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financial modeling
Corporate Finance Workbook Economic Foundations And Financial Modeling 3rd Edition CFA Institute, Michelle R. Clayman, Martin S. Fridson, George H. Troughton - Solutions
The existence of “stranded assets” is a specific concern among investors of:A. energy companies.B. health care companies.C. property companies.
An investor concerned about clean-up costs resulting from breaches in a publicly traded company’s safety standards would most likely consider which factors in her investment analysis?A. Social factors B. Governance factors C. Environmental factors
_______ investing is the umbrella term used to describe investment strategies that incorporate environmental, social, and governance (ESG) factors into their approaches.A. ESG B. Sustainable C. Responsible
An investor concerned about a publicly traded company’s data privacy and security practices would most likely incorporate which type of ESG factors in an investment analysis?A. Social B. Governance C. Environmental
Which of the following statements regarding ESG investment approaches is most accurate?A. Negative screening excludes industries and companies that do not meet the investor’s ESG criteria.B. Thematic investing considers multiple factors.C. Positive screening excludes industries with unfavorable
Which of the following stakeholders are least likely to be positively affected by increasing the proportion of debt in the capital structure?A. Senior management B. Non-management employees C. Shareholders
Which statement correctly describes corporate governance?A. Corporate governance complies with a set of global standards.B. Corporate governance is independent of both shareholder theory and stakeholder theory.C. Corporate governance seeks to minimize and manage conflicting interests between
Which of the following represents a responsibility of a company’s board of directors?A. Implementation of strategy B. Enterprise risk management C. Considering the interests of shareholders only
Which of the following statements concerning the legal environment and shareholder protection is most accurate?A. A civil law system offers better protection of shareholder interests than does a common law system.B. A common law system offers better protection of shareholder interests than does a
Two analysts are discussing the costs of external financing sources. The first states that the company’s bonds have a known interest rate but that the interest rate on accounts payable and the interest rate on equity financing are not specified. They are implicitly zero. Upon hearing this, the
A company has arranged a $20 million line of credit with a bank, allowing the company the flexibility to borrow and repay any amount of funds as long as the balance does not exceed the line of credit. These arrangements are called:A. convertibles.B. factoring.C. revolvers.
The SOA Company needs to raise 75 million, in local currency, for substantial new investments next year. Specific details, all in local currency, are as follows:• Investments of 10 million in receivables and 15 million in inventory will be made.Fixed capital investments of 50 million, including
XY1 Corporation’s CFO has decided to pursue a moderate approach to funding the firm’s working capital. Which of the following methods would best fit that particular approach?A. Finance permanent and variable current assets with long-term financing.B. Finance permanent and variable current
Kwam Solutions must raise €120 million. Kwam has two primary sources of liquidity:€60 million of marketable securities (which can be sold with minimal liquidation/brokerage costs) and €30 million of bonds (which can be sold with 3% liquidation costs). Kwam can sell some or all of either of
A company increasing its credit terms for customers from 1/10, net 30 to 1/10, net 60 will most likely experience:A. an increase in cash on hand.B. a lower level of uncollectible accounts.C. an increase in the average collection period.
Paloma Villarreal has received three suggestions from her staff about how to address her firm’s liquidity problems.Suggestion 1.Reduce the firm’s inventory turnover rate.Suggestion 2.Reduce the average collection period on accounts receivable.Suggestion 3.Accelerate the payments on accounts
Selected liquidity ratios for three firms in the leisure products industry are given in the table below. The most recent fiscal year ratio is shown along with the average of the previous five years.Relative to its peers and relative to its own prior performance, which company is in the most liquid
An analyst is examining the cash conversion cycles and their components for three companies that she covers in the leisure products industry. She believes that changes in the investments in these working capital accounts can reveal liquidity stresses on a company.Which company’s operating cycle
Which of the following are considered internal sources of financing for a company’s working capital management?A. Committed and uncommitted lines of credit B. Accounts receivable and inventory C. Accounts payable and accruals
The NPV of an investment is equal to the sum of the expected cash flows discounted at the:A. internal rate of return.B. risk-free rate.C. opportunity COC.
