Corporate Finance Final Class

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Equity equals:

A. Assets - Liabilities.

B. Liabilities - Assets.

C. Assets + Liabilities.

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1

Equity equals:

A. Assets - Liabilities.

B. Liabilities - Assets.

C. Assets + Liabilities.

A. Assets - Liabilities.

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2

Shareholders’ equity reported on the balance sheet is most likely to differ from the market value of shareholders’ equity because:

A. historical cost basis is used for all assets and liabilities.

B. some factors that affect the generation of future cash flows are excluded.

C. shareholders’ equity reported on the balance sheet is updated continuously.

B. some factors that affect the generation of future cash flows are excluded.

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3

All of the following are current assets except:

A. cash

B. goodwill

C. inventories

B. goodwill

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4

The most likely costs included in both the cost of inventory and property, plant, and equipment are:

A. selling costs

B. storage costs

C. delivery costs

C. delivery costs

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5

Debt is due within one year is considered

A. current

B. preferred

C. convertible

A. current

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6

The carrying value of inventories reflects:

A. their historical cost

B. their current value

C. the lower of historical cost or net realizable value

C. the lower of historical cost or net realizable value

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7

Accrued expenses (accrued liabilities) are:

A. expenses that have been paid.

B. created when another liability is reduced.

C. expenses that have been reported on the income statement but not yet paid.

C. expenses that have been reported on the income statement but not yet paid.

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8

Defining total asset turnover as revenue divided by average total assets, all else equal, impairment write-downs of long-lived assets owned by a company will most likely result in an increase for that company in:

A. the debt-to-equity ratio but not the total asset turnover.

B. the total asset turnover but not the debt-to-equity ratio.

C. both the debt-to-equity ratio and the total asset turnover.

C. both the debt-to-equity ratio and the total asset turnover.

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9

The item “retained earnings” is a component of:

A. assets.

B. liabilities.

C. shareholders’ equity.

C. shareholders’ equity.

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10

When a company buys shares of its own stock to be held in treasury, it records a reduction in:

A. both assets and liabilities.

B. both assets and shareholders’ equity.

C. assets and an increase in shareholders’ equity.

B. both assets and shareholders’ equity.

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11

Which of the following would an analyst most likely be able to determine from a common-size analysis of a company’s balance sheet over several periods?

A. An increase or decrease in sales.

B. An increase or decrease in financial leverage.

C. A more efficient or less efficient use of assets.

B. An increase or decrease in financial leverage.

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12

An investor concerned whether a company can meet its near-term obligations is most likely to calculate the:

A. current ratio.

B. return on total capital.

C. financial leverage ratio.

A. current ratio.

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13

The most stringent test of a company’s liquidity is its:

A. cash ratio.

B. quick ratio.

C. current ratio.

A. cash ratio.

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14

An investor worried about a company’s long-term solvency would most likely examine its:

A. current ratio.

B. return on equity.

C. debt-to-equity ratio.

C. debt-to-equity ratio.

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15

Given the following cash flows for a capital project, calculate the NPV and IRR. The required rate of return is 8 percent. NPV/IRR

A $1,905 / 10.9%

B $1,905 / 26.0%

C $3,379 / 10.9%

C $3,379 / 10.9%

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16

Given the following cash flows for a capital project, calculate its payback period and discounted payback period. The required rate of return is 8 percent. The discounted payback period is:

A. 0.16 years longer than the payback period.

B. 0.51 years longer than the payback period.

C. 1.01 years longer than the payback period.

C. 1.01 years longer than the payback period.

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17

An investment of $100 generates after-tax cash flows of $40 in Year 1, $80 in Year 2, and $120 in Year 3. The required rate of return is 20 percent. The net present value is closest to:

A. $42.22.

B. $58.33.

C. $68.52.

B. $58.33.

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18

An investment of $150,000 is expected to generate an after-tax cash flow of $100,000 in one year and another $120,000 in two years. The cost of capital is 10 percent. What is the internal rate of return?

A. 28.39 percent.

B. 28.59 percent.

C. 28.79 percent.

C. 28.79 percent.

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19

Kim Corporation is considering an investment of 750 million won with expected after-tax cash inflows of 175 million won per year for seven years. The required rate of return is 10 percent. What is the project’s: NPV/IRR?

