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BUSI 7110 Financial Analysis Exam 1 Questions
And Correct Answers
what does balance sheet provide liquidity, information about assets, liabilities and equities at a specific point in time what does income statement provide net income or eps of a particular period what does the Statement of Cash Flows provide source and use of funds during a given period; change in asset, liabilities, and equity formula average tax rate total tax / total income formula marginal tax rate total tax payable/ pre-tax income What do leverage ratios show us? use of debt What do liquidity ratios show us? ability of a company to pay debt obligations and its margin of safety
What do asset management ratios show us? how efficiently the company manages its assets to generate and maximize sales revenues What do profitability ratios show us? ability of a company to earn profits from its sales or operations, balance sheet assets, or shareholders' equity What do market value ratios show us? the current share price of a publicly-held company's stock market value / share stock price book value / share book value of equities on the Balance Sheet Why do we use the DuPont Identity? to see what factors are driving change in ROE Uses of Ratio Analysis (3)
- create common-size financial statements
- use DuPont Identity Limitations of Ratio Analysis
- benchmarking/conglomerates
Pros & Cons of Sole Proprietorship/Partnership Pros:
- easy formation
- few regulations
- no corporate income taxes Cons:
- limited life
- difficult to raise capital
- unlimited liability Pros & Cons of Corporation Pros:
- unlimited life
- easy transfer of ownership
- easy raising capital
- limited liability Cons:
- cost of setup and report filing
- double taxation projected future income statements pro forma financial statements Impact of Additional Interest on Estimated EFW (5)
- net income falls
- addition to retained earnings falls
- balance sheet no longer balances
- additional financing is needed
- process repeats the possibility of conflict of interest between the stockholders and management of a firm agency problem/conflict how to mitigate agency conflicts (3)
- managerial compensation
- control of the firm
- transparency Pros (2) & Cons (1) of debt Pros:
- provides capital
- tax deductibility of interest payments Cons:
- interest Which of the following most accurately describes an agency cost? the cost of having an independent audit of the company The capital structure of a firm refers to the firms: relative amounts of current and LT debt and equity
The sustainable growth rate will be equal to the internal growth rate only when: a firm has no debt maximum growth rate the firm can achieve with no additional external financing internal rate of growth Which is normally higher: the sustainable growth rate or the internal growth rate? sustainable growth rate 2 methods of forecasting external financing needs
- EFN formula
- pro forma financial statements a level stream of cash flows which continue forever; sometimes called "consuls" perpetuity Can you calculate the future value of a perpetuity? no You can only calculate growing perpetuities when r is (less than/greater than) g. greater than 3 tips for solving PV & FV
- add individual values together for multiple cash flows
- As time increases, PV decreases and FV increases
- As rate increases, PV decreases and FV increases
level stream of cash flows for a fixed period of time annuity an annuity for which the cash flow occurs at the beginning of the period annuities due PV Annuity Due Formula PV Annuity Due = (PV ordinary annuity) x (1+r) FV Annuity Due Formula FV Annuity Due = (FV ordinary annuity) x (1+r) the amount an investment is worth after 1 or more periods future value interest paid only on the original principal amount invested simple interest interest earned on both the initial principal plus the interest reinvested from previous periods compound interest We have an expert solution to this problem! the process of earning interest on an investment over time in order to earn more interest compounding 3 advantages of compounding
- rises with interest rate
B. the statement of cash flows reflects cash flows from continuing operations, but it does not reflect the effects of changes in working capital. C. the statement of cash flows shows how much the firm's cash - the total of currency, bank deposits, and short-term liquid securities (or cash equivalents) increased or decreased during a given year D. the statement of cash flows reflects cash flows from operations from borrowings, but it does not reflect cash obtained by selling new common stock E. the statement of cash flows reflects cash flows from operations, but it does not reflect the effects of buying or selling fixed assets C We have an expert-written solution to this problem! Which of the following does not appear on a company's balance sheet as a current liability? A. accrued payroll taxes B. accounts payable C. cost of goods sold D. accrued wages E. short-term notes payable to the bank C We have an expert-written solution to this problem! Which of the following statements is correct?
A. a typical industrial company's balance sheet lists the firm's assets that will be converted to cash first, and then goes on down to list the firm's longest lived assets B. for most companies, the market value of the stock equals the book value of the stock as reported on the balance sheet C. the balance sheet for a given year is designed to give us an idea of what happened to the firm during that year D. the difference between the total assets reported on the balance sheet and the debts reported on this statement tells us the current market value of the stockholders' equity, assuming the statements are prepared in accordance with GAAP E. the balance sheet for a given year tells us how much money the company earned during that year A Which of the following are considered a source of cash? I. common stock increase on the balance sheet II. accounts payable decrease III. accounts receivable increase IV. inventory decreases I & IV What value are assets usually recorded on the balance sheet? acquisition value
A. use effective rates for decisions about investments and use annual percentage rates for decisions about loans B. assume all loans and investments use simple interest C. take the loan with the lower effective annual rate over the loan with the annual percentage rate D. invest in an account paying 6%, compounded quarterly, rather than an account paying 6% compounded monthly E. ignore the effective rates and concentrate on the annual percentage rates for all transactions C You are the beneficiary of a life insurance policy. The insurance company gives you your choice of either a lump sum of $50,000 today or the payments of $550 a month for ten years. If you can earn 6 percent, compounded monthly, which should you take and why? A. You should take the lump sum because the payments are only worth $49,540. today. B. You should accept the payments because they are worth $51,523.74 today. C. You should accept the payments because they are worth $53,737.08 today. D. You should accept the $50,000 because the payments are only worth $49,757. today.
E. You should accept the $50,000 because the payments are only worth $48,808. today. A We have an expert-written solution to this problem! Ted bought an annuity today that pays $1,000 per month for five years. Today's payment counts as the first payment. Allison also bought an annuity today which pays $1,000 a month for five years, but she won't receive her first payment until one month from today. Which one of the following is correct in regard to the value today of these two annuities? A. The two annuities have the exact same present value. B. Allison's annuity is an annuity due. C. Ted's annuity has a higher present value than Allison's. D. Allison's annuity has a higher present value than Ted's. E. Ted's annuity is an ordinary annuity. C