A USD2.2 million investment will result in the following year-end cash flows:Using an 8% opportunity COC, the investment’s NPV is closest to:A. USD2.47 million.B. USD3.40 million.C. USD4.67 million. Year 1 2 3 4 Cash flow (millions) USD1.3 USD1.6 USD1.9 USD0.8
The IRR is best described as the:A. opportunity COC.B. time-weighted rate of return.C. discount rate that makes the NPV equal to zero.
A three-year investment requires an initial outlay of GBP1,000. It is expected to provide three year-end cash flows of GBP200 plus a net salvage value of GBP700 at the end of three years. Its IRR is closest to:A. 10%.B. 11%.C. 20%.
An investment of USD100 generates after-tax cash flows of USD40 in Year 1, USD80 in Year 2, and USD120 in Year 3.The required rate of return is 20%. The NPV is closest to:A. USD42.22.B. USD58.33.C. USD68.52.
Catherine Ndereba is an energy analyst tasked with evaluating a crude oil exploration and production company. The company previously announced that it plans to embark on a new project to drill for oil offshore. As a result of this announcement, the stock price increased by 10%. After conducting her
The Bearing Corp. invests only in positive-NPV projects. Which of the following statements is true?A. Bearing’s ROIC is greater than its COC.B. Bearing’s COC is greater than its ROIC.C. We cannot reach any conclusions about the relationship between the company’s ROIC and COC.
What type of project is most likely to yield new revenues for a company?A. Regulatory/compliance B. Going concern C. Expansion
What is the NPV (CAD millions) of the original project for Bouchard Industries without considering the production-flexibility option?A. –CAD6.11 million B. –CAD5.66 million C. CAD2.33 million Bouchard Industries is a Canadian company that manufactures gutters for residential houses. Its
What is the NPV (CAD millions) of the optimal set of investment decisions for Bouchard Industries including the production-flexibility option?A. –CAD6.34 million B. CAD7.43 million C. CAD31.03 million Bouchard Industries is a Canadian company that manufactures gutters for residential houses. Its
Should the capital allocation committee accept the internal auditor’s suggestions?A. No for Suggestions 1 and 2 B. No for Suggestion 1 and yes for Suggestion 2 C. Yes for Suggestion 1 and no for Suggestion 2 Bouchard Industries is a Canadian company that manufactures gutters for residential
Which of the following is least likely to affect the capital structure of Longdrive Trucking Company? Longdrive has moderate leverage today.A. The acquisition of a major competitor for shares B. A substantial increase in share price C. The payment of a stock dividend
Which of these statements is most accurate with respect to the use of debt by a start-up fashion retailer with negative cash flow and uncertain revenue prospects?A. Debt financing will be unavailable or very costly.B. The company will prefer to use equity rather than debt given its uncertain cash
Which of the following is true of the growth stage in a company’s development?A. Cash flow is negative, by definition, with investment outlays exceeding cash flow from operations.B. Cash flow may be negative or positive.C. Cash flow is positive and growing quickly.
Which of the following mature companies is most likely to use a high proportion of debt in its capital structure?A. A mining company with a large, fixed asset base B. A software company with very stable and predictable revenues and an asset-light business model C. An electric utility
Which of the following is most likely to occur as a company evolves from growth stage to maturity and seeks to optimize its capital structure?A. The company relies on equity to finance its growth.B. Leverage increases as the company needs more capital to support organic expansion.C. Leverage
Which of the following is least likely to be true with respect to optimal capital structure?A. The optimal capital structure minimizes WACC.B. The optimal capital structure is generally close to the target capital structure.C. Debt can be a significant portion of the optimal capital structure
Other factors being equal, in which of the following situations are debt-equity conflicts likely to arise?A. Financial leverage is low.B. The company’s debt is secured.C. The company’s debt is long-term.
Which of the following is an example of agency costs? In each case, management is advocating a substantial acquisition and management compensation is heavily composed of stock options.A. Management believes the acquisition will be positive for shareholder value but negative for the value and
Which of the following is least accurate with respect to debt-equity conflicts?A. Equityholders focus on potential upside and downside outcomes, while debtholders focus primarily on downside risk.B. Management attempts to balance the interests of equityholders and debtholders.C. Debt covenants can
Which of the following is least likely to be true with respect to agency costs and senior management compensation?A. Equity-based incentive compensation is the primary method to address the problem of agency costs.B. A well-designed compensation scheme should eliminate agency costs.C. High cash
Integrated Systems Solutions Inc. (ISS) is a technology company that sells software to companies in the building construction industry. The company’s assets consist mostly of intangible assets. Although the company is profitable, revenue growth and earnings growth have been slowing in recent
Tillett Technologies is a manufacturer of high-end audio and video (AV) equipment.The company, with no debt in its capital structure, has experienced rapid growth in revenues and improved profitability in recent years. About half of the company’s revenues come from subscription-based service
Discuss two financial metrics that can be used to assess a company’s ability to service additional debt in its capital structure.