A 102 million won / 14.0%

B 157 million won / 23.3%

C 193 million won / 10.0%

A 102 million won / 14.0%

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20

Kim Corporation is considering an investment of 750 million won with expected after-tax cash inflows of 175 million won per year for seven years. The required rate of return is 10 percent. Expressed in years, the project’s payback period and discounted payback period, respectively, are closest to:

A. 4.3 years and 5.4 years.

B. 4.3 years and 5.9 years.

C. 4.8 years and 6.3 years.

B. 4.3 years and 5.9 years.

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21

An investment of $20,000 will create a perpetual after-tax cash flow of $2,000. The required rate of return is 8 percent. What is the investment’s profitability index?

A. 1.08.

B. 1.16.

C. 1.25.

C. 1.25.

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22

Hermann Corporation is considering an investment of €375 million with expected after-tax cash inflows of €115 million per year for seven years and an additional after-tax salvage value of €50 million in Year 7. The required rate of return is 10 percent. What is the investment’s PI?

A. 1.19.

B. 1.33.

C. 1.56.

C. 1.56.

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23

Erin Chou is reviewing a profitable investment project that has a conventional cash flow pattern. If the cash flows for the project, initial outlay, and future after-tax cash flows all double, Chou would predict that the IRR would:

A. increase and the NPV would increase.

B. stay the same and the NPV would increase.

C. stay the same and the NPV would stay the same.

B. stay the same and the NPV would increase.

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24

Shirley Shea has evaluated an investment proposal and found that its payback period is one year, it has a negative NPV, and it has a positive IRR. Is this combination of results possible?

A. Yes.

B. No, because a project with a positive IRR has a positive NPV.

C. No, because a project with such a rapid payback period has a positive NPV.

A. Yes.

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25

An investment has an outlay of 100 and after-tax cash flows of 40 annually for four years. A project enhancement increases the outlay by 15 and the annual after-tax cash flows by 5. As a result, the vertical intercept of the NPV profile of the enhanced project shifts:

A. up and the horizontal intercept shifts left.

B. up and the horizontal intercept shifts right.

C. down and the horizontal intercept shifts left.

A. up and the horizontal intercept shifts left.

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26

Projects 1 and 2 have similar outlays, although the patterns of future cash flows are different. The cash flows as well as the NPV and IRR for the two projects are shown below. For both projects, the required rate of return is 10 percent. The two projects are mutually exclusive. What is the appropriate investment decision?

A. Invest in both projects.

B. Invest in Project 1 because it has the higher IRR.

C. Invest in Project 2 because it has the higher NPV.

C. Invest in Project 2 because it has the higher NPV.

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27

Consider the two projects below. The cash flows as well as the NPV and IRR for the two projects are given. For both projects, the required rate of return is 10 percent. What discount rate would result in the same NPV for both projects?

A. A rate between 0.00 percent and 10.00 percent.

B. A rate between 10.00 percent and 15.02 percent.

C. A rate between 15.02 percent and 16.37 percent.

B. A rate between 10.00 percent and 15.02 percent.

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28

Wilson Flannery is concerned that this project has multiple IRRs. How many discount rates produce a zero NPV for this project?

A. One, a discount rate of 0 percent.

B. Two, discount rates of 0 percent and 32 percent.

C. Two, discount rates of 0 percent and 62 percent.

C. Two, discount rates of 0 percent and 62 percent.

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29

With regard to the net present value (NPV) profiles of two projects, the crossover rate is best described as the discount rate at which:

A. two projects have the same NPV.

B. two projects have the same internal rate of return.

C. a project’s NPV changes from positive to negative.

A. two projects have the same NPV.

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30

With regard to net present value (NPV) profiles, the point at which a profile crosses the vertical axis is best described as:

A. the point at which two projects have the same NPV.

B. the sum of the undiscounted cash flows from a project.

C. a project’s internal rate of return when the project’s NPV is equal to zero.

B. the sum of the undiscounted cash flows from a project.

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31

With regard to net present value (NPV) profiles, the point at which a profile crosses the horizontal axis is best described as:

A. the point at which two projects have the same NPV.

B. the sum of the undiscounted cash flows from a project.

C. a project’s internal rate of return when the project’s NPV is equal to zero.

C. a project’s internal rate of return when the project’s NPV is equal to zero.

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32

With regard to capital budgeting, an appropriate estimate of the incremental cash flows from a project is least likely to include:

