mistakes from practice tests

Question 1

what is a levered metric?

Answer 1

• A levered metric is one that only reflects the shareholders position (not the debtholders)

Question 2

Is it true that we need to know a companys current capital structure to value its shares using an unlevered model?

Answer 2

Yes, only in terms of knowing the equity value of the company for the unlevered model

Question 3

what is a contract liability and is it understated or overstated for operating income to be overstated

Answer 3

contract liabilities are paid (revenue recognised) but unperformed performance obligations. This is understated for operating income to be overstated.

Question 4

what is the effect of recognising a bigger restructuring charge than appropriate?

Answer 4

• results in overstating operating income in the future periods as future expenses will be offset against the provision

Question 5

when is a change from equity method to consolidation done?

Answer 5

When the parent has over 50% control of the subsidiary, instead of joint control (50%) which requires the equity method

Question 6

How to calculate RNOA?

Answer 6

RNOA = OI (after tax)/ Avg NOA

Question 7

How to calculate ATO?

Answer 7

sales/ AVG NOA

Question 8

when is the company income statement done by nature?

Answer 8

• when employee benefits expense as well as Depreciation and amortisation expenses are disaggregated on the face of the income statement

Question 9

how to calculate Rd in WACC?

Answer 9

• Core NBC = NFE (after-tax, before OCI)/AvgNFO
• Rd = NFE(after tax)/ CORE NBC

Question 10

How to calculate the metric for the provision for doubtful debts for trade receivables?

Answer 10

= provision for doubtful debts/ gross receivables
* gross receivables = trade rec + allowance for doubtful debts

Question 11

how to calcuate RI?

Answer 11

RI = CI - Re x CSE(start) **

Question 12

what are the reasons for a dirty surplus

Answer 12

• change in accounting policy
• material misstatement
• restatement of past results

Question 13

what is the calculation for the DDM in a steady state

Answer 13

Ve = E[d(shareholders position) x (1 + g) /( r-g)

Question 14

which ratios indicate what the market expects?

Answer 14

• forward P/E
• P/E assuming no growth
  Compare above ^ if Forward PE> P/E assuming no growth-> positive RI growth expected
• P/B > 1 -> positive/ future RI