6

Question 1

Which of the following items are required to produce a forecasted future condensed income statement?
A. Tax rate; NOPAT margin; revenue growth; interest rate on ending debt
B. Tax rate; asset turnover; NOPAT margin; revenue growth
C. NOPAT margin; revenue growth; return on beginning investment assets; interest rate on beginning debt; leverage ratio
D. Tax rate; NOPAT margin; revenue growth; return on beginning investment assets; interest rate on beginning debt

Answer 1

D. Tax rate; NOPAT margin; revenue growth; return on beginning investment assets; interest rate on beginning debt

Question 2

T/F: Consider the following statement: “Revenue growth tends to revert faster to its economy-wide average than operating asset turnover.”

Answer 2

TRUE

Question 3

T/F: Consider the following statement: “Return on net operating assets tends to revert faster to its economy-wide average than financial leverage.”

Answer 3

TRUE

Question 4

T/F: Consider the following statement: “Financial leverage tends to revert faster to its economy-wide average than financial spread.”

Answer 4

FALSE

Question 5

In cyclical industries, revenue growth
A. Tends to move in line with economy-wide growth
B. Tends to approach zero
C. Tends to be negative during economic upturns
D. Consistently exceeds economy-wide growth

Answer 5

A. Tends to move in line with economy-wide growth

Question 6

Company A reports the following series of quarterly earnings: Q1 = 0.250; Q2 = 0.300; Q3 = 0.280; Q4 = 0.270; Q5 = 0.250; Q6 = 0.320; Q7 = 0.290; Q8 = 0.285. An analyst assumes that company A’s quarterly earnings perfectly follow the time-series process described by the Foster model. Under this assumption, the analyst’s forecast of quarter 9 earnings is
A. 0.2550
B. 0.2425
C. 0.2750
D. 0.2625

Answer 6

D. 0.2625

Question 7

T/F: Consider the following statement: “The Foster model does not take into account that quarterly earnings may exhibit a seasonal pattern.”

Answer 7

FALSE