Kaplan Finance unit 1,4,5,7,8,9 quizes

Kaplan Finance unit 1,4,5,7,8,9 quizes

Subject: Business / Finance Question

Question 1. Question :
Which of the following statements regarding the intrinsic value of a company is correct?
It can be calculated as book value plus the present value of future expected dividends, discounted at the cost of equity capital.
It can be calculated as present value of future expected dividends, discounted at the cost of debt.
It can be calculated as present value of future expected residual income, discounted at the cost of equity capital.
It can be calculated as book value plus the present value of future expected residual income, discounted at the cost of equity capital
Question 2. Question :
Which of the following statistics would be the most useful in determining the efficiency of a car rental company?
Inventory turnover
Number of employees per car rental
Average length of car rental
Number of days cars are rented as a percentage of number of days available for rent
Question 3. Question :
Following is some financial information for Dell Inc.
What is Dell’s P/E ratio for 2006?
\ 27.63
12.81
23.65
9.70
Question 4. Question :
A common size income statement would typically be prepared by dividing:
all items on income statement in Year t by their corresponding value in Year t-1.
all items on income statement in Year t by their corresponding balance sheet accounts in Year t.
all items on income statement in Year t by net income in Year t-1.
all items on income statement in Year t by sales in Year t.
Question 5. Question :
Given the following information, calculate the inventory turnover for ABC Co. for 2006 (pick closest number).
8.96
7.22
6.93
6.18
Question 6. Question :
You have been provided the following information about High Inc.
Working Capital for 2005 is:
$56,000
$20,000
$151,000
$207,000
Question 7. Question :
You are analyzing a large stable company. For the year ending 12/31/05 the company reported earnings of $58,900K and book value at the end of 2005 was $371,700K. You expect earnings to grow at 5% a year in perpetuity, and the dividend payout ratio of 70% to continue. The company borrows at 8%, and has a cost of equity of 12%. The company has 25,000K shares outstanding.
What is your estimate of price using the residual income valuation model at 12/31/05?
$20.62
$21.65
$23.56
$24.72 ()
s:
Question 8. Question :
If a company receives an unqualified audit opinion it means the auditors:
did not complete a full audit and therefore do not feel qualified to give an opinion on financial statements.
are providing assurance that the company will remain financially viable for at least the next year.
are providing assurance that the company’s financial statements fairly present company’s financial performance and position.
are providing assurance that the company’s financial statements are free from misstatement, fraudulent accounting and fairly indicate future performance.
Question 9. Question :
Which of the following ratios is not generally considered to be helpful in assessing short-term liquidity?
Acid test ratio
Current ratio
Days to collect receivables
Days goodwill held
:
Question 10. Question :
Two otherwise equal companies have significantly different dividend payout ratios. Which of the following statements is most likely to be correct? The company with higher the dividend payout ratio:
will have a higher inventory turnover ratio.
will have a lower inventory turnover ratio.
will have higher earnings growth.
will have lower earnings growth.
Which of the following steps are required to adjust LIFO to FIFO?Inventory needs to be calculated as reported LIFO inventory plus LIFO reserve.
Increase deferred tax payable by LIFO reserve times Tax rate.
Retained earnings need to be calculated as reported retained earnings plus LIFO reserve times (1 – Tax rate).
All of the above.
Question 2. Question :
The following information can be found in Manufacturer Company’s financial statements.
If Manufacturer used FIFO its retained earnings as of the end of fiscal 2006 would be:
$ 540,000
$ 440,000
$ 524,000
$ 506,000
Question 3. Question :
Below is selected information taken from the balance sheet of Huy Corporation as of 12/31/06.
The average age of Huy’s depreciable assets as of 2006 is:
2 years
7 years
14 years
34 years
Question 4. Question :
The following information can be found in Manufacturer Company’s financial statements.