Identify two market conditions that can be characterized as favorable for companies wishing to add debt to their capital structures.
Which of the following is least accurate with respect to the market value and book value of a company’s equity?A. Market value is more relevant than book value when measuring a company’s cost of capital.B. Book value is often used by lenders and in financial ratio calculations.C. Both market
Which of the following is not a reason why target capital structure and actual capital structure tend to differ?A. Financing is often tied to a specific investment.B. Companies raise capital when the terms are attractive.C. Target capital structure is set for a particular project, while actual
Vega Company has announced that it intends to raise capital next year, but it is unsure as to the appropriate method of raising capital. White, the CFO, has concluded that Vega should apply the pecking order theory to determine the appropriate method of raising capital. Based on White’s
At the time of valuation, the estimated betas for JPMorgan Chase & Co. and the Boeing Company were 1.50 and 0.80, respectively. The risk-free rate of return was 4.35%, and the equity risk premium was 8.04%. Based on these data, calculate the required rates of return for these two stocks using the
Happy 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 an 8% coupon with semi-annual payments and are priced to yield 13.65%. If Happy issues
SebCoe plc, a British firm, is evaluating an investment in a £50 million project that will be financed with 50% debt and 50% equity. Management has already determined that the NPV of this project is £5 million if it uses internally generated equity. However, if the company uses external equity,
Calculate an estimate of Precision’s after-tax cost of debt.
Explain why the SP LM chose for estimating Precision’s cost of equity is likely justified in being near the high end of the range.
Discuss company characteristics of Precision that would justify a higher or lower SCRP.
Calculate estimates of Precision’s cost of equity using the (1) extended CAPM and the (2) build-up approach.
Calculate an estimate of Precision’s WACC using the build-up approach estimate of the cost of equity.
The inclusion of index returns prior to Year 1 would be expected to:A. bias the historical ERP estimate upward.B. bias the historical ERP estimate downward.C. have no effect on the historical ERP estimate.An equity index is established in Year 1 for a country that has recently moved to a market
The events of 2012 to 2016 would be expected to:A. bias the historical ERP estimate upward.B. bias the historical ERP estimate downward.C. have no effect on the historical ERP estimate.An equity index is established in Year 1 for a country that has recently moved to a marketeconomy. The index
An estimate of the ERP consistent with the Grinold-Kroner model is closest to:A. 2.7%.B. 3.0%.C. 4.3%.An equity index is established in Year 1 for a country that has recently moved to a marketeconomy. The index vendor constructed returns for the four years prior to Year 1 based onthe initial group
The implementation of Proposal #1 would generally lead to shareholders:A. having to pay tax on the dividend received.B. experiencing a decrease in the total cost basis of their shares.C. having the same proportionate ownership as before implementation.John Ladan is an analyst in the research
If Yeta’s management implemented Proposal #2 at the current share price shown in Exhibit 1, Yeta’s book value per share after implementation would be closest to:A. US$25.20.B. US$25.71.C. US$26.12.John Ladan is an analyst in the research department of an international securities firm. Ladan is
Based on Exhibit 1, if Yeta’s management implemented Proposal #3 at the current share price, earnings per share would:A. decrease.B. remain unchanged.C. increase.John Ladan is an analyst in the research department of an international securities firm. Ladan is currently analyzing Yeta Products, a
Based on Yeta’s target capital structure, Proposal #4 will most likely:A. increase the default risk of Yeta’s debt.B. increase the agency conflict between Yeta’s shareholders and managers.C. decrease the agency conflict between Yeta’s shareholders and bondholders.John Ladan is an analyst in
The implementation of Proposal #4 would most likely signal to Ladan and other investors that future earnings growth can be expected to:A. decrease.B. remain unchanged.C. increase.John Ladan is an analyst in the research department of an international securities firm. Ladan is currently analyzing
Which of the following is least likely to be a key feature of a business model?A. Unit economics B. Channel strategy C. Financial forecasts D. Customer cost of ownership E. Target customer identification
