1. Match the following reports with the FASB requirement that they Fulfill:

Footnotes merely restate information that is readily apparent in the statements themselves

Which of the following statements record a firm’s financial situation on a single day?

On a income statement, all of the expenses which reduce a firm’s earnings involve an outlay of cash

A payment of dividends reduces the balances of the cash and common stock accounts on a balance sheet.

Which of the following does not contribute to the derivation of return on equity using the DuPont formula?

Because accounting practices vary, comparisons between a firm and its industry as a whole are considered useless

Management can improve its ROA by reducing investments in property, plant, and equipment.

Which of the following ratios cannot be compared among firms.

Many analysts prefer the current ratio to the quick ratio because the latter compares only cash equivalents to current liabilities

In a healthy manufacturing company, which of the following ratios would typically have the smallest value?

Financial strength ratios indicate a firm’s earning power.

Useful comparisons can be made between companies of similar size through the use of horizontal and vertical percentage analysis.

Which of the following are important qualitative issues which should be considered before one begins the quantitative portion of a financial analysis.

Analysts within a company are more likely to fall into the “false accuracy trap” when they develop pro formas than would external analysts because insiders have access to more detailed information.

When making financial projections, if a particular expense item cannot be predicted with any degree of confidence, it should be forecast at the highest level it would ever likely reach, so as to make the pro formas conservative.

The Greater the detail in a pro forma, the greater its accuracy will be

During the qualitative portion of the developing pro formas,

The qualitative portion of a financial analysis is analogous to the hypothesis-forming stage of scientific investigation because

An assumption is critical if

Horizontal and vertical percentage trends are useful in projecting future financial statements.

In a stable, predictable industry, an average of the previous ten years’ sales growth figures probably provides a more accurate forecast than assuming the same level of sales next year as in the current year.

When performing sensitivity analysis

The final step in using pro formas is to

Companies are concerned about shareholders’ interests because

As long as owners perceive that managers are creating value in the firm, they are likely to hold on to their shares

Value is created in a firm through

A firm’s dividend policy can usually be established independently of its growth plans.

Dividends are the sole source of returns for the shareholders.

It is likely that

Prudent managers have detailed knowledge of the composition of their shareholders

Financial risk

Financial leverage raises a share’s market value until

The present value of a cash flow allows an investor to assess

Present value calculations allow managers to

Unless an addition to working capital is permanent, it should not be considered among the cash flows of a capital budget.

Capital budgeting included

A future feasibility study to determine the environment impact of a planned investment should not be included in the incremental cash flows of an investment analysis.

Which of the following would not be included among the investment numbers of a capital budget?

Capital gains are a tax consequence of the sale of an old asset if

A differential analysis

Residual cash flows are estimated when

For capital budgeting purposes, an asset’s depreciable life is

Salvage Value

Qualitative considerations are as important as cash flow in investment selection

The advantage of using the marginal cost of capital as a company’s average hurdle rate is

It is important for managers to establish an average hurdle rate because

If a firm’s marginal weighted average cost of capital is 15%, an appropriate hurdle rate for investments of lower-than-average risk to the firm would be

The cost of capital can be defined as

A target cost of capital is

The marginal cost of capital is

The marginal cost of debt

The marginal cost of equity

The cost of convertible funds

If a convertible bond has been converted to common stock, then its current cost is the same as the cost of retained earnings.

Project investments are generally less complicated than mergers because:

Synergy between two companies

Legalities determine whether a merger should occur; a valuation determines what form the business combination shall be

Unlike capital budgeting derivations, it is best when evaluating mergers to rely on a single quantitative method:

Book value is unlike liquidation value and replacement value because:

The weakest link in earnings valuation is

The earnings dilution method is not a valuation method at all; it merely establishes the maximum price that the company can pay without experiencing a lower EPS next year.

Which of the following statements are true about relevant cash follow valuations?

In order to use a cash flow in perpetuity as a residual value for an asset, it must be reasonably assumed that the cash flows from that asset have leveled off.

From the acquirer’s perspective, the absolute maximum price that should ever be paid for a target is

In many ways, managers can consider the opinions of capital markets and the firm’s shareholders to be identical.

Every financing decision involves which consideration?

A FRICTO analysis enables prudent managers to assess investments decisions.

Flexibility issues are those which

Income issues deal with

Risk issues are those which

The issue of control is not important

Timing issues involve

“Other” issues may cause managers to assign more importance to one PRICTO element than the others.

Value can be created through financing by choosing the least expensive alternative.