If Manufacturer used FIFO its Net Income for fiscal 2006 would be:
$ 165,000
$ 149,000
$ 135,000
CORRECT $ 131,000
Question 5. Question :
Under current US GAAP, goodwill is:
I. amortized over a period not to exceed 40 years.
II. tested annually for impairment.
III. exclusive of separately identifiable intangible assets.
IV. recorded only upon purchase of another entity.
I, II, III and IV
II, III and IV
I, II and III
II and IV
Question 6. Question :
Look Good Corporation has current assets of $1.1M and current liabilities of $1M. It is close to year-end and it would like to increase its current ratio. Which of the following will achieve this?
Encourage customers to pay their bills more quickly.
Increase short-term borrowings by $0.1M.
Sold building for $0.2M in cash.
Liquidate some of its trading marketable securities.
Question 7. Question :
LIFO liquidation occurs when:
a firm changes from LIFO to another inventory method.
a firm experiences an increase in cost of raw materials.
the LIFO reserves decline in value.
the quantity of goods sold is greater than the quantity produced.
Question 8. Question :
The following information can be found in ABC Co.’s financial statements.
Assume a tax rate of 35%. Inventories valued using the LIFO method represented approximately 80% of consolidated inventories.
What will be the retained earnings for 2005 if ABC used FIFO valuation?
CORRECT 3,205,271
3,566,918
3,893,000
4,096,430
Question 9. Question :
A firm has a current ratio greater than 1.0. If the firm’s ending inventory is understated by $3,000 and beginning inventory is overstated by $5,000, the firm’s net income (before taxes) and current ratio will be:
Option A
Option B
Option C
Option D
Question 10. Question :
For Control Furniture Co.,
LIFO Reserve in Year 2006 $91 million
LIFO Reserve in Year 2005 $82 million
Tax Rate is 35%.
To restate Year 2006 LIFO inventories to a FIFO basis, we use the following analytical entry:
Option A
Option B
CORRECT Option C
Option D
Which of the following is incorrect?An analyst should be aware of the following when analyzing a company that has significant investments recorded using the equity method:Cash flow received from investee may be substantially different from investment income recorded.
As investee’s liabilities are not recorded on the company’s balance sheet, there may be significant off-balance-sheet financing.
They must mark investment in investee to market even though there may be no ready market in which they can sell their investment.
Company must record pro rata share of investee’s earnings, which may not be well correlated with changes in market value of investee.
Question 2. Question :
Guido Inc. buys 2,000 shares of Weiner Company for $30 per share on January 1, 2006. At the end of 2006, Weiner shares are trading at $33 per share. Weiner has a total of 200,000 shares outstanding and reported net income of $3,000,000 and paid dividends of $1,000,000 for fiscal 2006.
Determine the amount Guido Inc. will record as an investment on its balance sheet under the three scenarios: Weiner is considered trading marketable equity security (MES), available for sale (AFS) MES or using cost method.
Choice A
Choice B
Choice C
Choice D
Question 3. Question :
Constant Corp. bought Steady Company on June 30, 2005 in a pooling-of-interests transaction. Both companies are in stagnant markets. Steady had total assets of $50,000 and total liabilities of $30,000 with fair market values of $60,000 and $30,000, respectively. Constant issued 1,000 shares, valued at $45 per share. Both companies operate in tax-free havens and take a half-year’s depreciation in the year acquired using ten-year lives. Monthly operating results are as follows:
Assume revenue and earnings remain same for the next year. Company is following SFAS 142.
Feedback:
It can be either $42,000 or $48,000. Under GAAP for purchase accounting, there are two alternatives. Although income is always reported from the acquisition date forward, it is permitted to report 12 months sales of the acquired company, as long as 12 months expenses are included and pre-acquisition earnings are backed out. The simpler (and easier for the reader) approach is to only report post-acquisition (i.e., six months in this example) sales and expenses.
If accounted for as a purchase, 2005 consolidated earnings are reported as
$10,700
$11,900
$12,700
$13,200 (
)
Question 4. Question :
Parent Company Inc. successfully bids for Child Company Inc. in year X1. Parent Company Inc. has purchased all of Child’s shares outstanding for $8,500. Following are excerpts from both companies’ financial statements for year X1, prior to the acquisition.