A. externalities.

B. interest costs.

C. opportunity costs.

B. interest costs.

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33

The three factor DuPont Analysis is comprised of

A. Current Ratio, profit margin, debt ratio

B. Receivable turnover, gross profit margin, debt-equity ratio

C. Asset turnover, profit margin, financial leverage

D. Fixed asset turnover, profit margin, financial leverage

C. Asset turnover, profit margin, financial leverage

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34

Within the Dupont Analysis

A. An increase in financial leverage is met with a decrease in the use of debt.

B. An increase in financial leverage is met with an increase in the use of debt.

C. An increase in financial leverage is met with a decrease in the ROE.

D. An increase in financial leverage is met with an increase in the use of equity.

B. An increase in financial leverage is met with an increase in the use of debt.

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35

In DuPont Analysis where the financial leverage has consistently increased over the past several years

A. The ROE will be less than the ROA.

B. The ROE will be equal to the ROA.

C. Financial Leverage does not impact the ROE.

D. The ROE will be higher than the ROA.

D. The ROE will be higher than the ROA.

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36

The current ROA of a firm is 13% and it has an Equity Multiplier of 3.0. The resulting ROE will be approximately

A. 13%

B. 39%

C. 4.3%

D. 25%

B. 39%

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37

The ACME Company has current sales of $2,340,000 and Total Assets of $990,000. It also has earnings of $250,000, and Total Equity of $750,000. The current inventory is $124,000 and accounts payable is $98,000.

A. The asset turnover and profit margin are 2.36 and 10.68%

B. The ROE is 29.90%

C. The asset turnover and profit margin are 2.10 and 10.68%

D. The ROE is 35%

A. The asset turnover and profit margin are 2.36 and 10.68%

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38

The price-earnings (P/E) ratio is considered to be a price multiple. Which of the following is a true statement?

A. A decreasing P/E implies that the price of the stock is becoming more expensive.

B. An increasing P/E implies that the price of the stock is becoming more expensive.

C. A decreasing P/E implies that the price of the stock is becoming more expensive.

D. An increasing P/E implies that the price of the stock is becoming less expensive.

B. An increasing P/E implies that the price of the stock is becoming more expensive.

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39

If a stock has a beta of 2.0, which of the following is true?

A. The stock is not considered to be as volatile as the market.

B. The stock is considered to be as volatile as the market.

C. The stock is considered less volatile as the market.

D. The stock is considered to be more volatile than the market.

D. The stock is considered to be more volatile than the market.

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40

In order to assess a company’s ability to fulfill its long-term obligations, an analyst would most likely examine:

A. activity ratios.

B. liquidity ratios.

C. solvency ratios.

C. solvency ratios.

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41

Which ratio would a company most likely use to measure its ability to meet short-term obligations?

A. Current ratio.

B. Payables turnover.

C. Gross profit margin.

A. Current ratio.

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42

Which of the following ratios would be most useful in determining a company’s ability to cover its lease and interest payments?

A. ROA.

B. Total asset turnover.

C. Fixed charge coverage.

C. Fixed charge coverage.

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43

5. An analyst is interested in assessing both the efficiency and liquidity of Spherion PLC. The analyst has collected the following data for Spherion: Based on this data, what is the analyst least likely to conclude?

A. Inventory management has contributed to improved liquidity.

B. Management of payables has contributed to improved liquidity.

C. Management of receivables has contributed to improved liquidity.

C. Management of receivables has contributed to improved liquidity.

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44

An analyst is evaluating the solvency and liquidity of Apex Manufacturing and has collected the following data (in millions of euro): Which of the following would be the analyst’s most likely conclusion?

A. The company is becoming increasingly less solvent, as evidenced by the increase in its debt-to-equity ratio from 0.35 to 0.50 from FY3 to FY5.

B. The company is becoming less liquid, as evidenced by the increase in its debt-to-equity ratio from 0.35 to 0.50 from FY3 to FY5.

C. The company is becoming increasingly more liquid, as evidenced by the increase in its debt-to-equity ratio from 0.35 to 0.50 from FY3 to FY5.

A. The company is becoming increasingly less solvent, as evidenced by the increase in its debt-to-equity ratio from 0.35 to 0.50 from FY3 to FY5.

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45

With regard to the data in Problem 6, what would be the most reasonable explanation of the financial data?

