BAVA320 Business Analysis and Valuation

Please select the best answer for each of the following questions.

1. Which of the following economic characteristics is consistent with a grocery store chain?
   
   1. Minimal competition
   2. Extensive competition
   3. High net income to sales
   4. Differentiated product.

1. The following steps make up the steps in financial statement analysis:
   1. Identify the strategies the firm pursues to gain and sustain a competitive advantage.
   2. Analyse the current profitability and risk of the firm using information in the financial statements.
   3. Value the firm.
   4. Identify the economic characteristics and competitive dynamics of the industry in which a particular firm participates.
   5. Assess the quality of the firm’s financial statements and, if necessary, adjust them for such desirable characteristics as sustainability or comparability.
   6. Prepare forecasted financial statements.
   7. A,B,C,D,E,F
   8. D,F,B,E,A,C
   9. D,A,E,B,F,C
   10. A,D,B,E,C,F

1. Nickel Industries reported the following amounts on its balance sheet on December 31, 2014:

Based on the information provided in the table above, which of the following statements is correct?

1. Retained earnings equal $210,000.
2. The stockholders’ equity is $750,000 and the total liabilities equal $100,000.
3. Retained earnings equal $960,000.
4. The total asset is $1,025,000 and the total liabilities equal $175,000.

1. Please match the given assets and liabilities with the valuation methods below:
   1. Land (A) Adjusted historical cost
   2. Buildings, Plants and Equipment (B) Acquisition cost
      1. Long term receivables and payables (C) market value/fair value
         1. Investments in marketable securities (D) Initial present value
   3. i – (A), ii – (B), iii – (C), and iv – (D)
   4. i – (B), ii – (A), iii – (D), and iv – (C)
   5. i – (D), ii – (B), iii – (C), and iv – (A)
   6. i – (B), ii – (C), iii – (A), and iv – (D)

1. A company in the growth phase of its product life cycle will normally have which of the following patterns of cash flows?
   
   1. Negative cash flows from operations, negative cash flows from investing and positive cash flows from financing.
   2. Negative or positive cash flows from operations, negative cash flows from investing and positive cash flows from financing.
   3. Positive cash flows from operations, positive cash flows from investing and positive cash flows from financing.
   4. Negative or positive cash flows from operations, negative cash flows from investing and negative cash flows from financing.

1. Normally, cash flows from operations will peak during which phase of the product life cycle?
   1. Introduction
   2. Growth
   3. Maturity
   4. Decline

1. Outback Corp. recorded sales of $1,300,000 in 2010, in addition the company’s accounts receivable balance grew from $120,000 at the beginning of 2010 to $165,000 at the end of 2010. How much cash did Outback collect from customers in 2010? (2 marks)

a.   $1,300,000

b.   $1,345,000

c. $1,255,000

d.   $1,135,000

1. Which of the following is NOT an indicator of potential future cash flow problems?
   1. Growth in accounts receivable or inventories that is less the growth rate in sales.
   2. Increases in accounts payable that exceed the increase in inventories.
   3. Capital expenditures that substantially exceed cash flow from operations.
   4. A substantial shift from long-term borrowing to short-term borrowing.

1. On many occasions 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?
   
   1. A company signs a new contract with a customer.
   2. A delivery company incurs a loss from disposal of used delivery trucks.
   3. A company changes the useful life of its equipment from 5 years to 8 years.
   4. A company incurs a charge related restructuring its operations.

1. To account for a 3-for-1 stock split, the firm will need to make the following entries:
   
   1. A decrease in Retained Earnings and an increase in Share Capital
   2. A decrease in Retained Earnings and a decrease in Cash.
   3. An increase in Retained Earnings and a decrease in Share Capital
   4. A memorandum entry only to note that the number of share outstanding triples for each ordinary shareholder

1. The firm receives land in exchange for 50,000 ordinary shares. The land was originally purchased by the equity investor at $250,000 three years ago. Similar land has recently sold for $350,000. How should the firm record this transaction? (1.5 marks)
   1. An increase in Land of $250,000 and an increase in Share Capital of $250,000.
   2. An increase in Cash of $350,000 and an increase in Share Capital of $350,000.
   3. An increase in Land of $350,000 and an increase in Share Capital of $350,000
   4. An increase in Long-term Liabilities of $250,000 and an increase in Share Capital of $250,000

