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financial statement analysis
Portfolio Management Corporate Issuers Financial Statement Analysis Volume 2 CFA Institute - Solutions
8. 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
7. For 2009, Flamingo Products had net income of USD1,000,000. At 1 January 2009, there were 1,000,000 shares outstanding. On 1 July 2009, the company issued 100,000 new shares for USD20 per share. The company paid USD200,000 in dividends to common shareholders. What is Flamingo’s basic earnings
6. 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.
5. 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.
4. 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.
3. 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
2. Fairplay reported the information shown in Exhibit 1 related to the sale of its products during 2009, which was its first year of business:Exhibit 1: Fairplay Revenue USD1,000,000 Returns of goods sold USD100,000 Cash collected USD800,000 Cost of goods sold USD700,000 Under the accrual basis of
1. 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.
evaluate a company’s financial performance using common-size income statements and financial ratios based on the income statement
describe how earnings per share is calculated and calculate and interpret a company’s basic and diluted earnings per share for companies with simple and complex capital structures including those with antidilutive securities
describe the financial reporting treatment and analysis of non-recurring items (including discontinued operations, unusual or infrequent items) and changes in accounting policies
describe general principles of expense recognition, specific expense recognition applications, implications of expense recognition choices for financial analysis and contrast costs that are capitalized versus those that are expensed in the period in which they are incurred
describe general principles of revenue recognition, specific revenue recognition applications, and implications of revenue recognition choices for financial analysis
16. Which of the following sources of information used by analysts is found outside a company’s annual report?A. Auditor’s report B. Peer company analysis C. Management discussion and analysis
15. Interim financial reports released by a company are most likely to be:A. monthly.B. unaudited.C. unqualified.
14. An independent audit report is most likely to provide:A. absolute assurance about the accuracy of the financial statements.B. reasonable assurance that the financial statements are fairly presented.C. a qualified opinion with respect to the transparency of the financial statements.
13. An auditor determines that a company’s financial statements are prepared in accordance with applicable accounting standards except with respect to inventory reporting. This exception is most likely to result in an audit opinion that is:A. adverse.B. qualified.C. unqualified.
12. What type of audit opinion is preferred when analyzing financial statements?A. Adverse B. Qualified C. Unqualified
11. Information about a company’s objectives, strategies, and significant risks are most likely to be found in the:A. auditor’s report.B. management commentary.C. notes to the financial statements.
10. Information about management and director compensation is most likely to be found in the:A. auditor’s report.B. proxy statement.C. earnings release.
9. Accounting policies, methods, and estimates used in preparing financial statements are most likely to be found in the:A. auditor’s report.B. management commentary.C. notes to the financial statements.
8. Which of the following best describes why the notes that accompany the financial statements are required? The notes:A. permit flexibility in statement preparation.B. standardize financial reporting across companies.C. provide information necessary to understand the financial statements.
7. A core objective of the International Organization of Securities Commissions is to:A. eliminate systemic risk.B. protect users of financial statements.C. ensure that markets are fair, efficient, and transparent.
6. US GAAP are currently developed by which entity?A. Securities and Exchange Commission B. Financial Accounting Standards Board C. Public Company Accounting Oversight Board
5. International Financial Reporting Standards are currently developed by which entity?A. IFRS Foundation B. International Accounting Standards Board C. International Organization of Securities Commissions
4. The primary role of financial statement analysis is best described as:A. providing information useful for making investment decisions.B. evaluating a company for the purpose of making economic decisions.C. using financial reports prepared by analysts to make economic decisions.
3. Which of the following best describes the role of financial statement analysis?A. To provide information about a company’s performance B. To provide information about a company’s changes in financial position C. To form expectations about a company’s future performance and financial
2. Which phase in the financial statement analysis framework is most likely to involve producing updated reports and recommendations?A. Follow-up B. Analyze/interpret the processed data C. Develop and communicate conclusions and recommendations
1. Ratios are an input into which step in the financial statement analysis framework?A. Process data B. Collect input data C. Analyze/interpret the processed data
describe information sources that analysts use in financial statement analysis besides annual and interim financial reports
describe implications for financial analysis of alternative financial reporting systems and the importance of monitoring developments in financial reporting standards
describe the importance of regulatory filings, financial statement notes and supplementary information, management’s commentary, and audit reports
describe the roles of financial statement analysis
describe the steps in the financial statement analysis framework
5. Discuss key risks, opportunities, and questions regarding DiaSera’s business model.
4. Discuss key risks, opportunities, and questions regarding the HealthyPet business model.
3. Complete the table of business model features for DiaSera.Customers Products Channels Pricing strategy
2. Complete the grid of business model features for HealthyPet.Customers Products Channels Pricing strategy
1. The sequence of processes involved in the creation of a product, both within and external to a firm, including all the steps involved in producing a physical product and delivering it to the end customer, regardless of whether those steps are performed by a single firm, is referred to as the:A.
describe various types of business models
describe key features of business models
5. A financial analyst is evaluating the capital structure for Plover, Inc., a European-based unleveraged firm with a constant (perpetual) cash flow of EUR10.0 million per year before taxes. The firm has a market value of EUR100.0 million and a corporate tax rate of 20%. Plover plans to issue
4. The level of debt that will maximize the value of Boulder Inc. is closest to:A. $15 million.B. $20 million.C. $30 million.