A. The decline in the company’s equity results from a decline in the market value of this company’s common shares.

B. The €250 increase in the company’s debt from FY3 to FY5 indicates that lenders are viewing the company as increasingly creditworthy.

C. The decline in the company’s equity indicates that the company may be incurring losses, paying dividends greater than income, and/or repurchasing shares.

C. The decline in the company’s equity indicates that the company may be incurring losses, paying dividends greater than income, and/or repurchasing shares.

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46

An analyst observes a decrease in a company’s inventory turnover. Which of the following would most likely explain this trend?

A. The company installed a new inventory management system, allowing more efficient inventory management.

B. Due to problems with obsolescent inventory last year, the company wrote off a large amount of its inventory at the beginning of the period.

C. The company installed a new inventory management system but experienced some operational difficulties resulting in duplicate orders being placed with suppliers.

C. The company installed a new inventory management system but experienced some operational difficulties resulting in duplicate orders being placed with suppliers.

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47

Which of the following would best explain an increase in receivables turnover?

A. The company adopted new credit policies last year and began offering credit to customers with weak credit histories.

B. Due to problems with an error in its old credit scoring system, the company had accumulated a substantial amount of uncollectible accounts and wrote off a large amount of its receivables.

C. To match the terms offered by its closest competitor, the company adopted new payment terms now requiring net payment within 30 days rather than 15 days, which had been its previous requirement.

B. Due to problems with an error in its old credit scoring system, the company had accumulated a substantial amount of uncollectible accounts and wrote off a large amount of its receivables.

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48

Brown Corporation had average days of sales outstanding of 19 days in the most recent fiscal year. Brown wants to improve its credit policies and collection practices and decrease its collection period in the next fiscal year to match the industry average of 15 days. Credit sales in the most recent fiscal year were $300 million, and Brown expects credit sales to increase to $390 million in the next fiscal year. To achieve Brown’s goal of decreasing the collection period, the change in the average accounts receivable balance that must occur is closest to:

A. +$0.41 million.

B. –$0.41 million.

C. –$1.22 million.

A. +$0.41 million.

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49

An analyst observes the following data for two companies: Which of the following choices best describes reasonable conclusions that the analyst might make about the two companies’ ability to pay their current and long-term obligations?

A. Company A’s current ratio of 4.0 indicates it is more liquid than Company B, whose current ratio is only 1.2, but Company B is more solvent, as indicated by its lower debt-to-equity ratio.

B. Company A’s current ratio of 0.25 indicates it is less liquid than Company B, whose current ratio is 0.83, and Company A is also less solvent, as indicated by a debt-to-equity ratio of 200 percent compared with Company B’s debt-to-equity ratio of only 30 percent.

C. Company A’s current ratio of 4.0 indicates it is more liquid than Company B, whose current ratio is only 1.2, and Company A is also more solvent, as indicated by a debt-to-equity ratio of 200 percent compared with Company B’s debt-to-equity ratio of only 30 percent.

A. Company A’s current ratio of 4.0 indicates it is more liquid than Company B, whose current ratio is only 1.2, but Company B is more solvent, as indicated by its lower debt-to-equity ratio.

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50

The company’s total assets at year-end FY9 were GBP 3,500 million. Which of the following choices best describes reasonable conclusions an analyst might make about the company’s efficiency?

A. Comparing FY14 with FY10, the company’s efficiency improved, as indicated by a total asset turnover ratio of 0.86 compared with 0.64.

B. Comparing FY14 with FY10, the company’s efficiency deteriorated, as indicated by its current ratio.

C. Comparing FY14 with FY10, the company’s efficiency deteriorated due to asset growth faster than turnover revenue growth.

C. Comparing FY14 with FY10, the company’s efficiency deteriorated due to asset growth faster than turnover revenue growth.

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51

Which of the following choices best describes reasonable conclusions an analyst might make about the company’s solvency?

A. Comparing FY14 with FY10, the company’s solvency improved, as indicated by an increase in its debt-to-assets ratio from 0.14 to 0.27.

B. Comparing FY14 with FY10, the company’s solvency deteriorated, as indicated by a decrease in interest coverage from 10.6 to 8.4.

C. Comparing FY14 with FY10, the company’s solvency improved, as indicated by the growth in its profits to GBP 645 million.

B. Comparing FY14 with FY10, the company’s solvency deteriorated, as indicated by a decrease in interest coverage from 10.6 to 8.4.

