accounting general

Question 1

1. To measure a firm’s economic performance and position in a given period, it makes sense to measure all of the following except:

	a.	A portion of the long-lived resources consumed during that period.
	b.	The cost of commitments made during that period to pay retirement benefits to employees in future periods.
	c.	Expenses incurred for resources consumed in that period.
	d.	The daily free cash flow published by the Wall Street Journal.

1.2 points   

Question 2

1. Clean surplus accounting for most common stock transactions holds for shares accounted for at market value. An exception to this is:

	a.	issuance of common equity shares for employee stock options exercises
	b.	repurchase of common shares
	c.	issuance of common shares to new shareholders in public exchanges
	d.	none of these.

1.2 points   

Question 3

1. Assume that a firm’s book value at the beginning of the year is $17,800 and that the firm reports net income of $6,200. If the firm’s book value at the end of the year is $20,000 what was the amount of dividends paid during the year?

	a.	$8,800
	b.	Insufficient information to determine
	c.	$4,000
	d.	$2,200

1.2 points   

Question 4

1. Assume that a firm had shareholders' equity on the balance sheet at a book value of $1,200 at the end of 2010. During 2011 the firm earns net income of $900, pays dividends to shareholders of $400, and issues new stock to raise $250 of capital. The book value of shareholders equity at the end of 2011 is:

	a.	$1,450
	b.	$2,750
	c.	$250
	d.	$1,950

1.2 points   

Question 5

1. Equity-based valuation models are based on all metrics except

	a.	working capital
	b.	cash flow
	c.	dividends
	d.	earnings

1.2 points   

Question 6

1. Zonk Corp. The following data pertains to Zonk Corp., a manufacturer of ball bearings (dollar amounts in millions):

Total assets	$6,840
Interest-bearing debt	$3,562
Average pre-tax borrowing cost	11.5%
Common equity:
Book value	$2,560
Market value	$12,850
Income tax rate	35%
Market equity beta	1.24

2. Assume that Zonk is a potential leveraged buyout candidate. Assume that the buyer intends to put in place a capital structure that has 70 percent debt with a pretax borrowing cost of 14 percent and 30 percent common equity. Compute the revised equity beta for Zonk based on the new capital structure.

	a.	1.24
	b.	4.34
	c.	4.77
	d.	3.91

1.2 points   

Question 7

1. Equity valuation models based on dividends, cash flows, and earnings have been the topic of many theoretical and empirical research studies in recent years. All of the following are true regarding these studies except:

	a.	temporary deviations of price from value occur
	b.	share prices in the capital markets generally correlate closely with share value
	c.	unexpected changes in earnings, dividends, and cash flows do not correlate closely with changes in stock prices
	d.	share prices do not always equal share values

1.2 points   

Question 8

1. Over the life of a firm, the capital invested in the firm by the shareholders plus the income of the firm will reflect

	a.	the value of the firm to shareholders.
	b.	the dividend paying ability of the firm.
	c.	the free cash flows available to shareholders.
	d.	the value of the firm for debtholders and shareholders.

1.2 points   

Question 9

1. Dirty surplus items in U.S. GAAP typically arise from all of the following except:

	a.	foreign currency exchange rates
	b.	changes in investment security fair values
	c.	interest rates
	d.	realized gains

1.2 points   

Question 10

1. Assume that a firm had shareholders' equity on the balance sheet at a book value of $1,600 at the end of 2010. During 2011 the firm earns net income of $1,300, pays dividends to shareholders of $600, and uses $300 to repurchase common shares. The book value of shareholders equity at the end of 2011 is:

	a.	$2,600
	b.	$2,000
	c.	$400
	d.	$3,800

1.2 points   

Question 11

1. The residual income valuation model is a rigorous and straightforward valuation approach, but the analyst should be aware of all of the following implementation issues that will hinder its ability to measure firm value correctly except:

	a.	positive book value of equity.
	b.	dirty surplus accounting items.
	c.	portions of net income attributable to equity claimants other than common shareholders.
	d.	common stock transactions.

1.2 points   

Question 12

1. Zonk Corp. The following data pertains to Zonk Corp., a manufacturer of ball bearings (dollar amounts in millions):

Total assets	$6,840
Interest-bearing debt	$3,562
Average pre-tax borrowing cost	11.5%
Common equity:
Book value	$2,560
Market value	$12,850
Income tax rate	35%
Market equity beta	1.24

2. Assume that Zonk is a potential leveraged buyout candidate. Assume that the buyer intends to put in place a capital structure that has 70 percent debt with a pre tax borrowing cost of 14 percent and 30 percent common equity. Compute the weighted average cost of capital for Zonk based on the new capital structure.

	a.	13.01%
	b.	20.63%
	c.	9.94%
	d.	12.56%

1.2 points   

Question 13

1. At the beginning of 2012 investors had invested $125,000 of common equity in Jan Corp.and expect to earn a return of 15% per year. In addition, investors expect Jan Corp. to pay out 100% of income in dividends each year. Forecasts of Jan’s net income are as follows:             2012 - $41,000             2013 - $35,400             2014 - $33,200             2015 and beyond - $25,000 Using this information what is Jan’s residual income valuation at the beginning of 2012?

