1. Rank the steps involved in valuing a company
Position 1 of 3 Determining the discounted present value that reflects the
risk. incorrect toggle button unavailable
Determining the discounted present value that reflects the risk.
Position 2 of 3 Forecasting future amounts of some financial attribute
incorrect toggle button unavailable
Forecasting future amounts of some financial attribute
Position 3 of 3 Determining the risk associated with the forecasted future
amounts incorrect toggle button unavailable
Determining the risk associated with the forecasted future amounts
Correct Answer
1. Forecasting future amounts of some financial attribute
2. Determining the risk associated with the forecasted future amounts
3. Determining the discounted present value that reflects the risk.
2. A company's operating cash flow and its free cash flow
Multiple choice question.
differ in that free cash flow subtracts interest expense after tax
incorrect
are basically the same thing
differ in that free cash flow subtracts capital expenditures
Correct Answer
differ in that free cash flow subtracts capital expenditures
3. Estimating the worth, or intrinsic value, of a company is
called* fundamental Blank 1Blank 1 fundamental , Incorrect
Unavailable* valuation Blank 2Blank 2 valuation , Correct Unavailable.
Correct Answer
Blank 1:business
Blank 2:valuation
4. The FASB believes that current earnings outperform current cash flows
in predicting future cash flow and that belief stems from the forward-
looking nature of* future Blank 1Blank 1 future , Incorrect
Unavailable* costs Blank 2Blank 2 costs , Incorrect Unavailable.
Correct Answer
Blank 1:accrual
Blank 2:accounting
5. Free cash flow
Multiple choice question.
is used to reduce debt and purchase stock in other companies
is calculated as GAAP operating cash flow minus cash outflow for capital
expenditures
incorrect
is used to reduce debt, pay dividends and purchase stock in other companies
is calculated as operating cash flow plus interest expense after tax minus
cash outflow for capital expenditures
Correct Answer
is calculated as operating cash flow plus interest expense after tax minus
cash outflow for capital expenditures
6. A company's operating cash flow and its free cash flow
Multiple choice question.
differ in that free cash flow subtracts capital expenditures
differ in that free cash flow subtracts interest expense after tax
incorrect
are basically the same thing
Correct Answer
differ in that free cash flow subtracts capital expenditures
7. If a company's equity cost of capital is 8% and they report current
earnings of $6 per share, this implies a share price of
Multiple choice question.
$7.50.
Reason:*
1/0.08 x $6 = $75
$4.80.
incorrect
Reason:*
1/0.08 x $6 = $75
$48.
Reason:*
1/0.08 x $6 = $75
$75.
Correct Answer
$75.
8. Using the abnormal earnings approach, investors will pay a premium
for those firms that
Multiple choice question.
earn less than the cost of capital.
incorrect
produce negative abnormal earnings.
earn an amount equal to the cost of capital.
earn more than the cost of capital.
Correct Answer
earn more than the cost of capital.
9. The FASB believes that current earnings outperform current cash flows
in predicting future cash flow and that belief stems from the forward-
looking nature of* abnormal Blank 1Blank 1 abnormal , Incorrect
Unavailable* earnings Blank 2Blank 2 earnings , Incorrect Unavailable.
Correct Answer
Blank 1:accrual
Blank 2:accounting
10. Assume the following for the Morgan Goldman firm: Actual
earnings of $14,000, beginning book value of $250,000, and cost of
capital of 8%. What are their abnormal earnings?
Multiple choice question.
$34,000
Reason:*
$14,000 - (250,000 x 8%) = $(6,000)
$(6,000)
$6,000
Reason:*
$14,000 - (250,000 x 8%) = $(6,000)
$14,000
incorrect
Reason:*
$14,000 - (250,000 x 8%) = $(6,000)
Correct Answer
$(6,000)
11. If there is no active market for an asset, fair value could be
determined by
Multiple select question.
using market value for similar assets.
correct
using the entry price and adjust it for differences.
using historical cost.
incorrect
using a valuation model.
incorrect
Correct Answer
using market value for similar assets.
using a valuation model.
12. True or false: Level 2 of the GAAP hierarchy of approaches used
to measure fair value uses unobservable inputs such as management's
estimates of expected future cash flows.
True false question.
Trueincorrect
Reason:*
This explains Level 3 of the GAAP hierarchy
False
Correct Answer
False
13. Which of the following are reasons that the free cash flow model
differs from cash flow from operations under GAAP?
Multiple select question.
Interest expense and the related income tax benefit are excluded under the
free cash flow model.
incorrect
Income from noncore investments and the related income tax expense are
excluded from cash flow under GAAP.
Income from noncore investments and the related income tax expense are
excluded under the free cash flow model.
correct
Interest expense and the related income tax benefit are excluded from cash
flow from operations under GAAP.
incorrect
Correct Answer
Interest expense and the related income tax benefit are excluded
under the free cash flow model.
Income from noncore investments and the related income tax expense
are excluded under the free cash flow model.
14. True or false: Different levels of risk or uncertainty associated
with earnings can cause the share price for firms with the same level of
current and future expected earnings to sell at different prices.
True false question.
True
Falseincorrect
Reason:*
Risk differences between two firms can cause share prices to be different.