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52

Which of the following choices best describes reasonable conclusions an analyst might make about the company’s liquidity?

A. Comparing FY14 with FY10, the company’s liquidity improved, as indicated by an increase in its debt-to-assets ratio from 0.14 to 0.27.

B. Comparing FY14 with FY10, the company’s liquidity deteriorated, as indicated by a decrease in interest coverage from 10.6 to 8.4.

C. Comparing FY14 with FY10, the company’s liquidity improved, as indicated by an increase in its current ratio from 0.71 to 0.75.

C. Comparing FY14 with FY10, the company’s liquidity improved, as indicated by an increase in its current ratio from 0.71 to 0.75.

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53

Which of the following choices best describes reasonable conclusions an analyst might make about the company’s profitability?

A. Comparing FY14 with FY10, the company’s profitability improved, as indicated by an increase in its debt-to-assets ratio from 0.14 to 0.27.

B. Comparing FY14 with FY10, the company’s profitability deteriorated, as indicated by a decrease in its net profit margin from 11.0 percent to 5.7 percent.

C. Comparing FY14 with FY10, the company’s profitability improved, as indicated by the growth in its shareholders’ equity to GBP 6,165 million.

B. Comparing FY14 with FY10, the company’s profitability deteriorated, as indicated by a decrease in its net profit margin from 11.0 percent to 5.7 percent.

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54

Assuming no changes in other variables, which of the following would decrease ROA?

A. A decrease in the effective tax rate.

B. A decrease in interest expense.

C. An increase in average assets.

C. An increase in average assets.

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55

An analyst compiles the following data for a company: Based only on the information above, the most appropriate conclusion is that, over the period FY13 to FY15, the company’s:

A. net profit margin and financial leverage have decreased.

B. net profit margin and financial leverage have increased.

C. net profit margin has decreased but its financial leverage has increased.

C. net profit margin has decreased but its financial leverage has increased.

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56

What does the P/E ratio measure?

A. The “multiple” that the stock market places on a company’s EPS.

B. The relationship between dividends and market prices.

C. The earnings for one common share of stock.

A. The “multiple” that the stock market places on a company’s EPS.

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57

A creditor most likely would consider a decrease in which of the following ratios to be positive news?

A. Interest coverage (times interest earned).

B. Debt-to-total assets.

C. Return on assets.

B. Debt-to-total assets.

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58

When developing forecasts, analysts should most likely:

A. develop possibilities relying exclusively on the results of financial analysis.

B. use the results of financial analysis, analysis of other information, and judgment.

C. aim to develop extremely precise forecasts using the results of financial analysis.

B. use the results of financial analysis, analysis of other information, and judgment.

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59

Expenses on the income statement may be grouped by:

A. nature, but not by function.

B. function, but not by nature.

C. either function or nature.

C. either function or nature.

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60

An example of an expense classification by function is:

A. tax expense.

B. interest expense.

C. cost of goods sold.

C. cost of goods sold.

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61

Denali Limited, a manufacturing company, had the following income statement information: Denali’s gross profit is equal to

A. $280,000.

B. $500,000.

C. $1,000,000.

C. $1,000,000.

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62

Under IFRS, income includes increases in economic benefits from:

A. increases in liabilities not related to owners’ contributions.

B. enhancements of assets not related to owners’ contributions.

C. increases in owners’ equity related to owners’ contributions.

B. enhancements of assets not related to owners’ contributions.

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63

Fairplay had the following information related to the sale of its products during 2009, which was its first year of business: Under the accrual basis of accounting, how much net revenue would be reported on Fairplay’s 2009 income statement?

A. $200,000.

B. $900,000.

C. $1,000,000.

B. $900,000.

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64

If the outcome of a long-term contract can be measured reliably, the preferred accounting method under both IFRS and US GAAP is:

A. the cost recovery method.

B. the completed contract method.

C. the percentage-of-completion method.

C. the percentage-of-completion method.

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65

At the beginning of 2009, Florida Road Construction entered into a contract to build a road for the government. Construction will take four years. The following information as of 31 December 2009 is available for the contract: Assume that the company estimates percentage complete based on costs incurred as a percentage of total estimated costs. Under the completed contract method, how much revenue will be reported in 2009?