3. Including the present value of the cost of distress, the value of Boulder is closest to:A. $49 million.B. $55 million.C. $59.5 million.
2. The use of the $15 million of debt financing increases the value of Boulder by ____________ over its unlevered value. Ignore the costs of financial distress.A. $4.5 million B. $10.5 million C. $15 million
1. The WACC of the unleveraged firm, prior to the debt issue, is closest to:A. 4.00%.B. 9.33%.C. 13.33%.
describe optimal and target capital structures
explain the Modigliani–Miller propositions regarding capital structure
explain factors affecting capital structure and the weighted-average cost of capital
calculate and interpret the weighted-average cost of capital for a company
5. Considering ABC management’s ROIC-based investment criterion and the IRR and NPV of both projects, Soroka should recommend to:A. reject both projects A and B.B. invest only in Project B because it has a higher NPV.C. invest only in Project A because has positive cash flow during all four years.
4. Based on ABC’s balance sheet presented in Exhibit 2, Soroka should calculate:A. average invested capital of $72,510 and ROIC of 9.50%.B. average invested capital of $80,720 and ROIC of 10.94%.C. average invested capital of $92,995 and ROIC of 9.50%.
3. The most likely impact from the cash-flow timing considered by Soroka is that:A. both IRR and NPV would decrease.B. both IRR and NPV stay unchanged.C. only IRR would decrease but NPV would increase.
2. With regard to Project A and Project B, which of the following is true?A. Both projects should be invested in according to the IRR decision rule.B. Both projects should be invested in according to the NPV decision rule.C. Only Project B should be invested in according to the IRR decision rule.
1. When preparing the cash-flow forecasts for both projects, Soroka should include:A. only the cost of the market research.B. only the loss of revenue from existing products.C. both the market research cost and the loss of revenue from existing products.
describe types of real options relevant to capital investments
describe principles of capital allocation and common capital allocation pitfalls
describe the capital allocation process, calculate net present value(NPV), internal rate of return (IRR), and return on invested capital(ROIC), and contrast their use in capital allocation
describe types of capital investments
5. An issuer eliminated the prompt-payment discount it had offered to customers.This action most likely will:A. increase the issuer’s liquidity.B. decrease the issuer’s liquidity.C. not affect the issuer’s liquidity.
4. An analyst is evaluating an issuer’s liquidity and calculates a negative cash conversion cycle for the issuer in the most recent fiscal year. This result is:A. not feasible.B. possible, because the issuer has sufficient cash and marketable securities on hand to support short-term needs.C.
3. An analyst gathers balance sheet information for the most recent fiscal year for three issuers.Issuer A Issuer B Issuer C Cash 100 120 50 Marketable securities 20 10 20 Accounts receivable 300 300 200 Inventory 500 600 300 Prepaid expenses 50 0 10 Accounts payable 400 500 300 Accrued expenses 40
2. Which of the following will most likely decrease an issuer’s cash conversion cycle?An increase in its days:A. sales outstanding.B. of inventory on hand.C. payable outstanding.
1. An issuer changing its credit terms for customers from 2/10, net 30 to 2/10, net 40 will most likely experience:A. a pull on its liquidity.B. a drag on its liquidity.C. no change in its liquidity.
describe issuers’ objectives and compare methods for managing working capital and liquidity
explain liquidity and compare issuers’ liquidity levels
explain the cash conversion cycle and compare issuers’ cash conversion cycles
5. Kobe Steel’s governance failures most likely resulted in reduced:A. cost of debt.B. agency costs.C. growth opportunities.
4. Discuss the financial risk implications of the post-scandal stock and bond prices with regard to investor confidence.
3. Which of the following is considered a best practice that would strengthen the measures discussed to prevent a recurrence of the misconduct?A. A shareholder rights plan B. A stock-based compensation plan C. An audit committee composed solely of independent board members
2. Discuss the stakeholder incentives and the conflicts that arose between Kobe’s management and the company’s customers.
