is:
A) net income.
B) income from continuing operations.
C) income before extraordinary items.
D) income before extraordinary item and change in accounting principle.
Q4) When evaluating the quality of accounting information,an analyst should consider all of the following except:
A) reliability of the measurements made
B) adequacy of disclosures
C) comparability of estimates
D) economic faithfulness of the measurements made
Q5) On the income statement the disposal of a segment of a business should be shown
8
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Chapter 7: Financing Activities
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Sample Questions
Q1) The first date at which employees can exercise their stock options is termed the _________________________.
Q2) All of the following are correct regarding operating leases except:
A) Cash outflow is in the form of rent payments
B) The rights to use the property for a specified period of time are conferred to the lessee by the lessor.
C) At the end of the lease the lessee returns the property to the lessor
D) Depreciation expense can be recorded on the books by the lessee
Q3) The acceptable method of accounting for stock options is the _________________________ method.
Q4) 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.
Q5) Which of the following is the date on which the dividend distribution occurs?
A) date of record
B) commitment date
C) date of declaration
D) date of payment
Page 9
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Chapter 8: Investing Activities
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Sample Questions
Q1) U.S.GAAP stipulates that firms should ____________________ expenditures that increase the service potential of an asset beyond that originally anticipated
Q2) Assume that Morrison Company used cash to acquire machinery expected to contribute to the generation of revenues over a three-year period and the company erroneously expensed the cost to acquire the machine.
Required:
a.Describe the effects on ROA of the error over the three-year period.
b.Explain how the error would affect the statement of cash flows.
Q3) GAAP stipulates that firms should do what with expenditures that increase the service potential of an asset beyond that originally anticipated?
A) Expense the expenditure immediately.
B) Capitalize the expenditure and depreciate it over the remaining service life of the asset.
C) Capitalize the expenditure, but do not depreciate the asset.
D) Charge it off to shareholders' equity.
Q4) Firms that capitalize routine maintenance and repair charges will end up with the result of having the current period's income being ____________________.
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Chapter 9: Operating Activities
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Sample Questions
Q1) Given the following information,compute December 31,2012 projected benefit obligation (PBO)and fair market value (FMV)of plan assets for Eagan Company.
\(\begin{array}{|l|r|}
\hline \text { Prior service cost granted in a 2012 plan amendment } & \$ 115,000 \\
\hline \text { Interest on PBO } & 73,000 \\
\hline \text { Actual return on plan assets } & 101,000 \\
\hline \text { Service cost } & 84,000 \\
\hline \text { Contribution sent to plan trustee } & 62,000 \\
\hline \text { Benefit payments to retirees } & 24,000 \\
\hline \text { Liability loss (gain) } & (37,000) \\
\hline \text { FMV of plan assets, January 1, 2012 } & 735,000 \\
\hline \text { PBO, January 1, 2012 } & 814,000\\
\hline
\end{array}\)
What amount of asset or liability will be reported on the balance sheet at December 31,2012?
Q2) Dividing a company's income tax expense by its book income before income taxes provides the company's ___________________________________.
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Chapter 10: Forecasting Financial Statements
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Sample Questions
Q1) When projecting operating expenses,it is important to determine the mix of fixed and variable costs; one clue suggesting the presence of fixed costs is:
A) the percentage change in cost of goods sold in prior years is significantly greater than the percentage change in sales.
B) the percentage change in cost of goods sold in prior years is significantly less than the percentage change in sales.
C) low capital intensity in the production process.
D) the percentage change in sales in prior years is significantly greater than the percentage change in receivables.
Q2) All of the following are true regarding the key principles of forecasting except:
A) Financial statement forecasts need not be comprehensive.
B) Forecasts should not manifest wishful thinking.
C) Financial statement forecasts must be internally consistent.
D) Financial statement forecasts must rely on assumptions that have external validity.
Q3) If a firm operates at less than full capacity,then price _______________________ are not likely
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Chapter 11: Risk-Adjusted Expected Rates of Return and the Dividends Valuation Approach
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Sample Questions
Q1) An analyst wants to value the common shareholders' equity of Bridgetron,compute the relevant cost of capital that should be used.
Q2) 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?
Q3) Determine the weight on equity capital that should be used to calculate Zonk's weighted-average cost of capital:
A) 79.00%
B) 78.3%
C) 41.8%
D) 50%
Q4) Dividends measure the cash that ____________________ ultimately receive from investing in an equity share.
Q5) If dividend projections include the effect of inflation,then the discount rate used should be a(n)____________________ rate.
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Chapter 12: Valuation: Cash-Flow-Based Approaches
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Sample Questions
Q1) If cash flow projections include the effect of inflation then the discount rate used should be a(n)____________________ rate.
Q2) Clarmont Corporation engaged in the following cash transactions during 2012: \(\begin{array}{|l|r|}
\hline\text { Sale of land and building } & 209,000 \\
\hline \text { Purchase of treasury stock } & 35,000 \\
\hline \text { Purchase of land } & 38,000 \\
\hline \text { Payment of cash dividend } & 105,000 \\
\hline \text { Purchase of equipment } & 54,000 \\
\hline \text { Issuance of common stock } & 150,000 \\
\hline \text { Retirement of bonds } & 97,500\\
\hline
\end{array}\)
Required:
What is Clarmont's free cash flow,assuming that it reported net cash provided by operating activities of $650,000?
Q3) ________________________________________ typically include accounts payable,accrued expenses,accrued taxes,deferred taxes,pension obligations and other retirement benefit obligations.
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Page 14
Chapter 13: Valuation: Earnings-Based Approaches
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Sample Questions
Q1) If an analyst expects a firm to generate net income each period exactly equal to required earnings,then the value of the firm will be:
A) exactly equal to the book value of common shareholders' equity.
B) greater than the book value of common shareholders' equity.
C) less than the book value of common shareholders' equity.
D) exactly equal to working capital.
Q2) Economists sometimes argue that earnings are not a(n)_________________________ attribute on which to base valuation.
Q3) In many cases,using the residual income valuation model will result in a different value than either the dividend discount model or the free cash flow valuation methods.What are some reasons that the three valuation models would result in inconsistent valuations?
Q4) __________________ means that net income includes all of the recognized elements of income of the firm for common equity shareholders and dividends include all direct capital transactions between the firm and the common equity shareholders.
Q5) Clean surplus accounting means that net income includes all of the recognized elements of income for the firm for
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Chapter 14: Valuation: Market-Based Approaches
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Sample Questions
Q1) Analysts use the PEG ratio to assess share price relative to earnings and
Q2) All of the following are accounting factors that can drive a firm's price-earnings ratio in a given period to be higher than that of other firms in the same industry except:
A) non-recurring expenses or losses in that period
B) a greater degree of accounting conservatism that requires expensing R&D or other intangible asset-generating activities
C) a less conservative accounting stance that uses straight-line depreciation rather than accelerated methods
D) a greater degree of accounting conservatism regarding accelerated depreciation of PP&E
Q3) The use of P/E ratios in valuation can result in measurement bias.What two items can result in measurement error and why?
Q4) Why is book value often meaningless? What improvements to financial statements would make it more meaningful?
Q5) Explain the analysts' role in making the capital markets efficient.
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Page 16