Valuation Practice Exam
Course Introduction
Valuation is a critical finance course that explores the methodologies and frameworks used to determine the intrinsic value of assets, companies, and investment projects. This course covers fundamental valuation approaches such as discounted cash flow (DCF) analysis, relative valuation using multiples, and asset-based valuation methods. Students learn to assess financial statements, apply forecasting techniques, and incorporate risk analysis to arrive at informed value estimates. The course also discusses the implications of market conditions, industry trends, and strategic considerations in the valuation process, preparing students for real-world applications in investment banking, corporate finance, and asset management.
Recommended Textbook
Financial Reporting Financial Statement Analysis and Valuation 8th Edition by James M. Wahlen
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Chapter 1: Overview of Financial Reporting, financial
Statement Analysis, and Valuation
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Q1) ___________________________________ financial statements are helpful in highlighting the relative magnitude of changes in financial statement data from year to year.
Answer: Percentage change
Q2) Which of the following is not an expense of a business?
A) Depreciation
B) Dividends
C) Salaries
D) Advertising
Answer: B
Q3) The main components that make up the stockholder's equity section of the balance sheet are_________________ and _______________________
Answer: retained earnings ,common stock
Q4) Another important step in financial statement analysis is to assess the quality of a firm's ________________________________________ and if necessary adjust them for such characteristics as sustainability or comparability.
Answer: financial statements
Q5) Normally,intense rivalries have a tendency to reduce ____________________. Answer: profitability
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Chapter 2: Asset and Liability Valuation and Income
Measurement
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Q1) When recognizing deferred tax assets and liabilities,the income statement approach and the balance sheet approach yield identical results
A) when enacted tax rates applicable to future periods do not change.
B) when the firm recognizes no valuation allowance on deferred tax assets.
C) Both (a) and (b) are correct.
D) None of these answers is correct.
Answer: C
Q2) Permanent tax differences are revenues and expenses
A) that firms include in income tax returns, but do not appear in the income statement.
B) that are included in both the tax return and income statement, but in different accounting periods.
C) that firms include in the income statement, but do not appear in income tax returns.
D) that are not included in either the tax return or the income statement.
Answer: C
Q3) Acquisition costs includes all costs necessary to get an asset ready for its
Answer: intended use
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Page 4
Chapter 3: Income Flows Versus Cash Flows: Understanding
the Statement of Cash Flows
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Q1) An example of an item that is deducted from net income when preparing the operating activities section of the statement of cash using the indirect method is A) depreciation expense.
B) compensation expense related to stock option plans.
C) income from an investment accounted for using the equity method.
D) unrealized losses on trading investments
Answer: C
Q2) Which of the following statements is false?
A) Purchase of equipment is an investing cash outflow.
B) Sale of equipment creates investing cash outflow equal to its selling price.
C) Purchase of short-term investments is an investing cash outflow.
D) Purchase of a patent is an investing cash outflow.
Answer: B
Q3) Which of the following statements is true?
A) A cash dividend is an operating cash outflow.
B) Cash paid to repurchase treasury stock is an investing cash outflow.
C) Cash paid to acquire stock in another company is a financing outflow.
D) Purchase of a patent is an investing cash outflow.
Answer: D
Page 5
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Chapter 4: Profitability Analysis
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Q1) Refer to the information for Net Devices Inc.What is Net Devices' return on common shareholders' equity for 2011?
A) 26.54%
B) 30.89%
C) 35.81%
D) 42.16%
Q2) To reduce the risk inherent in ______________________________ a company should strive for a high proportion of variable costs in its cost structure.
Q3) Explain the difference between a simple and complex capital structure as the terms are used in the calculation of EPS.
Q4) ________________________________________ is the level of earnings and the growth in the levels of earnings expected to persist in the future.
Q5) The rationale for adding back the _______________________________________________________ relates to attaining consistency in the numerator and denominator of ROA.
Q6) Firms with high operating leverage have a higher proportion of _________________________ in their cost structure.
Q7) When calculating Basic earnings per share net income is adjusted by____________
Page 6
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Chapter 5: Risk Analysis
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Q1) The source of risk related interest rate changes and demographic changes is
Q2) The main ratio used by many financial analysts to examine a company's short-term liquidity risk is the current ratio.However,there are a number of problems that arise when this ratio is used to examine short-term liquidity risk that may make the current ratio less useful than initially thought.Discuss the interpretative problems of using the current ratio.
