Name: _______ _______ Class: ____FSA_______ Date: ___05/01/2013_______

Quiz 4
1.Book value per share may not approximate market value per share because:
a. the book value is after tax.
b. book values are based on replacement costs rather than market
values.
c. book value is related to book figures and market value is related
to the future potential as seen by investors.
d. investors do not understand book value.
e. book value is not related to dividends.
2.Which of the following can offer a type of comparison in financial statement
analysis?
a. Past ratios and figures
b. Industry averages
c. Statistics of competitors
d. All of the answers are correct.
e. None of the answers are correct.
3. In the context of the Capital Asset Pricing Model (CAPM) the relevant risk is
a. unique risk.
b. market risk
c. standard deviation of returns.
d. variance of returns.
e. none of the above.

4.Which of the following would not be a user of financial statements?

a. Management
b. Bankers
c. Employee unions
d. Investment analysts
e. All of the answers are users.
5.Which of these statements is false?
a. A ratio can be computed from any pair of numbers.
b. Given the large quantity of variables included in financial
statements, a very long list of meaningful ratios can be derived.
c. Comparing ratios computed from income statement and balance
sheet numbers can create difficulties due to the timing of the
financial statements.
d. Financial ratios are usually expressed in percent or times.
e. In vertical analysis, a figure from this year's statement is
compared with a base selected from the prior statement.

6. Which of these statements is false?

a. Many companies will not clearly fit into any one industry.
b. A financial service uses its best judgment as to which industry the
firm best fits.
c. The analysis of an entity's financial statements can be more
meaningful if the results are compared with industry averages
and with results of competitors.
d. When using industry averages, it is often necessary to use an
industry that the firm best fits.
e. A company comparison should not be made with industry
averages if the company does not clearly fit into any one industry.
7. Company A uses LIFO and Company B uses FIFO for inventory valuation.
Otherwise, the firms are of similar size and have the same revenue and
expense. Assume inflation. In analyzing liquidity and profitability of the two
firms, which of the following will hold true?
a. It is impossible to compare two firms with different inventory
methods.
b. Company B will have relatively higher profit and higher inventory
turnover.
c. Company B will have relatively higher profit and lower inventory
turnover.
d. Company A will have a higher current ratio and acid test ratio,
with the same profit.
e. Company B will have relatively higher profit and a higher current
ratio.
8.Which of the following would best indicate that the firm is carrying excess
inventory?
a. A decline in sales
b. A decline in the current ratio
c. A decline in days' sales in inventory
d. A stable current ratio with declining quick ratios
e. A rise in total asset turnover
9.Which of the following is not an acceptable inventory costing method?
a. Specific identification
b. Last-In, First-Out (LIFO)
c. First-In, First-Out (FIFO)
d. Average cost
e. Next-In, First-Out (NIFO)
10. What are the abnormal earnings of a firm that has NOPAT of $40,000 with an
equity cost of capital of 10%, when the book value at the beginning of period is
$800,000?

a. $ (40,000)
b. $ (80,000)
c. $ 40,000
d. $ 80,000
e. None of the answers are correct.
Abnormal earnings= NOPAT (cost of equity x book value) = 40,000 (0.1 x
80,000) =40,000-80,000= (40,000)

11. Refer to Table 6-1. What are the abnormal earnings for Firm A?
a. $ (4,000)
b. $ (6,000)
c. $ 4,000
d. $ 6,000
e. None of the answers are correct.
Abnormal earnings= NOPAT (r x book value)= 6,000 (0.1 x 100,000)=
6,000 10,000 =$ (4,000)
12. Refer to Table 6-1. What are the abnormal earnings for Firm B?
a. $ 1,000
b. $ 2,000
c. $ 12,000
d. $ 14,000
e. None of the answers are correct.
Abnormal earnings= NOPAT (r x book value) = 14,000 (0.08 x 150,000) =
14,000 12,000 = $ 2,000
13. Refer to Table 6-1. What are the abnormal earnings for Firm C?
a. $ (2,400)
b. $ (4,800)
c. $ 4,800
d. $ 9,600
e. None of the answers are correct.
Abnormal earnings= NOPAT (r x book value) = 18,000 (0,12 x 190,000) =
18,000 22,800= $ (4,800)
14. Refer to Table 6-1. Assume that Firm A can cut costs by $4,000. Abnormal
earnings would be

a. $ (1,000).
b. $ 0.
c. $ 1,000.
d. $ 1,500.
e. None of the answers are correct.
Abnormal earnings= NOPAT-(r x book value)= (4,000 + 6,000) (0.1 x
100,000)= 10,000 10,000= $0
15. Refer to Table 6-1. Assume that Firm B can divest itself of $20,000 of
unproductive capital with NOPAT falling by only $3,000. Abnormal earnings are
a. $200.
b. $400.
c. $600.
d. $800.
e. None of the answers are correct.
Abnormal earnings= NOPAT- (r x book value)= (14,000- 3,000) [ 0.08 x
(150,000- 20,000)]= 11,000 (0.08 x 130,000)= 11,000 10,400 = $600
16. According to the discounted free cash flow valuation model, the market value
of common shares depends upon investors
a. future expectations about the future economic prospects of free cash
flows.
b. current expectations about the future economic prospects of free cash
flows.
c. future expectations about the current economic prospects of free cash
flows.
d. current expectations about the current economic prospects of free cash
flows.
e. None of the answers are correct.
17. Capital structure decisions refer to the:
a. dividend yield of the firm's stock.

b. blend of equity and debt used by the firm.

c. capital gains available on the firm's stock.
d. maturity date for the firm's securities.

e. None of the answers are correct.

18. The company cost of capital, after tax, for a firm with a 65/35 debt/equity split,
8% cost of debt, 15% cost of equity, and a 35% tax rate would be:
a. 7.02%
b. 8.63%
c.10.80%
d.13.80%

e. None of the answers are correct.

Debt x Cost of debt x (1-Tax rate) + Equity x cost of equity= 0.65 x 0.08 x (10.35) + 0.35 x 0.15= 0.00338 + 0.0525 = 0.0863= 8.63%

19. Muligan Inc have 2 million shares of common stock outstanding at a book
value of $2 per share. The stock trades for $3.00 per share. It also has $2 million
in face value of debt that trades at 90% of par. What is its ratio of debt to value for
WACC purposes?
a.15.38%
b.28.6%
c.31.0%
d.33.3%
e. None of the answers are correct.
20. Given the following two stocks A and B

If the expected market rate of return is 0.09 and the risk-free rate is 0.05, which security
would be considered the better buy and why?

a. A because it offers an expected excess return of 1.2%.

b.
c.
d.
e.

B
A
B
B

because
because
because
because

it
it
it
it

offers an expected excess return of 1.8%.

offers an expected excess return of 2.2%.
offers an expected return of 14%.
has a higher beta.

Rf + * (Rm- Rf) = 0.05 + 1.8 * (0.09- 0.05) = 0.05 + 0.072= 0.122

0.14- 0.122 = 0.018= 1.8%