1. Identify three key stakeholder relationships for Kobe Steel and discuss their role in the misconduct or how they were affected.
describe potential risks of poor corporate governance and stakeholder management and benefits of effective corporate governance and stakeholder management
describe corporate governance and mechanisms to manage stakeholder relationships and mitigate associated risks
describe the principal-agent relationship and conflicts that may arise between stakeholder groups
5. Explain why a company’s management might not act in the best interests of shareholders.
4. A company has developed a long-term relationship with its major supplier. The supplier has developed complex systems that integrate with those of the compa-ny and has an agreement to receive payment within 30 days for goods delivered.Discuss the supplier’s stakeholder relationship with the
3. Consider the same all-equity-financed firm as in Question 1 and its choices for financing a new investment in LT assets of 40. The pertinent details in the firm’s initial balance sheet are shown below. Revenue before the investment is 200, operating expenses are 140 and are expected to remain
2. Calculate the return on equity for the period if the firms experience a 20% increase and decrease in revenue (from Question 1), assuming operating expenses remain unchanged.
1. If we assume an interest rate of 20% for the period, calculate net income for each firm and compare their returns on equity for the period, ignoring income taxes.
5. Which of the following rationales would be most consistent with the Dee family’s choice to create this complex organizational structure instead of simply organizing as a limited partnership?A. It provides management control without the need for majority ownership by the family, while
4. What is a significant difference between the limited partners of DAG LP and the outside shareholders of DAG Inc.?A. Managerial responsibilities B. Taxation of income from the partnership C. The ability to vote and replace members of the DAG Inc. board of directors
3. Which of the following best describes DAG LP and DAG Inc.?A. Neither DAG LP nor DAG Inc. is managed by a majority owner.B. DAG Inc. has limits to its ability to raise new capital because of the dividend requirement on its corporate form.C. DAG Inc. faces unlimited liability as the general
2. Which of the following best describes the taxation of DAG Inc. and DAG LP?A. DAG LP pays tax based on its pre-tax income.B. Shareholders of DAG Inc. pay tax based on dividend income.C. DAG Inc. pays tax based on its pre-tax income.
1. What percentage of the timber and forest assets are effectively owned by the Dee family members in this scenario?A. 24%B. 30%C. 80%
41. Portfolio managers, who are maximizing risk-adjusted returns, will seek to invest less in securities with:A. lower values for nonsystematic variance.B. values of nonsystematic variance equal to 0.C. higher values for nonsystematic variance.
40. Portfolio managers who are maximizing risk-adjusted returns will seek to invest more in securities with:A. lower values of Jensen’s alpha.B. values of Jensen’s alpha equal to 0.C. higher values of Jensen’s alpha.
39. The intercept of the best fit line formed by plotting the excess returns of a manager’s portfolio on the excess returns of the market is best described as Jensen’s:A. beta.B. ratio.C. alpha.
38. Analysts who have estimated returns of an asset to be greater than the expected returns generated by the capital asset pricing model should consider the asset to be:A. overvalued.B. undervalued.C. properly valued.
37. The slope of the security characteristic line is an asset’s:A. beta.B. excess return.C. risk premium.
36. Which of the following performance measures is most appropriate for an investor who is not fully diversified?A. M2.B. Treynor ratio.C. Jensen’s alpha.
35. Which of the following performance measures does not require the measure to be compared to another value?A. Sharpe ratio.B. Treynor ratio.C. Jensen’s alpha.
34. Which of the following performance measures is consistent with the CAPM?A. M2.B. Sharpe ratio.C. Jensen’s alpha.
33. Three equity fund managers have performance records summarized in the following table:Mean Annual Return (%)Standard Deviation of Return (%)Manager 1 14.38 10.53 Manager 2 9.25 6.35 Manager 3 13.10 8.23 Given a risk-free rate of return of 2.60%, which manager performed best based on the Sharpe
32. With respect to capital market theory, which of the following assumptions allows for the existence of the market portfolio? All investors:A. are price takers.B. have homogeneous expectations.C. plan for the same, single holding period.
31. With respect to capital market theory, which of the following statements best describes the effect of the homogeneity assumption? Because all investors have the same economic expectations of future cash flows for all assets, investors will invest in:A. the same optimal risky portfolio.B. the
30. With respect to the capital asset pricing model, a decline in the expected market return will have the greatest impact on the expected return of:A. Security 1.B. Security 2.C. Security 3.
29. With respect to the capital asset pricing model, if the expected market risk premium is 6% the security with the highest expected return is:A. Security 1.B. Security 2.C. Security 3.
28. With respect to the capital asset pricing model, if expected return for Security 2 is equal to 11.4% and the risk-free rate is 3%, the expected return for the market is closest to:A. 8.4%.B. 9.0%.C. 10.3%.
27. With respect to the capital asset pricing model, if the expected market risk premium is 6% and the risk-free rate is 3%, the expected return for Security 1 is closest to:A. 9.0%.B. 12.0%.C. 13.5%.
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