Q3) An analyst can view the revenues to cash ratio as a ________________________________________.
Q4) Falcon Corporation has current assets of $400,000 and current liabilities of $275,000. Required:
Compute the effect of each of the following transactions on Falcon's current ratio:Compute the effect of each of the following transactions on Falcon's current ratio:
a.Refinanced a $60,000 long-term mortgage with a short-term note.
b.Purchasing $108,000 of merchandise inventory with short-term accounts payable.
c.Paying $50,000 of short-term accounts payable.
d.Collecting $90,000 of short-term accounts receivable.
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Page 7
Chapter 6: Accounting Quality
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Q1) Gains and losses differ from revenues and expenses in that they are produced by ____________________ activities.
Q2) Many times a financial analyst may decide to make adjustments to the financial statements in order to make the statements more useful.Which of the following would not require an adjustment to the financial statement?
A) A company signs a new contract with a customer.
B) A delivery company incurs a loss from disposition of used delivery trucks.
C) A company changes the useful life of its equipment from 5 years to 8 years.
D) A company incurs a charge related restructuring its operations.
Q3) Earnings that are high quality would
A) be informative about current performance and provide information about the long-run sustainability of profits.
B) be informative about past performance and provide information about the long-run sustainability of profits.
C) be informative about current performance and provide information about the long-run sustainability of assets.
D) be informative about past performance and provide information about the long-run sustainability of assets and liabilities.
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Chapter 7: Financing Activities
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Q1) Regarding accounting for troubled debt,which of the following statements is true?
A) The treatment for troubled debt is the same under both U.S. GAAP and IFRS.
B) The settlement of troubled debt results in an economic loss to the debtor because the creditor accepts more than the book value of the debt to settle the debt.
C) U.S. GAAP uses a "10 percent rule" to determine whether a gain is recognized by the debtor in a troubled debt situation.
D) Because IFRS uses the present value approach to determine the magnitude of the settlement for troubled debt, the magnitude of the new book value of the restructured debt will be lower and the gain recognition will be larger under IFRS.
Q2) Liabilities requiring the future delivery of goods or services appear on the balance sheet at the ______________________________ of those goods and services.
Q3) Assume that you are currently negotiating a lease transaction in the role of the lessee.Discuss whether you would rather structure the lease as an operating lease or a capital lease and why.In addition,provide the conditions that would require that the lease be accounted for as a capital lease.
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Chapter 8: Investing Activities
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Q1) The method used to account for oil and gas exploration costs that capitalizes the exploration costs of productive wells is the
A) reserve recognition accounting.
B) successful efforts approach.
C) soft asset approach.
D) full-cost approach.
Q2) Currently,the FASB's Statements of Accounting Concepts (Nos.5 and 6)define an asset as having all of the following characteristics except:
A) costs not guided by management's judgment
B) probable future benefits
C) resulting from past transactions and events
D) something that is obtained/controlled by the entity
Q3) You are trying to determine the functional currency of a foreign unit.For the following three factors determine what conditions would result in the foreign currency being the functional currency:a.Sales Prices
b.Financing
c.Relationships between the Parent and the Foreign Unit
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Chapter 9: Operating Activities
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Q1) Income tax expense consists of two components,the ____________________ portion and the ____________________ portion.
Q2) Derivative instruments acquired to hedge exposure to variability in expected future cash are _________________________ hedges.
Q3) The statement of cash flows allows the accountant to agree the net cash provided to the _________________________ the general ledger
Q4) Recording municipal bond interest received in the general ledger will generate a _________________ difference
Q5) When input prices are increasing,companies that use the LIFO method of accounting for inventory will report
A) Lower cost of goods sold amounts in comparison to the FIFO method
B) Higher sales amounts in comparison to the FIFO method
C) Higher ending inventory amounts in comparison to the FIFO method
D) Lower gross profit margins in comparison to the FIFO method
Q6) A contractor would not use ________________________________________ method of income recognition when there is substantial uncertainty regarding the total costs it will incur in completing the project.
Q7) What are the foiur disclosures required by US.GAAP relating to income taxes?