A. None.

B. $300,000.

C. $1,500,000.

A. None.

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66

During 2009, Argo Company sold 10 acres of prime commercial zoned land to a builder for $5,000,000. The builder gave Argo a $1,000,000 down payment and will pay the remaining balance of $4,000,000 to Argo in 2010. Argo purchased the land in 2002 for $2,000,000. Using the installment method, how much profit will Argo report for 2009?

A. $600,000.

B. $1,000,000.

C. $3,000,000.

A. $600,000.

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67

Using the same information as in Question 8, how much profit will Argo report for 2009 using the cost recovery method?

A. None.

B. $600,000.

C. $1,000,000.

A. None.

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68

Under IFRS, revenue from barter transactions should be measured based on the fair value of revenue from:

A. similar barter transactions with unrelated parties.

B. similar non-barter transactions with related parties.

C. similar non-barter transactions with unrelated parties.

C. similar non-barter transactions with unrelated parties.

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69

Apex Consignment sells items over the internet for individuals on a consignment basis. Apex receives the items from the owner, lists them for sale on the internet, and receives a 25 percent commission for any items sold. Apex collects the full amount from the buyer and pays the net amount after commission to the owner. Unsold items are returned to the owner after 90 days. During 2009, Apex had the following information: How much revenue should Apex report on its 2009 income statement?

A. €500,000.

B. €2,000,000.

C. €1,500,000.

A. €500,000.

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70

A company previously expensed the incremental costs of obtaining a contract. All else being equal, adopting the May 2014 IASB and FASB converged accounting standards on revenue recognition makes the company’s profitability initially appear:

A. lower.

B. unchanged.

C. higher.

C. higher.

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71

During 2009, Accent Toys Plc., which began business in October of that year, purchased 10,000 units of a toy at a cost of ₤10 per unit in October. The toy sold well in October. In anticipation of heavy December sales, Accent purchased 5,000 additional units in November at a cost of ₤11 per unit. During 2009, Accent sold 12,000 units at a price of ₤15 per unit. Under the first in, first out (FIFO) method, what is Accent’s cost of goods sold for 2009?

A. ₤120,000.

B. ₤122,000.

C. ₤124,000.

B. ₤122,000.

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72

Which inventory method is least likely to be used under IFRS?

A. First in, first out (FIFO).

B. Last in, first out (LIFO).

C. Weighted average.

B. Last in, first out (LIFO).

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73

At the beginning of 2009, Glass Manufacturing purchased a new machine for its assembly line at a cost of $600,000. The machine has an estimated useful life of 10 years and estimated residual value of $50,000. Under the straight-line method, how much depreciation would Glass take in 2010 for financial reporting purposes?

A. $55,000.

B. $60,000.

C. $65,000.

A. $55,000.

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74

Using the same information as in Question 15, how much depreciation would Glass take in 2009 for financial reporting purposes under the double-declining balance method?

A. $60,000.

B. $110,000.

C. $120,000.

C. $120,000.

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75

Which combination of depreciation methods and useful lives is most conservative in the year a depreciable asset is acquired?

A. Straight-line depreciation with a short useful life.

B. Declining balance depreciation with a long useful life.

C. Declining balance depreciation with a short useful life.

C. Declining balance depreciation with a short useful life.

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76

Under IFRS, a loss from the destruction of property in a fire would most likely be classified as:

A. continuing operations.

B. discontinued operations.

C. other comprehensive income.

A. continuing operations.

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77

A company chooses to change an accounting policy. This change requires that, if practical, the company restate its financial statements for:

A. all prior periods.

B. current and future periods.

C. prior periods shown in a report.

C. prior periods shown in a report.

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78

For 2009, Flamingo Products had net income of $1,000,000. At 1 January 2009, there were 1,000,000 shares outstanding. On 1 July 2009, the company issued 100,000 new shares for $20 per share. The company paid $200,000 in dividends to common shareholders. What is Flamingo’s basic earnings per share for 2009?

A. $0.80.

B. $0.91.

C. $0.95.

C. $0.95.

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79

For its fiscal year-end, Calvan Water Corporation (CWC) reported net income of $12 million and a weighted average of 2,000,000 common shares outstanding. The company paid $800,000 in preferred dividends and had 100,000 options outstanding with an average exercise price of $20. CWC’s market price over the year averaged $25 per share. CWC’s diluted EPS is closest to:

A. $5.33.

B. $5.54.

C. $5.94.

B. $5.54.

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80

A company with no debt or convertible securities issued publicly traded common stock three times during the current fiscal year. Under both IFRS and US GAAP, the company’s:

A. basic EPS equals its diluted EPS.

B. capital structure is considered complex at year-end.

C. basic EPS is calculated by using a simple average number of shares outstanding.

A. basic EPS equals its diluted EPS.

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81

24. Laurelli Builders (LB) reported the following financial data for year-end 31 December: Which statement about the calculation of LB’s EPS is most accurate?