Correct Answer
True
15. The amount a firm would receive if it sold its investment is called
Multiple choice question.
the exit price.
replacement cost.
the entry price.
historical cost.
incorrect
Correct Answer
the exit price.
16. Match the level of the hierarchy for measuring fair values on the
left with its description on the right.
Level 1
Uses quoted prices from similar assets or liabilities.
Level 2
Uses quoted prices from active markets for identical assets or liabilities.
Level 3
Uses unobservable inputs such as management's estimates of expected
future cash flows.
Correct Answer
Level 1 matches = Uses quoted prices from active markets for identical
assets or liabilities.
Level 2 matches = Uses quoted prices from similar assets or liabilities.
Level 3 matches = Uses unobservable inputs such as management's
estimates of expected future cash flows.
17. Income or loss from discontinued operations are known as
Multiple choice question.
transitory earnings.
permanent earnings.
value-irrelevant earnings.
abnormal earnings.
incorrect
Correct Answer
transitory earnings.
18. Term lending agreements are ______ and have maturities of more
than one year.
Multiple choice question.
short-term loans
incorrect
commercial paper
revolving loans
long-term loans
Correct Answer
long-term loans
19._____ ________ are considered a variation on a seasonal credit lines.
Correct Answer
Blank 1:Revolving
Blank 2:Loans
20. Which of the following are true about short-term loans?
Multiple select question.
They may be unsecured.
correct
They are used primarily to finance the purchase of fixed assets.
They may be secured.
incorrect
They are used primarily to finance working capital needs.
correct
Correct Answer
They may be unsecured.
They may be secured.
They are used primarily to finance working capital needs.
21. Long-term forms of public debt financing include
Multiple select question.
revolving loans.
incorrect
commercial paper.
bonds.
correct
seasonal lines of credit.
notes.
correct
Correct Answer
bonds.
notes.
22. The interest rate on a revolving loan
Multiple choice question.
will remain fixed as the prime rate rises or falls over the life of the credit line.
incorrect
is equal to the bank's prime lending rate.
will usually change as the prime rate rises or falls over the life of the credit
line.
is below the bank's prime lending rate.
Correct Answer
will usually change as the prime rate rises or falls over the life of the credit
line.
23. Which of the following are true of commercial paper?
Multiple select question.
It is a variation on the seasonal credit line.
incorrect
It is sold directly to investors by large and financially sound companies.
incorrect
It includes an interest rate significantly below the rate a bank would charge.
incorrect
It is usually secured by a bank credit line.
correct
Correct Answer
It is sold directly to investors by large and financially sound companies.
It includes an interest rate significantly below the rate a bank would
charge.
It is usually secured by a bank credit line.
24. A qualitative assessment of the business, its customers and
suppliers, and management character and capability is known
as* covenant Blank 1Blank 1 covenant , Incorrect
Unavailable* waivers Blank 2Blank 2 waivers , Incorrect Unavailable.
Correct Answer
Blank 1:due
Blank 2:diligence
25. An unsecured debt, meaning no specific pledge of property is
made, is called a* corporate Blank 1Blank 1 corporate , Incorrect
Unavailable*bond.
Correct Answer
Blank 1:debenture
26. Which of the following assess and grade the creditworthiness of
companies and public entities that sell debt to investors?
Multiple select question.
Internal Revenue Service
incorrect
Standard & Poor's Corp.
incorrect
Fitch Inc.
incorrect
Securities and Exchange Commission
incorrect
Moody's Investors Service
incorrect
Correct Answer
Standard & Poor's Corp.
Fitch Inc.
Moody's Investors Service
27. Match the Standard & Poor's credit rating on the left with its
credit quality on the right.
AAA
adequate protection
BBB
extremely strong
CCC
currently vulnerable
D
in default
Correct Answer
AAA
matches
extremely strong
BBB
matches
adequate protection
CCC
matches
currently vulnerable
D
matches
in default
28. Match the ratio used for credit analysis on the left with its
measurement on the right.
EBIT interest coverage
EBIT interest coverage Drop zone cash flow capacity incorrect Toggle Button
Unavailable.
cash flow capacity
total debt/capital
total debt/capital Drop zone financial structure correct Toggle Button Unavailable.
financial structure
funds from operations/total debt
funds from operations/total debt Drop zone the extent to which operating earnings
exceed interest costs incorrect Toggle Button Unavailable.
the extent to which operating earnings exceed interest costs
return on capital
return on capital Drop zone profitability correct Toggle Button Unavailable.
profitability
Correct Answer
EBIT interest coverage
matches
Choice
the extent to which operating earnings exceed interest costs
total debt/capital
matches
Choice
financial structure
funds from operations/total debt
matches
Choice
cash flow capacity
return on capital
matches
Choice
profitability
29. Which of the following are true regarding the financial statement
ratios that credit analysts at Standard & Poor's track?
Multiple select question.
They are compared to average ratios for corporate borrowers.
incorrect
Each credit analyst defines how the ratio will be computed.
incorrect
They each have a precise definition so that every credit analyst is consistent
with computations.
correct
Correct Answer
They are compared to average ratios for corporate borrowers.
They each have a precise definition so that every credit analyst is
consistent with computations.
