Exam Questions

Question 1

A company’s value to owners is its

Answer 1

Economic value assuming actual payoffs are known

Question 2

A letter of credit…

Answer 2

Provides guarantee of payment from the buyer, reducing the credit risk to the seller

Question 3

Covenants represent

Answer 3

Promises the company makes to the creditor

Question 4

Many companies have cyclical operating cash needs due to…

Answer 4

Seasonality of sales

Question 5

The overarching purpose of credit risk analysis is to…

Answer 5

Quantify potential credit losses

Question 6

The variable EBIT divided by Total Assets in the Altman Z-Score measures which of the following concepts?

Answer 6

Current level of profitability

Question 7

The variable Market Value of Equity divided by Total Liabilities in the Altman Z-Score measures which of the following concepts?

Answer 7

Current level of leverage

Question 8

Which of the following concepts is not captured by one of the variables in Altman’s Z-score?

Answer 8

Current level of net operating assets

Question 9

Which of the following is not one of Porter’s five forces that determine a company’s competitive intensity?

Answer 9

Ability to obtain financing

Question 10

On April 24, 2009, Ford Motor Company reported net loss of $1.4 billion for the fiscal quarter. That day, Ford’s stock price climbed from $4.49 per share to $5.00. This demonstrates that:

Answer 10

The net loss was smaller than investors expected

Question 11

This is a advantage of the ROPI model

Answer 11

Utilizes both the balance sheet and income statement, and captures the information in accrual accounting

Question 12

One critique of the ROPI model is that it focuses managers’ attention solely on short term operating assets and neglects investments in long-term operating assets.

Answer 12

This assumption is incorrect

Question 13

Decrease in A/R is not included in calculating…

Answer 13

NOPAT

Question 14

What are 5 nonoperating assets?

Answer 14

1 cash
2 short term investments
3 trading assets
4 Marketable Equity securities
5 Other long term investments

Question 15

2 nonoperating liabilities

Answer 15

Short term debt

Long term debt

Question 16

As uncertainty of cash flows increases, companies generally…2

Answer 16

Substitute equity for debt

In order to reduce the magnitude of contractual payment
Obligations

Question 17

A cash asset is on what financial statements?

Answer 17

Balance sheet

Statement of cash flows

Question 18

Are expenses on the statement of cash flows?

Answer 18

Not according to the HW solutions

Question 19

Cash inflow from stock issued is on which financial statements?

Answer 19

Statement of cash flows

Statement of stockholder’s equity

Question 20

Cash outflow for dividends is on which financial statements?

Answer 20

Statement of cash flows

Statement of stockholder’s equity

Question 21

Net income is on which financial statements?

Answer 21

Income statement

Statement of cash flows

Statement of stockholder’s equity

Question 22

Why would we expect a company like Intel to report a relatively high proportion of equity vs. debt?2

Answer 22

High tech companies have a lot of risk relating to changing
Technology

Future cash flows are not as certain to maintain high levels
Of debt

Question 23

A negative amount from investing activities reflects…2

Answer 23

Further investment by company in investment activities

Often a positive sign

Question 24

A negative amount for cash from financing activities reflects…2

Answer 24

Reflects reduction in long term debt

Often a positive sign

Question 25

Inventory that had been purchased on credit, is sold on credit (for more than it cost). What income statement accounts are affected either positive or negative?

Answer 25

IS: increase in revenues, expenses and net income

Question 26

What area on the cashflow statement does interest expense affect?

Answer 26

Operating cash flow

Question 27

Companies with the highest profit margins have either...2

Answer 27

Effectively succeeded at differentiating their brands Or controlling their costs

Question 28

Reporting the highest level of operating cash flow as a percentage of sales indicates...

Answer 28

Very efficient operations

Question 29

It is accurate for companies to exclude discontinued operations from GAAP earnings because...

Answer 29

They are not included in the company's future cash flows

Question 30

Disaggregation means

Answer 30

Break out into each individual component

Question 31

The excess of ROE to RNOA signifies...2

Answer 31

Debt is financing assets that earn an excess return in excess to the cost of debt Improving returns for shareholders

Question 32

When ROA is much lower than ROE, this signifies that the company...

Answer 32

Holds a significant amount of investment securities that have A low return

Question 33

Current ratio above 1 implies...

Answer 33

Positive working capital

Question 34

It is not uncommon for quick ratios to...

Answer 34

Be below 1

Question 35

Median total liabilities to equity ratios for publicly traded companies in the S&P 500 is... Anything around there is...

Answer 35

1.5 Modest leverage

Question 36

A high times interest earned ratio...

Answer 36

Lessens the company's solvency concerns

Question 37

If a current ratio is below 1, a company is liquid if...3

Answer 37

1 customers all pay within 30 days 2 company holds very little inventory 3 cash flow is sufficient to meet short term bills

Question 38

To put a company's current ratio in perspective, we would want to know the...

Answer 38

Average current ratio for the industry

Question 39

Around 6, times interest earned is considered...

Answer 39

Strong

Question 40

To assess a companies solvency, you should compare the liabilities to equities ratio to...

Answer 40

Competitors

Question 41

If a company has significant debt in its capital structure capital expenditures could...

Answer 41

Negatively impact the company's competitive position

Question 42

When assessing liquidity it is helpful to know when...2

Answer 42

Cash flows from current assets will be realized When current liabilities will need to be paid

Question 43

Liability to equity and debt to equity ratios can worsen due to...2

Answer 43

Decrease in retained earnings Increase in other comprehensive loss

Question 44

Reduced equity will worsen a companies solvency (liabilities to equity, debt to equity) when a company is...3

Answer 44

Highly leveraged Does stock buy backs Pays high dividends

Question 45

ROE is lower than RNOA when the company...

Answer 45

Holds a large amount of low return investments

Question 46

When liabilities to equity and debt to equity ratios are below 1, this indicates...

Answer 46

Solvency ratios are very strong

Question 47

The cash conversion cycle measures the average time (in days) to...4

Answer 47

Sell inventories Collect receivables Pay the payables Return to cash

Question 48

Companies prefer a lower cash conversion cycle, this means that operating cycle is...2

Answer 48

Generating profit and cash flow quickly

Question 49

Cash conversion cycle analysis focuses on...2

Answer 49

Trends over time Comparisons to peers

Question 50

Delaying payment on payables is...

Answer 50

An improvement on the cash conversion cycle

Question 51

Cash is calculated as a percentage of...

Answer 51

Sales

Question 52

Increases in assets on the statement of cash flow are...

Answer 52

Negative

Question 53

On the statement of cash flows, Decrease in long term debt includes...

Answer 53

Change in short term debt

Question 54

Amortization of purchased intangibles is estimated as...

Answer 54

Purchased intangibles net at the start of the year

Question 55

When excess cash is forecasted we assume, excess cash will be...

Answer 55

Invested in marketable securities