	a.	$190,262
	b.	$260,415
	c.	$125,000
	d.	$184,600

1.2 points   

Question 14

1. Early in a period in which sales were increasing at a modest rate and plan expansion and start-up costs were occurring at a rapid rate, a successful business would likely experience

	a.	Decreased profits and increased financing requirements because of an increasing cash shortage.
	b.	Increased profits and no change in financing requirements.
	c.	Increased profits and increased financing requirements because of an increasing cash shortage.
	d.	Decreased profits and decreased financing requirements because of an increasing cash surplus.

1.2 points   

Question 15

1. The historical discount rate of the firm may be a good indicator of the appropriate discount rate to apply to the firm in the future, when all of the following conditions hold true except:

	a.	The existing capital structure of the firm is the same as the expected future capital structure of the firm.
	b.	The current risk of the firm is the same as the expected future risk of the firm.
	c.	The current mix of debt and equity financing is equal.
	d.	Expected future interest rates are likely to equal current interest rates.

1.2 points   

Question 16

1. Residual income valuation focuses on

	a.	free cash flows as a periodic measure of shareholder wealth creation.
	b.	dividend-paying capacity in free-cash flows.
	c.	earnings as a periodic measure of shareholder wealth creation.
	d.	dividends as a periodic measure of shareholder wealth creation.

1.2 points   

Question 17

1. Under the cash-flow-based valuation approach, free cash flows can be used instead of dividends as the expected future payoffs to the investor in the numerator of the general valuation model because:

	a.	this approach focuses on wealth distribution to shareholders.
	b.	this approach focuses on earnings as a measure of the capital that a firm creates.
	c.	over the life of the firm, the free cash flows out of the firm for investments and cash flows paid into the firm in dividends from these investments will be equivalent.
	d.	over the life of the firm, the free cash flows into the firm and cash flows paid out of the firm in dividends to shareholders will be equivalent.

1.2 points   

Question 18

1. The appropriate discount rate for the residual income model is

	a.	The risk free interest rate
	b.	Cost of common equity capital
	c.	Weighted average cost of capital
	d.	The risk free interest rate plus the market premium

1.2 points   

Question 19

1. The two most popular discounted earnings models appear to be

	a.	Free cash flow and dividend discount model.
	b.	Price-cash flow and dividend discount.
	c.	Discounted abnormal earnings and residual income.
	d.	Sales/market capitalization and price-earnings.

1.2 points   

Question 20

1. Residual income is

	a.	the difference between the net income the analyst expects the firm to generate and the required earnings of the firm.
	b.	the difference between the net income the analyst expects the firm to generate and the reported earnings of the firm.
	c.	the book value of common equity capital at the beginning of the period multiplied by the required rate of return on common equity capital.
	d.	adjusted net income the firm reports.

1.2 points   

Question 21

1. Which of the following is probably the least likely reason for acquirers to pay too much in an acquisition?

	a.	Overbidding.
	b.	Over estimation of synergies.
	c.	Over optimistic appraisal of market potential.
	d.	Overuse of conventional financial statements.

1.2 points   

Question 22

1. At the beginning of 2012 investors had invested $25,000 of common equity in Grant Corp.and expect to earn a return of 11% per year. In addition, investors expect Grant Corp. to pay out 100% of income in dividends each year. Forecasts of Grant’s net income are as follows:             2012 - $3,500             2013 - $3,200             2014 - $2,900             2015 and beyond - $2,750 Using this information what is Grant’s residual income valuation at the beginning of 2012?

	a.	$26,041
	b.	$26,350
	c.	$26,151
	d.	$25,000

1.2 points   

Question 23

1. If investors have invested $25,000 of common equity in a company and it is determined that the required earnings of the company are $2,250 each period, then investors must expect to earn what return?

	a.	9%
	b.	11%
	c.	the market premium
	d.	the risk free rate

1.2 points   

Question 24

1. In theory, all three valuation models, when correctly implemented with internally consistent assumptions, will produce the same estimates of value.  However, in practice, which of the following errors can result in different value estimates? 

	a.	incomplete or inconsistent earnings and cash flow forecasts.
	b.	inconsistent estimates of weighted average costs of capital.
	c.	incorrect continuing value computations.
	d.	All of these errors result in different value estimates.

1.2 points   

Question 25

1. Required earnings are the

	a.	net income the analyst expects the firm to generate multiplied by the required rate of return on common equity capital.
	b.	the book value of common equity capital at the beginning of the period multiplied by the required rate of return on common equity capital.
	c.	adjusted net income multiplied by the required rate of return on common equity capital.
	d.	the market value of common equity capital at the beginning of the period multiplied by the required rate of return on common equity capital.