Also assume the following information: the acquisition was accounted for using the purchase method. $1,500 of the excess price relates to depreciable assets, and those assets have an additional useful life of 10 years at the time of the acquisition. Parent Company Inc. uses the straight line depreciation method and has a 34% tax rate. The combined net income for both companies for year X2 (excluding any expenses that need to be recorded as a result of the purchase method accounting for the merger) was $1,560.
What would be total assets in the consolidated financial statements for the date on which the merger became effective, assuming any excess purchase price relates to goodwill?
$50,008
$49,498
$41,508
$44,113
Question 5. Question :
The following information is from L&H’s 2004 income statement:
Feedback: Pre-tax income in 2005 is $3,900 ($2,600 x 1.5), an increase of $1,300. Starting with 2004, add back amortization expense no longer permitted by SFAS 142 (income increases by $2,000) less the impact of the sales decline of $1,400 (at 50% gross margin = $700 real economic income decrease).
Based upon your analysis, you reflect that L&H management
is more than holding its own in a tough economic environment.
needs to strengthen its marketing.
is achieving growth in its new product line.
has adroitly managed its asset portfolio.
Question 6. Question :
Constant Corp. bought Steady Company on June 30, 2005 in a pooling-of-interests transaction. Both companies are in stagnant markets. Steady had total assets of $50,000 and total liabilities of $30,000 with fair market values of $60,000 and $30,000, respectively. Constant issued 1,000 shares, valued at $45 per share. Both companies operate in tax-free havens and take a half-year’s depreciation in the year acquired using ten-year lives. Monthly operating results are as follows:
Assume revenue and earnings remain same for the next year. Company is following SFAS 142.
Feedback:
It can be either $42,000 or $48,000. Under GAAP for purchase accounting, there are two alternatives. Although income is always reported from the acquisition date forward, it is permitted to report 12 months sales of the acquired company, as long as 12 months expenses are included and pre-acquisition earnings are backed out. The simpler (and easier for the reader) approach is to only report post-acquisition (i.e., six months in this example) sales and expenses.
If accounted for as a pooling-of-interests, 2005 consolidated earnings are reported as:
$12,000
$13,200
$14,400
It cannot be determined without further information (
)
Question 7. Question :
A U.S. company has a subsidiary located in Great Britain. If the British pound is the functional currency and is appreciating relative to the dollar, what will happen to the following ratios after translation?
Choice A
Choice B
Choice C
Choice D
Question 8. Question :
Constant Corp. bought Steady Company on June 30, 2005 in a pooling-of-interests transaction. Both companies are in stagnant markets. Steady had total assets of $50,000 and total liabilities of $30,000 with fair market values of $60,000 and $30,000, respectively. Constant issued 1,000 shares, valued at $45 per share. Both companies operate in tax-free havens and take a half-year’s depreciation in the year acquired using ten-year lives. Monthly operating results are as follows:
Assume revenue and earnings remain same for the next year. Company is following SFAS 142.
It can be either $42,000 or $48,000. Under GAAP for purchase accounting, there are two alternatives. Although income is always reported from the acquisition date forward, it is permitted to report 12 months sales of the acquired company, as long as 12 months expenses are included and pre-acquisition earnings are backed out. The simpler (and easier for the reader) approach is to only report post-acquisition (i.e., six months in this example) sales and expenses.
If accounted for as a purchase, 2006 consolidated earnings are reported as
$10,700
$13,400
$11,950
$14,400
Question 9. Question :
Parent Company Inc. successfully bids for Child Company Inc. in year X1. Parent Company Inc. has purchased all of Child’s shares outstanding for $8,500. Following are excerpts from both companies’ financial statements for year X1, prior to the acquisition.