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Chapter 10: Forecasting Financial Statements
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Q1) Financial statement forecasts should rely on ____________________ within financial statements.
Q2) A firm in transition from the high growth to the mature phase of its life cycle,or a firm with significant technological improvements in its production processes,might expect increases in ______________________________ but decreases in sales prices per unit.
Q3) As a firm progresses through the introduction life-cycle stage,what type of flexible account will it be more likely to use to balance the balance sheet?
A) dividends.
B) growth related assets.
C) issued equity.
D) stock buy-backs.
Q4) When projecting ____________________,the analyst should consider economy-wide factors such as the expected rate of general price inflation in the economy.
Q5) For some types of assets,such as accounts receivable,asset growth typically ____________________ future sales growth.
Q6) Financial statement forecasts should rely on _________________________ across financial statements.
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Chapter 11: Risk-Adjusted Expected Rates of Return and the Dividends Valuation Approach
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Q1) One rationale for using expected dividends in valuation is
A) Dividends are a necessary payment in order for a firm to have value.
B) Dividends are paid in cash, and cash serves as a measurable common denominator for comparing the future benefits of alternative investment opportunities.
C) Dividends are the most reliable measure of value because most companies payout dividends to shareholders.
D) Dividend payout ratios are set based on profitability.
Q2) Explain the theory behind the dividends valuation approach.Why are dividends value-relevant to common equity shareholders?
Q3) In theory,the value of a share of common equity is the present value of
Q4) 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%
Q5) Why are dividends value-relevant to common equity shareholders?
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Chapter 12: Valuation: Cash-Flow-Based Approaches
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Q1) What is Houston's free cash flow for common equity holders for year 2012?
A) $564
B) $399
C) $324
D) $412
Q2) Free cash flows for common equity shareholders are the cash flows specifically available to the common shareholders after making all capital expenditures,_____________________________________________ and ____________________________________________________________.
Q3) Changes in general price levels due to inflation or deflation cause the ______________________________ of the monetary unit to increase or decrease ______________
Q4) Net income for the year for Tanglewood Inc.was $750,000,but the statement of cash flows reports that cash provided by operating activities was $860,000.Tanglewood also reported capital expenditures of $75,000 and paid dividends in the amount of $30,000.Compute Tanglewood's free cash flow.
Q5) The present value of future free cash flows valuation method focuses on free cash flows,a base that economists argue has more economic meaning than ____________________.
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Chapter 13: Valuation: Earnings-Based Approaches
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Q1) The two most popular discounted earnings models appear to be
A) Free cash flow and dividend discount model.
B) Sales/market capitalization and price-earnings.
C) Discounted abnormal earnings and residual income.
D) Price-cash flow and dividend discount.
Q2) Explain residual income.What does residual income represent? What does residual income measure?
Q3) The foundation for residual income valuation is the classical _____________________________________________.
Q4) If investors have invested $20,000 of common equity in a company and it is determined that the required earnings of the company are $$1,250 each period,then investors must expect to earn what return?
A) the risk free rate
B) 9%
C) 6.25%
D) the market premium
Q5) Clean surplus accounting means that ____________________ include all direct capital transactions between the firm and the common equity shareholders.
Q6) What is meant by the term clean surplus accounting?
Page 15
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Chapter 14: Valuation: Market-Based Approaches
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Q1) The market price of a share of common equity reflects the _____________________________________________ of all of the market participants following that particular stock.
Q2) The risk of the firm increases the _____________________________________________.
Q3) Investors have invested $30,000 in common equity in a company.The investors expect that the company will reinvest all income back into projects.The company is forecasted to earn $7,000 the first year,$6,000 the second year,$5,750 the third year,and $6,442 each year after the third year.The company's current stock price is $18 per share.Assuming that the company has 4,300 shares outstanding and the risk-free rate of interest is 7%,calculate the price differential for this company.
Q4) Valuation using market multiples captures
A) absolute valuation per dollar of book value or per dollar of earnings.
B) dollar of book value or dollar of earnings per dollar of common equity.
C) relative valuation per dollar of book value or per dollar of earnings.
D) intrinsic valuation per dollar of book value or per dollar of earnings.
Q5) What is a price differential and how is it computed? What information does a price differential provide to an analyst?
Q6) Explain the analysts' role in making the capital markets efficient.
Page 16
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