Fulfills a firm’s requirement to disclose its earnings for a period.

Which of the following rates measure liquidity?

Which of the following ratios is the best indicator of a firm’s ability to manage its assets?

The most reliable financial comparisons can be drawn between companies of the same size in the same industry.

Which of the following ratios is not used in the DuPont formula?

Although the cash flow statement using the indirect method is useful, it does not show net income for the period.

Generally speaking, large increases in sales by a company require more investments in inventories and receivables.

Qualitative considerations are never as important as the numerical comparisons in the financial analysis.

The ratio which many observers use to quantity the stock market’s opinion of a firm is the

The P/E ratio indicates the stock market’s opinion of a company’s prospects for growth and earnings as well as the market’s perception of the firm’s risk.

Qualitative analysis is the first step in the development of pro forma statements.

Sensitivity Analysis should not be performed

Statistical methods can be employed to

There are three distinct steps in developing pro forma statement. Which of the following is not one of those steps?

Precise forecasts which may be supported by great detail are useless if they do not approximate reality.

What is the most compelling reason to project a firm’s income statement before projecting its balance sheet?

Vertical analysis is useful in projecting financial statements because it allows you to project items relative to a benchmark.

Which of the following companies should provide the longest time horizon for quantitative analysis?

Which of the accounts listed below vary with sales?

The most significant portions of your projection are, no matter how carefully contrived, still little more than educated guesses.

It is possible for stock appreciation to oddest a dividend reduction and create value for shareholders.

If stockholders perceive that the financial risk of a firm has decreased and all other factors are the same, then the stock price will probably rise.

The formula for compounding and discounting contains the same basic elements, just the arrangements is different for each procedure.

Present value calculations

Management has two methods by which it can add value to the firm through components on either side of the according equality.

By selecting the proportions of debt and equity in the most efficient way, a manager can add value to the firm

Decreasing the discount rate increases the present value.

Dividend payout is the only determination of increase in stockholder returns.

An increase in risk should carry with it an increase in return.

Compounding is the opposite of discounting.

The internal rate of return is the discount factor necessary to make an investment’s NPV greater than one.

An asset’s depreciable life for capital budgeting purposes is defined by the Internal Revenue Code

Hurdle rates are used in an attempt to

What is the major advantage of using the present value index (PVI) instead of the NPV or IRR for comparison of alternative investments?

Payback is often referred to as a break-even analysis

Which if the following techniques does not account for the time value of money?

Which of the following items is not included in the cash flows of a capital budget?

You division has spent six months and $50,000 researching the feasibility of developing a new product line.

Which of the following techniques does not present the future value of the present value of the cash flows?

The payback method accounts for the time value of money.

If a company consistently uses hurdle rates that are higher than its marginal cost of capital, then

The cost of debt is the coupon rate of the bonds used to finance the debt

The “efficient market” theory seems to be reasonable because

For WACC purposes, to calculate the cost of debt, you multiply the interest rate by (1 – Tax rate)

The risk of illiquidity is more pronounced for debt holders than it is for share owners in a public company.

Which of the following statements about bonds is always true?

A firm with substantial fixed costs such as a manufacturing overhead will have a higher degree of risk in the trough of a business cycle than will a firm with high variable costs and limited fixed costs.

During a recession, which of the following firms is riskier?

To calculate the yield to maturity of a bond, you are using which of the following capital budgeting technique ?

The cost of equity can be calculated by more than one method.

Book Value is based on historical cost

The implicit assumption behind the dilution method is that the capital markets have fairly valued the stock.

The book value of the firm is a similar concept to the net worth of the individual.

Which of the following is the most likely reason that a merger will not be as financially rewarding as initially projected?

Which of the following valuation methods usually results in the lowest value for the target firm ?

Residual values tend to be the earliest value to predict.

Market Capitalization is obtained by multiplying the number of shares outstanding by the price per share.

Discounting the terminal value of the target involves a discount rate that is

There is a difference between cash flow and operating cash flow.

Valuations determine whether a merger is financially feasible but tax consequences and control considerations help shape the resultant firm’s legal structure.

Which of the following is a flexibility issue ?

Flexibility issues are those that may impact the debt capacity that a firm should maintain.

FRICTO analysis can point out poor investments.

Timing issues involve

Capital market status is important in the issue of

Coverage ratios

A flexibility crisis is a rare unpredictable event.

Debt mitigates the issue of control.

A breakeven P/E calculation

Breakeven EBIT calculations enable managers to assess