A. LB’s basic EPS is $1.12.

B. LB’s diluted EPS is equal to or less than its basic EPS.

C. The weighted average number of shares outstanding is 2,210,000.

B. LB’s diluted EPS is equal to or less than its basic EPS.

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82

Cell Services Inc. (CSI) had 1,000,000 average shares outstanding during all of 2009. During 2009, CSI also had 10,000 options outstanding with exercise prices of $10 each. The average stock price of CSI during 2009 was $15. For purposes of computing diluted earnings per share, how many shares would be used in the denominator?

A. 1,003,333.

B. 1,006,667.

C. 1,010,000.

A. 1,003,333.

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83

For its fiscal year-end, Sublyme Corporation reported net income of $200 million and a weighted average of 50,000,000 common shares outstanding. There are 2,000,000 convertible preferred shares outstanding that paid an annual dividend of $5. Each preferred share is convertible into two shares of the common stock. The diluted EPS is closest to:

A. $3.52.

B. $3.65.

C. $3.70.

C. $3.70.

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84

When calculating diluted EPS, which of the following securities in the capital structure increases the weighted average number of common shares outstanding without affecting net income available to common shareholders?

A. Stock options

B. Convertible debt that is dilutive

C. Convertible preferred stock that is dilutive

A. Stock options

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85

Which statement is most accurate? A common size income statement:

A. restates each line item of the income statement as a percentage of net income.

B. allows an analyst to conduct cross-sectional analysis by removing the effect of company size.

C. standardizes each line item of the income statement but fails to help an analyst identify differences in companies’ strategies.

B. allows an analyst to conduct cross-sectional analysis by removing the effect of company size.

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86

Selected year-end financial statement data for Workhard are shown below. Workhard’s comprehensive income for the year:

A. is $18 million.

B. is increased by the derivatives accounted for as hedges.

C. includes $4 million in other comprehensive income.

C. includes $4 million in other comprehensive income.

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87

When preparing an income statement, which of the following items would most likely be classified as other comprehensive income?

A. A foreign currency translation adjustment

B. An unrealized gain on a security held for trading purposes

C. A realized gain on a derivative contract not accounted for as a hedge

A. A foreign currency translation adjustment

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88

The cost of equity is equal to the:

A. expected market return.

B. rate of return required by stockholders.

C. cost of retained earnings plus dividends.

B. rate of return required by stockholders.

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89

Which of the following statements is correct?

A. The appropriate tax rate to use in the adjustment of the before-tax cost of debt to determine the after-tax cost of debt is the average tax rate because interest is deductible against the company's entire taxable income.

B. For a given company, the after-tax cost of debt is generally less than both the cost of preferred equity and the cost of common equity.

C. For a given company, the investment opportunity schedule is upward sloping because as a company invests more in capital projects, the returns from investing increase.

B. For a given company, the after-tax cost of debt is generally less than both the cost of preferred equity and the cost of common equity.

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90

Using the dividend discount model, what is the cost of equity capital for Zeller Mining if the company will pay a dividend of C$2.30 next year, has a payout ratio of 30 percent, a return on equity (ROE) of 15 percent, and a stock price of C$45?

A. 9.61 percent.

B. 10.50 percent.

C. 15.61 percent.

C. 15.61 percent.

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91

Dot.Com has determined that it could issue $1,000 face value bonds with an 8 percent coupon paid semi-annually and a five-year maturity at $900 per bond. If Dot.Com’s marginal tax rate is 38 percent, its after-tax cost of debt is closest to:

A. 6.2 percent.

B. 6.4 percent.

C. 6.6 percent.

C. 6.6 percent.

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92

Morgan Insurance Ltd. issued a fixed-rate perpetual preferred stock three years ago and placed it privately with institutional investors. The stock was issued at $25 per share with a $1.75 dividend. If the company were to issue preferred stock today, the yield would be 6.5 percent. The stock's current value is:

A. $25.00.

B. $26.92.

C. $37.31.

B. $26.92.

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93

A financial analyst at Buckco Ltd. wants to compute the company's weighted average cost of capital (WACC) using the dividend discount model. The analyst has gathered the following data: Buckco’s WACC is closest to:

A. 8 percent.

B. 9 percent.

C. 12 percent.

B. 9 percent.

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94

The Gearing Company has an after-tax cost of debt capital of 4 percent, a cost of preferred stock of 8 percent, a cost of equity capital of 10 percent, and a weighted average cost of capital of 7 percent. Gearing intends to maintain its current capital structure as it raises additional capital. In making its capital-budgeting decisions for the average-risk project, the relevant cost of capital is:

A. 4 percent.

B. 7 percent.

C. 8 percent.

B. 7 percent.

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95

Fran McClure of Alba Advisers is estimating the cost of capital of Frontier Corporation as part of her valuation analysis of Frontier. McClure will be using this estimate, along with projected cash flows from Frontier's new projects, to estimate the effect of these new projects on the value of Frontier. McClure has gathered the following information on Frontier Corporation: The weights that McClure should apply in estimating Frontier's cost of capital for debt and equity are, respectively:

A. wd = 0.200; we = 0.800.

B. wd = 0.185; we = 0.815.

C. wd = 0.223; we = 0.777.

C*. wd* = 0.223; we = 0.777.

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96

Wang Securities had a long-term stable debt-to-equity ratio of 0.65. Recent bank borrowing for expansion into South America raised the ratio to 0.75. The increased leverage has what effect on the asset beta and equity beta of the company?

A. The asset beta and the equity beta will both rise.

B. The asset beta will remain the same and the equity beta will rise.

C. The asset beta will remain the same and the equity beta will decline.

B. The asset beta will remain the same and the equity beta will rise.

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97

Brandon Wiene is a financial analyst covering the beverage industry. He is evaluating the impact of DEF Beverage’s new product line of flavored waters. DEF currently has a debt-to-equity ratio of 0.6. The new product line would be financed with $50 million of debt and $100 million of equity. In estimating the valuation impact of this new product line on DEF's value, Wiene has estimated the equity beta and asset beta of comparable companies. In calculating the equity beta for the product line, Wiene is intending to use DEF's existing capital structure when converting the asset beta into a project beta. Which of the following statements is correct?

A. Using DEF’s debt-to-equity ratio of 0.6 is appropriate in calculating the new product line's equity beta.

B. Using DEF’s debt-to-equity ratio of 0.6 is not appropriate, but rather the debt-to-equity ratio of the new product, 0.5, is appropriate to use in calculating the new product line’s equity beta.

C. Wiene should use the new debt-to-equity ratio of DEF that would result from the additional $50 million debt and $100 million equity in calculating the new product line's equity beta.

B. Using DEF’s debt-to-equity ratio of 0.6 is not appropriate, but rather the debt-to-equity ratio of the new product, 0.5, is appropriate to use in calculating the new product line’s equity beta.

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98

Trumpit Resorts Company currently has 1.2 million common shares of stock outstanding and the stock has a beta of 2.2. It also has $10 million face value of bonds that have five years remaining to maturity and 8 percent coupon with semi-annual payments, and are priced to yield 13.65 percent. If Trumpit issues up to $2.5 million of new bonds, the bonds will be priced at par and have a yield of 13.65 percent; if it issues bonds beyond $2.5 million, the expected yield on the entire issuance will be 16 percent. Trumpit has learned that it can issue new common stock at $10 a share. The current risk-free rate of interest is 3 percent and the expected market return is 10 percent. Trumpit’s marginal tax rate is 30 percent. If Trumpit raises $7.5 million of new capital while maintaining the same debt-to-equity ratio, its weighted average cost of capital is closest to:

A. 14.5 percent.

B. 15.5 percent.

C. 16.5 percent.

B. 15.5 percent.

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99

Using the capital asset pricing model, Kruspa’s cost of equity capital for its typical project is closest to:

A. 7.62 percent.

B. 10.52 percent.

C. 12.40 percent.

B. 10.52 percent.

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100

Sandell is interested in the weighted average cost of capital of Kruspa AB prior to its investing in the China project. This weighted average cost of capital (WACC) is closest to:

A. 7.65 percent.

B. 9.23 percent.

C. 10.17 percent.

B. 9.23 percent.

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