Financial Analysis Test Answers

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Which of the following is not a quality of accounting information?
Consistency
None of the Above
Relevance
Reliability


True or False? Depreciation is not affected by how an asset purchase is financed.
False
True


What do you call the discount rate that equates the cash inflows and cash outflows of an investment project, resulting in a net present value of zero?
Historical rate principle
Going-concern rate
Investment value
Internal Rate of Return


Fiduciary duty effectively requires all financial organizations and people to act in the best interests of their client
True
FALSE


In the US most companies follow which accounting standard?
IFAS
APA
IFRS
GAAP


Which technique is used to find volume of sales at which a company just covers the total cost?
Target-Profit analysis
Breakeven-point analysis
Profit-Sensitivity analysis
Activity based cost analysis


What is Arbitrage?
Buying something of value and the selling it for a higher price at another Exchange
Buying stock options.


What is the difference between APR and EAR?
APR is annual rate and EAR is effective rate after compounding
EAR is the rate typically mentioned on loan
APR is greater than EAR
APR and EAR are same


True or False: Projections and Simulators (Monte Carlo etc) are only as good as their assumptions
FALSE
True


What does the Beta Coefficient of a stock indicate?
Stock's growth factor
Stock's dividend
Company's growth factor
A stock’s volatility in relation to the overall market


Which of the following is an example of fixed income security?
Equity
Mutual Funds
Bonds


__________ of the cash flow generated by the firm's operations, investments and financial activities.
None of the above is a report
the auditor's statement of financial condition
The statement of cash flows is a report
The balance sheet is a report
The income statement is a report


Basic principle for Financial Analysis
The process of evaluating businesses, projects, budgets and other finance-related entities to determine their suitability for investment. Typically, financial analysis is used to analyze whether an entity is stable, solvent, liquid, or profitable enough to be invested in.Continue or discontinue its main operation or part of its business;Make decisions regarding investing or lending capital;
Its is a key factor to determine their suitability for investment.
Make decisions regarding investing or lending capital by the board of directors
The process of evaluating businesses, projects, budgets and other finance-related entities
Typically, financial analysis is used to analyze whether an entity is stable, solvent, liquid, or profitable enough to be invested in.Continue or discontinue its main operation or part of its business


What is a bond?
Paper money.
A security for a loan.
A certificate of debt.


Ratio Interpretation : High EPS , high book value & high Dividend pay out per share represents
Its not a BLUECHIP company
company share / stock price will not good investment
Its a conservative company & not advisable for investments
Good company grows in better both - eligible Investment & Investor friendly
Companies growth in worst poth


__________ of the profitability of the firm over a period of time such as a year
The income statement is a summary
The balance sheet is a summary
None of the above is a summary
That statement of cash flows is a summary
The audit report is a summary


The interest on government bonds (treasuries, t-bills etc) are typically considered:
Cost of capital for large corporations
Overnight lending rate for large banks.
Cost of doing business with the government
Risk free lending rate


The recorded value of the shareholders equity on the balance sheet reflects:
Net profit
Gross profit
Net worth
Operational cash flow


Company A is incorporated in the US and operates in the US only. Calculate the corporate tax on EBT of $57,000 for 2012, assuming no tax reduction practices and 40% tax rate.
$8,550
$14,250
$22,800
$11,400


What is net working capital?
Total assets - total liabilities
Current assets - current liabilities
Total assets - current assets
Cash - debt


True or False? At the half-way time of mortgage period, the remaining balance is half of the original loan amount.
True
False


True or False The purpose of auditing financial statements is to form a view that the information presented is an accurate general view of the financial situation of a company at a given date.
FALSE
True


The process of testing the impact on the results of an analysis from changes of one or more of the input variables is called:
A sensitivity analysis
An A/B analysis
A sequential analysis
A blanket analysis


The accounting term for a company to continue functioning into the foreseeable future is
Durability
Going Concern
Liveliness
Comparability


What is capital?
Any assets ready to be used in the production of new assets .
Paper money.
Dividend.


