Exam Questions Flashcards
A company’s value to owners is its
Economic value assuming actual payoffs are known
A letter of credit…
Provides guarantee of payment from the buyer, reducing the credit risk to the seller
Covenants represent
Promises the company makes to the creditor
Many companies have cyclical operating cash needs due to…
Seasonality of sales
The overarching purpose of credit risk analysis is to…
Quantify potential credit losses
The variable EBIT divided by Total Assets in the Altman Z-Score measures which of the following concepts?
Current level of profitability
The variable Market Value of Equity divided by Total Liabilities in the Altman Z-Score measures which of the following concepts?
Current level of leverage
Which of the following concepts is not captured by one of the variables in Altman’s Z-score?
Current level of net operating assets
Which of the following is not one of Porter’s five forces that determine a company’s competitive intensity?
Ability to obtain financing
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:
The net loss was smaller than investors expected
This is a advantage of the ROPI model
Utilizes both the balance sheet and income statement, and captures the information in accrual accounting
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.
This assumption is incorrect
Decrease in A/R is not included in calculating…
NOPAT
What are 5 nonoperating assets?
1 cash 2 short term investments 3 trading assets 4 Marketable Equity securities 5 Other long term investments
2 nonoperating liabilities
Short term debt
Long term debt
As uncertainty of cash flows increases, companies generally…2
Substitute equity for debt
In order to reduce the magnitude of contractual payment
Obligations
A cash asset is on what financial statements?
Balance sheet
Statement of cash flows
Are expenses on the statement of cash flows?
Not according to the HW solutions
Cash inflow from stock issued is on which financial statements?
Statement of cash flows
Statement of stockholder’s equity
Cash outflow for dividends is on which financial statements?
Statement of cash flows
Statement of stockholder’s equity
Net income is on which financial statements?
Income statement
Statement of cash flows
Statement of stockholder’s equity
Why would we expect a company like Intel to report a relatively high proportion of equity vs. debt?2
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
A negative amount from investing activities reflects…2
Further investment by company in investment activities
Often a positive sign
A negative amount for cash from financing activities reflects…2
Reflects reduction in long term debt
Often a positive sign
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?
IS: increase in revenues, expenses and net income
What area on the cashflow statement does interest expense affect?
Operating cash flow
Companies with the highest profit margins have either…2
Effectively succeeded at differentiating their brands
Or controlling their costs
Reporting the highest level of operating cash flow as a percentage of sales indicates…
Very efficient operations
It is accurate for companies to exclude discontinued operations from GAAP earnings because…
They are not included in the company’s future cash flows
Disaggregation means
Break out into each individual component
The excess of ROE to RNOA signifies…2
Debt is financing assets that earn an excess return in excess to the cost of debt
Improving returns for shareholders
When ROA is much lower than ROE, this signifies that the company…
Holds a significant amount of investment securities that have
A low return
Current ratio above 1 implies…
Positive working capital
It is not uncommon for quick ratios to…
Be below 1
Median total liabilities to equity ratios for publicly traded companies in the S&P 500 is…
Anything around there is…
1.5
Modest leverage
A high times interest earned ratio…
Lessens the company’s solvency concerns
If a current ratio is below 1, a company is liquid if…3
1 customers all pay within 30 days
2 company holds very little inventory
3 cash flow is sufficient to meet short term bills
To put a company’s current ratio in perspective, we would want to know the…
Average current ratio for the industry
Around 6, times interest earned is considered…
Strong
To assess a companies solvency, you should compare the liabilities to equities ratio to…
Competitors
If a company has significant debt in its capital structure capital expenditures could…
Negatively impact the company’s competitive position
When assessing liquidity it is helpful to know when…2
Cash flows from current assets will be realized
When current liabilities will need to be paid
Liability to equity and debt to equity ratios can worsen due to…2
Decrease in retained earnings
Increase in other comprehensive loss
Reduced equity will worsen a companies solvency (liabilities to equity, debt to equity) when a company is…3
Highly leveraged
Does stock buy backs
Pays high dividends
ROE is lower than RNOA when the company…
Holds a large amount of low return investments
When liabilities to equity and debt to equity ratios are below 1, this indicates…
Solvency ratios are very strong
The cash conversion cycle measures the average time (in days) to…4
Sell inventories
Collect receivables
Pay the payables
Return to cash
Companies prefer a lower cash conversion cycle, this means that operating cycle is…2
Generating profit and cash flow quickly
Cash conversion cycle analysis focuses on…2
Trends over time
Comparisons to peers
Delaying payment on payables is…
An improvement on the cash conversion cycle
Cash is calculated as a percentage of…
Sales
Increases in assets on the statement of cash flow are…
Negative
On the statement of cash flows, Decrease in long term debt includes…
Change in short term debt
Amortization of purchased intangibles is estimated as…
Purchased intangibles net at the start of the year
When excess cash is forecasted we assume, excess cash will be…
Invested in marketable securities
