Test questions

Question 1

Statement of Cash Flows shows how much cash and cash equivalents have changed from opening to ending balance sheets.

Answer 1

True

Question 2

WACC is a measure of the accounting rate of return

Answer 2

False

Question 3

If ROIC (return on invested capital is greater than the cost of capital (WACC), then the Economic Value Added (EVA) will be negative.

Answer 3

False

Question 4

Invested capital can be decomposed into components to trace the profit margin drivers.

Answer 4

False

Question 5

Valuation models are less sophisticated valuation tools than price multiples.

Answer 5

False

Question 6

Analysts’ earnings forecasts become more accurate as time to the earnings announcement becomes shorter.

Answer 6

True

Question 7

According to the Discounted Free Cash Flow (DFC) model, firms that generate cash flows early in their life will be worth less than firms that generate cash flows later.

Answer 7

False

Question 8

A firm can be seen as a portfolio of projects.

Answer 8

True

Question 9

Dividend discount model is based on the idea that the value of the firm is the sum of the net present values of the projects of the firm.

Answer 9

False

Question 10

Earnings management always reduces the quality of the reported earnings.

Answer 10

False

Question 11

Influencing marketing and R&D spending is a common accounting policy choice among managers when they manage earnings of the firm.

Answer 11

False

Question 12

Ordinary firms generate value mainly from their financial activities.

Answer 12

False

Question 13

Reformatted balance sheets and income statements are needed to separate operating activities from financing activities.

Answer 13

True

Question 14

P/D ratio can be used to calculate the expected return on a stock

Answer 14

True

Question 15

If the foretasted ROE is less than the cost of equity, then

Answer 15

P/B ratio should be less than 1.

Question 16

Given the definition of EVA, a firm’s management should aim at minimizing the amount of financing costs paid to equity and debt investors.

Answer 16

True

Question 17

Growth of the firm cannot destroy value

Answer 17

False

Question 18

Growth in EVA due to transitory items is less sustainable than growth in EVA due to recurring operations.

Answer 18

True

Question 19

The range of individual analysts’ earnings forecasts measures the uncertainty in the analysts’ opinions about the value of the upcoming earnings.

Answer 19

True

Question 20

The so-called Dupont Identity of ROE is defined as follows:

Answer 20

ROE = (Net Income/Revenues) x (Revenues/Invested Capital) x Invested Capital/Equity)

Question 21

In the abnormal earnings model,

Answer 21

clean surplus retention is the underlying assumption.

Question 22

In the discounted free cash flow model, value of equity is calculated by

Answer 22

adding financial assets to and deducting interest-bearing debt from the present value of future cash flows.

Question 23

In their research article, Kallunki and Pyykkö (2013, RAST) explore whether

Answer 23

appointing CEOs and directors with past personal payment default entries increases the likelihood of financial distress of the firm.

Question 24

We have the following information for a firm: Sales are $240, EBITDA is $100. depreciations are $80, effective rate is 20%, equity is $70, interest bearing net debt is $50, financial assets are $40. What are the components of ROIC?

Answer 24

6.67% and 2

Question 25

We have the following information about a firm Super IT Connections Ltd: Book value per share (BPS) is 5.35, EPS is 20.10, and sales is 15 million Euros.
We also have the following data for the comparable firms of Super IT Connections Ltd:

Software Connections Corp P/B ratio 2.4 Median BPS forecast 14.5
Never Connected Inc P/B ratio 4.3 Median BPS forecast 13.2
Internet & Co Inc P/B ratio 4.9 Median BPS forecast 11.2

What is the intrinsic price of Super IT Connections Ltd, by using relative valuation based on the median price multiple?

Answer 25

22.6

Question 26

We have the following information about the firm: Book value of equity in 2018 is 8.00, forecasted EPS for 2019 is 15.00, forecasted EPS for 2020 is 17.00, dividend pay-out ratio is 25%, cost of equity is 15% and WACC is 8% and cost of debt is 5%.
Suppose you are determining the value of this firm by using the residual income (abnormal earnings valuation model at the end of 2018. What is the residual income (abnormal earnings) in year 2020?

Answer 26

13.2