If a company faces a 15% increase in production while production costs increase 35% it is most likely experiencing:
Economies of Scale
Diseconomies of Scale
Economies of Scope
Returns to Market


Palo Alto Industries has a debt-to-equity ratio of 1.6 compared with the industry average of 1.4. This means that the company
will be viewed as having high creditworthiness.
will not experience any difficulty with its creditors.
has less liquidity than other firms in the industry.
has greater than average financial risk when compared to other firms in its industry.


Among other responsibilities The Federal Reserve is the lender of last resort
FALSE
True


The cash conversion cycle (CCC) measures
how long a firm will be deprived of cash if it decreases its investment in resources in order to expand customer sales. It is thus a measure of the liquidity risk entailed by growth
how long a firm will be deprived of cash if it increases its investment in resources in order to expand customer sales. It is thus a measure of the liquidity risk entailed by growth


True or False? Retained earnings are largely the same as paid-in capital
False
True


An "acid test" measures the ability of a company to use its ______ to extinguish or retire its current liabilities immediately.
credit
near cash
bonds
net sales


What does a Bear Market mean?
A market characterized by falling prices for securities.
A market characterized by rising prices for securities.
Volatile market.


How does Capital Asset Pricing Model (CAPM) help?
It exactly shows stock price for a later date
It attempts to explain how stock prices are set in the market
It attempts to explain company's revenue
It attempts to explain company's profit margin


A creditor whose claim is specifically designed as ranking below the claims of other creditors in the company is called a:
Subordinate creditor
Lower creditor
Stock creditor
Safe creditor


What is a leveraged buyout?
The acquisition of a business by investors using a high percentage of debt carried by the business itself
An acquisition of a business in which the purchasing company becomes a subsidiary of the purchased company
Two companies combine their operations and gains strength in terms of improved performance, increased capital, and enhanced profits


__________ a snapshot of the financial condition of the firm at a particular time.
All of the above provide
The balance sheet provides
The statement of cash flows provides
None of the above provides
The income statement provides


In the case of conflict, why is the NPV method preferred over IRR?
NPV is the robust formula for capital budgeting
IRR is not always a reliable method especially with a mixture of positive and negative cash flows.
NPV has a more simple assumption for the discount rate
NPV has more probability of indicating to undertake a projec


Which costing method allocates overhead cost to a product using activities required to produce the product?
Activity based costing
Volume based costing
Unit level costing
Product costing


A bond covenant is a:
Person responsible for administering the bonds coupons and principle payment
Contract outlining rights and responsibilities of the involved parties
Another term for coupon
Term describing asymmetric risks/returns of bonds


Regarding dividend payments: common stock and preferred stock differ in which way most importantly?
Quantity of dividends
Size of dividends
Timing of dividends
Seniority of dividends


What is a Buy Back?
Initial Public Offering
Buying back of stocks or bonds by the issuing company.
Issuing new company shares


Banks relative to most other types of companies are more likely to have more
Shareholders
Current Assets
Fixed Assets
Taxes


The term "fund" as in Mutual Fund suggests
Intermingling of multiple investors money in a single vehicle
An investment vehicle only for stocks
An investment vehicle primarily for investing outside of the investor's domestic country
A large company responsible for investing for the 'Mutual' benefit of investors


What is an equity security that has some of the characteristics of debt?
Preferred Stock
Bank Loan
Treasury
Private Placement Bond
Common Stock


True or False? Equity is historically much riskier than debt.
False
True


The standard model for valuing a company based on it's dividends is called?
Stakeholder Dividend Model
Dividend NPV
Dividend Valuation Technique
Dividend Discount Model


What is the other name for Earnings before interest and taxes?
Revenue
Operating Profit
Net Income
Gross Earnings


The minimum rate of return that capital investment projects have to meet, usually based on the cost of capital, is known as the:
Cutoff rate
Sale rate
Debt to asset ratio
Debt ceiling


What is a corporation's taxable income?
Revenue
EAT
EBT
EBTDA


Which process shows an internal detailed plan of the use of financial and operating resources over a specific period of time?
Financial statements
Profit & Loss statements
Planning
Budgeting