1. What is the net effect on the Liabilities to Assets ratio and the Long-Term Debt to Long-Term Capital ratio if the firm issues long-term debt and uses the cash proceeds to repurchase common stock? (2 marks)
   1. The Liabilities to Assets ratio increases and the Long-term Debt to Long-term Capital ratio increases
   2. The Liabilities to Assets ratio decreases and the Long-term Debt to Long-term Capital ratio decreases
   3. The Liabilities to Assets ratio increases and the Long-term Debt to Long-term Capital ratio decreases
   4. The Liabilities to Assets ratio decreases and the Long-term Debt to Long-term Capital ratio increases.

1. Sales growth forecasts will most likely affect growth in:
   
   1. accounts receivable.
   2. accounts payable.
   3. depreciation.
   4. salary payable.

1. If a firm has a market beta of 0.9, is subject to an income tax rate of 35 percent, has a risk-free rate of 6 percent and has a market value of debt to market value of equity ratio of 60 percent, what does the market expect the firm to generate in terms of equity returns using the CAPM if the Market Risk Premium is 7 per cent?

a.   6.0%

b.   7.0%

c. 12.3%

d.   13.0%

1. During the year, Adam Company paid $124,000 in dividends to ordinary shareholders. The company also repurchased stock with the total value of $412,000 and the company issued new ordinary shares which had fair value of consideration of $95,000. In order to value the firm, please determine the total dividends paid to ordinary shareholders for the year.

a.   $124,000

b.   $613,000

c. $536,000

d.   $441,000

1. If an analyst wants to value a company, the relevant cash flows and the discount rate the analyst should use are: (2 marks)
   1. free cash flow from operations; required return to equity
   2. free cash flows to the firm (FCFF); WACC
   3. free cash flows to equity (FCFE); required return to equity
   4. cash flow from operations; WACC

1. Residual income valuation focuses on:
   1. dividend-paying capacity in free-cash flows.
   2. earnings as a periodic measure of shareholder wealth creation.
   3. free cash flows as a periodic measure of shareholder wealth creation.
   4. dividends as a periodic measure of shareholder wealth creation.
2. A decomposition of ROE for Thin Constructions Limited is as follows:

Which of the following choices best describes reasonable conclusions an analyst might make based on this ROE decomposition?

1. Pro?tability and the liquidity position both improved in FY16.
2. The lower average tax rate in FY16 offset the deterioration in activity.
3. The higher average tax rate in FY16 was outweighed by the improvement in activity.

1. Which of the following would best explain an increase in receivables turnover?
   1. The company adopted new credit policies last year and began offering credit to customers with weak credit histories.
   2. An unusually large number of bad debts had to be written off.
   3. To match the terms offered by its closest competitor, the company adopted new payment terms now requiring net payment within 30 days rather than 15 days, which had been its previous requirement.

1. Circus S.P.A., a U.K.-based company that follows IFRS, sells an intangible asset with a historical acquisition cost of £12 million and accumulated amortization of £2 million and reports a gain on disposal of the asset of £3.2 million. Which of the following amounts is most likely the sale price of the asset?
   
   1. £13.2 million
   2. £5.2 million
   3. £15.2 million

1. In order to identify possible overstatement of expenses connected to income smoothing, an analyst would most likely be on the look-out for:
   
   1. A material increase in expected useful life of a PPE asset.
   2. A material reduction in expected useful life of a PPE asset.
   3. An increased residual value of a PPE asset.

1. Which of the following industries is the least debt intensive?
2. Pharmaceutical industry
   1. Air transportation industry
   2. Infrastructure sector
      1. Steel making

1. Which of the following statements is correct? (2 marks)
2. Revenues cannot be recognized before cash is collected.
   1. Expenses cannot be recognized before the cash outflow has occurred.
   2. Revenues cannot be recognized if cash collection is uncertain.
      1. Expenses will always be recognized before or when the cash outflow occurs.
      2. None of the above.
         1. Which of the following statements is correct?
         2. The accounting analysis follows the financial analysis
            1. The prospective analysis precedes the strategy analysis
            2. The prospective analysis follows the financial analysis
               1. The financial analysis precedes the strategy analysis