When should an analyst expect a business model to employ premium pricing? When:A. the company is a price taker.B. the firm is small and returns are highly scale sensitive.C. significant differentiation is possible in the product category.D. the firm is a market leader and demand is very price
Which is the most accurate statement about a platform business?A. A platform business is based on network effects.B. A platform business can be a non-technology business.C. Value creation for customers for a platform business occurs externally.D. It can be difficult to attract users in the
Which of the following businesses is least likely to have network effects?A. A stock exchange B. A telephone company C. A classified advertising website D. A price comparison website for travel airfares E. A resume preparation service for online job seekers
A flower shop has preferred supplier arrangements with an answering service, to take orders after hours, and a bicycle delivery service, to ensure that it can make deliveries quickly, reliably, and at a reasonable cost. Which of the following statements is most accurate for the flower shop?A. The
Which of the following is the closest example of a one-sided network?A. An online employment website B. A dating website for men and women C. A social network for model train collectors D. A website for home improvement contractors
Which of the following statements is not representative of unit costs?A. Unit costs generally exclude labor costs.B. Business models generally consider unit costs.C. Unit costs are used to calculate break-even points.D. If a lemonade stand uses 5 cents worth of lemons, 2 cents worth of sugar, and a
Which of the following companies would most likely have a high level of macro risk?A. A coffee plantation in Brazil B. A Swedish mining equipment manufacturer C. A call center outsourcing business based in India
Which of the following is most likely to have a high level of industry risk?A. Toll road B. Pest control services company C. Oil well drilling service company
For a newly launched clothing company in Japan that uses offshore production in Malaysia, classify each of the following impacts: 1. Demand falls gradually due to a declining population 2. Consumer tastes shift to favor locally manufactured apparel 3. The company faces uncertainty about future
Which of the following is an example of significant execution risk?A. A manufacturer replaces aging factory machinery with similar but more efficient equipment.B. A marketer of high-fashion pet accessories tests the market to see if there is demand for glamourous dog harnesses made with faux fur.C.
Which of the following is most likely to increase a business’s operating leverage?A. Reducing prices B. Borrowing rather than issuing equity C. Using casual labor rather than a salaried work force
Which of the following is most likely to increase financial leverage?A. Cutting prices B. Replacing short-term debt with long-term debt C. Entering a sale-leaseback transaction for the company’s head office building
A cyclical company is most likely to:A. have low operating leverage.B. sell relatively inexpensive products.C. experience wider-than-average fluctuations in demand.
An automobile manufacturer is most likely classified in which of the following industry sectors?A. Consumer staples B. Industrial durables C. Consumer discretionary
Which of the following companies most likely has the greatest ability to quickly increase its capacity to offer goods or services?A. A restaurant B. A steel producer C. An insurance company
Industry consolidation and high barriers to entry most likely characterize which life-cycle stage?A. Mature B. Growth C. Embryonic
Based on Exhibit 2, the job candidate most likely using a bottom-up approach to model net sales is:A. Candidate A B. Candidate B C. Candidate C Angela Green, an investment manager at Horizon Investments, intends to hire a new investment analyst. After conducting initial interviews, Green has
Based on Exhibit 2, the modeling approach used by Candidate B to project future net sales is most accurately classified as a:A. hybrid approach.B. top-down approach.C. bottom-up approach.Angela Green, an investment manager at Horizon Investments, intends to hire a new investment analyst. After
Based on Exhibits 1 and 2, Candidate C’s forecast for cost of sales in 2020 is closest to:A. USD18.3 million.B. USD18.9 million.C. USD19.3 million.Angela Green, an investment manager at Horizon Investments, intends to hire a new investment analyst. After conducting initial interviews, Green has
Based on Exhibits 1 and 2, Candidate A’s forecast for SG&A expenses in 2020 is closest to:A. USD23.8 million.B. USD25.5 million.C. USD27.4 million.Angela Green, an investment manager at Horizon Investments, intends to hire a new investment analyst. After conducting initial interviews, Green