The appropriate objective of an enterprise is
Maximisation of profits.
Maximisation of sale
None of these.
Maximisation of owners wealth
Maximisation of revenue


When creating projections over a long period of time it is important to assume
Management will change impacting the projects longevity
Interest rates will increase impacting cash flow
Taxes will increase substantially
Growth rates will stabilize


Why is cost allocation necessary?
Different products or services can not share common resources
Finding indirect cost is the ultimate goal
There are always dedicated resources for business activities
Different products or services often share common resources


What are the three financial statements that are used for business analysis?
Cash flow statements
Income statement
All of these
Balance sheets


The efficient market hypothesis is true in all cases
TRUE
False
It has never been properly tested


Which one of the following best describes the Cost of Capital?
An average number of shares held by its investors
The cost of buying fixed assets
The cost of repaying company debts
The required return on a company's outstanding securities


Which valuation method is suitable to use when a company's leverage structure is constantly changing over time?
Discounted Cash flow
Adjusted Present Value
WACC or Cost of Capital
Dividend Discount model


True or False: It is the job of auditors to comment on the capabilities of management and governance
False
True


When valuing a start-up with limited funding these types of ratios are most important
Leverage
Business
Efficiency
Liquidity


When comparing mutually exclusive projects to undertake which methodology is most appropriate?
IRR
NPV
MIRR
Payback Period


What is the main financial disadvantage of a C-Corp?
Requires personal guarantees
Not easy to get loan
Complex structure to set up
Double taxation on earnings


Accounting Profit and Economic Profit differ most in their attention to:
Interest Rates
Opportunity Cost
Future Value
Depreciation


A method to represent an unknown variable in a financial plan is known as a:
Principal
Option
Plug
Operator


A firm faces leverage both explicitly and implicitly. Which of the following is a type of leverage?
Hiring smart people and 'leveraging' their talents
Purchases of expensive equipment for production
Government intervention on behalf of the firm
Close proximity to customers


Which of the following best describes period expense?
Cost of selling and raw material
Cost of selling and admin activities
Cost of raw material and admin activities
Cost of labor and raw material activities


Which of these is an example of an amortized bond?
30 Year Mortgage
Treasury
Zero Coupon Bond
Semi Annual Corporate Bond


What does the market risk premium indicate?
A very general market risk factor
Degree of risk aversion felt by investor
It is the market's rate of return
It is the risk free rate of return


A company has a high quality of earnings, when it has ....
High cash flow in comparison with reported net income
High net profit margin
High operational leverage
High return on average assets


In the American tax system, what is total Effective Tax Rate (TETR)? (Tf=federal tax, Ts=state tax)
Tf+Ts(1-Tf)
Ts+Tf(1-Ts)
Ts+Tf(1-Tf)
Tf+Ts(1-Ts)


What is the relative measure of variation in Risk Theory?
Coefficient of Variation
Standard Variation
Variance
Mean/Standard Deviation


True or False? APR is always less than or equal to EAR.
False
True


What type of asset is 'Stock' classified as?
Security assets
Real assets
Investment assets
Financial assets


Which of the following indicates off-balance-sheet activities of a bank?
Credit check of prospective borrowers
Loan sales
Generating cash
Issuing loan


When discussing the NPV of a start-up company in addition to considering the cost of capital its important to consider this concept to properly discount cash flows?
Location
The expected return from stock market
Required Return
Likelihood of failure


When using NPV the discount rate should take into account:
The risk of the relative project
Current rate of inflation
The WACC (Weighted Average Cost of Capital) of the company
Interest rates paid by the company on it's bonds


B&A Company has an EBIT of $20 million and faces a tax rate of 40% and an interest rate of 6%. What are B&A's Earnings?
$10.8 million
At least $12 million
$12 million
$13.2 million


Under U.S GAAP, where is the dividend received so it will be presented in the cash flow statement?
Investing activities
Operating activities
Financing activities

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