Based on Exhibit 2, forecasted interest expense will reflect changes in Chrome’s debt level under the forecast assumptions used by:A. Candidate A.B. Candidate B.C. Candidate C.Angela Green, an investment manager at Horizon Investments, intends to hire a new investment analyst. After conducting
Candidate B asks Green if she had additional information on Horizon’s industry peers and competitors, to put the profitability estimates in a richer context. By asking for this additional information for their analysis, Candidate B is seeking to mitigate which behavioral bias?A. Illusion of
Which profitability metric should French use to assess Archway’s five-year historic performance relative to its competitors?A. Current ratio B. Operating margin C. Return on invested capital Nigel French, an analyst at Taurus Investment Management, is analyzing Archway Technologies, a
Based on the current competitive landscape presented in Exhibit 1, French should conclude that Archway’s ability to:A. pass along price increases is high.B. demand lower input prices from suppliers is low.C. generate above-average returns on invested capital is low.Nigel French, an analyst at
Based on the current competitive landscape presented in Exhibit 1, Archway’s operating profit margins over the forecast horizon are least likely to:A. decrease.B. remain constant.C. increase.Nigel French, an analyst at Taurus Investment Management, is analyzing Archway Technologies, a
Based on Exhibit 2, Archway’s forecasted gross profit margin for 2020 is closest to:A. 62.7%.B. 67.0%.C. 69.1%.Nigel French, an analyst at Taurus Investment Management, is analyzing Archway Technologies, a manufacturer of luxury electronic auto equipment, at the request of his supervisor, Lukas
French’s approach to forecasting Archway’s working capital accounts would be most likely classified as a:A. hybrid approach.B. top-down approach.C. bottom-up approach.Nigel French, an analyst at Taurus Investment Management, is analyzing Archway Technologies, a manufacturer of luxury electronic
The most appropriate response to Wright’s question about the technological development is to:A. increase the required return.B. decrease the price-to-earnings multiple.C. decrease the perpetual growth rate.Nigel French, an analyst at Taurus Investment Management, is analyzing Archway
If the luxury electronic auto equipment industry is subject to rapid technological changes and market share shifts, how should French best adapt his approach to modeling?A. Examine base rates B. Speak to analysts who hold diverse opinions on the stock C. Forecast multiple scenarios Nigel French, an
Using Porter’s five forces analysis, which of the following competitive factors is likely to have the greatest impact on Omikroon’s petrol scooter pricing power?A. Rivalry B. Threat of substitutes C. Threat of new entrants Gertrude Fromm is a transportation sector analyst at Tucana Investments.
The metric used by Fromm to assess Omikroon’s performance takes into account:A. degree of financial leverage.B. operating liabilities relative to operating assets.C. competitiveness relative to companies in other tax regimes.Gertrude Fromm is a transportation sector analyst at Tucana Investments.
Based on Omikroon’s expectations, the gross profit margin of Omikroon’s electric scooter division in 2021 is most likely to be affected by:A. competition.B. research costs.C. cannibalization by petrol scooters.Gertrude Fromm is a transportation sector analyst at Tucana Investments. She is
Which factor best justifies the five-year forecast horizon for Omikroon selected by Fromm?A. Factor 1 B. Factor 2 C. Factor 3 Gertrude Fromm is a transportation sector analyst at Tucana Investments. She is conducting an analysis of Omikroon, N.V., a (hypothetical) European engineering company that
Fromm’s sensitivity analysis will result in a decrease in the 2020 base case gross profit margin closest to:A. 0.55 percentage points.B. 0.80 percentage points.C. 3.32 percentage points.Gertrude Fromm is a transportation sector analyst at Tucana Investments. She is conducting an analysis of
Fromm’s estimate of growth capital expenditure included in Omikroon’s PP&E under Scenario 2 should be:A. lower than under Scenario 1.B. the same as under Scenario 1.C. higher than under Scenario 1.Gertrude Fromm is a transportation sector analyst at Tucana Investments. She is conducting an
To validate the forecast for rapid growth in the electronic scooter market over the next 10 years, Fromm speaks to the management of Omikroon and investor relations of ZeroWheel, a competitor. Fromm might be subject to which behavioral bias?A. Conservatism B. Overconfidence C. Confirmation Gertrude
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