Also assume the following information: the acquisition was accounted for using the purchase method. $1,500 of the excess price relates to depreciable assets, and those assets have an additional useful life of 10 years at the time of the acquisition. Parent Company Inc. uses the straight line depreciation method and has a 34% tax rate. The combined net income for both companies for year X2 (excluding any expenses that need to be recorded as a result of the purchase method accounting for the merger) was $1,560.
What would be total liabilities in the consolidated financial statements for the date on which the merger became effective, assuming any excess purchase price relates to goodwill?
$28,221
$27,231
$27,741
$25,462
Question 10. Question :
Parent Company Inc. successfully bids for Child Company Inc. in year X1. Parent Company Inc. has purchased all of Child’s shares outstanding for $8,500. Following are excerpts from both companies’ financial statements for year X1, prior to the acquisition.
Also assume the following information: the acquisition was accounted for using the purchase method. $1,500 of the excess price relates to depreciable assets, and those assets have an additional useful life of 10 years at the time of the acquisition. Parent Company Inc. uses the straight line depreciation method and has a 34% tax rate. The combined net income for both companies for year X2 (excluding any expenses that need to be recorded as a result of the purchase method accounting for the merger) was $1,560.
What would be the net income in the consolidated income statement for year X2 assuming any excess purchase price relates to goodwill, and goodwill was found to be impaired by $830?
$1,461
$1,560
$1,012.2

Which of the following ratios best measures the profitability of a company?
Return on equity
Gross margin
Current ratio
Net operating asset turnover
Question 2. Question :
Under the accrual basis of accounting, which of the following statements is true?
I. Reported net income provides a measure of operating performance
II. Revenue is recognized when cash is received, and expenses are recognized when payment is made
III. Cash inflows are recognized when they are received, and cash outflows are recognized when they are made
I only
III only
CORRECT I and III
I, II and III
Question 3. Question :
Compared with firms with capital leases, firms with operating leases generally report:
higher cash flow from operations
lower cash flow from operations
identical cash flow from operations
lower or higher cash flow from operations depending upon market interest rates
Points Received: 0 of 2
Comments:
Question 4. Question :
The balance for supplies is $41,000 and $27,000 for 12/31/05 and 12/31/06, respectively. During the 2006, the company recorded $30,500 of supplies expense was recorded. How much new supplies were purchased?
$44,500
$16,500
$14,000
$30,500
Question 5. Question :
Return on operating assets for 2005 is:
7.9%
7.41%
8.78%
8.1%
Question 6. Question :
Which of the following could cause return on net operating assets to increase, all
things equal?
A decrease in interest rate on debt
Increase in days accounts receivable are outstanding
Increase in inventory turnover
Decrease in gross margin
Question 7. Question :
Assume all assets are operating assets; all current liabilities are operating liabilities.
Return on equity for 2005 is:
20.41%
19.75%
17.54%
18.12%
Question 8. Question :
Below is selected information from Tricrop.
Return on Common Equity for Year 1 is:
19.0%
19.60%
21.08%
26.03%
Points Received: 2 of 2
Question 9. Question :
Which of the following statements is correct?
Net operating profit margin divided by net operating asset turnover equals return on net operating assets
Return on net operating assets can be disaggregated into net operating profit margin and leverage
Return on equity equals return on net operating assets less interest, net of tax
Return on equity can be disaggregated into net operating profit margin, net operating asset turnover and leverage
:
Question 10. Question :
Which of the following statements about the equity growth rate is correct?
I. the higher the ROCE the higher equity growth rate, all other things equal
II. the higher the dividend payout the higher the equity growth rate
III. the equity growth rate is unaffected by the cost of debt
IV. the equity growth rate indicates the expected growth in stock price each period
I, II, III and IV
I, II and III
I and III
I only

The residual income model defines stock price as book value plus the present value of residual income. What is the effect on stock price in a given period if the firm’s cost of capital is greater than its return on equity?
Cannot be determined
No effect
Stock price increases
Stock price decreases
:
Question 2. Question :
Gupta Corporation has forecasted its need for external funding in the following year. It needs to raise $2M in either debt or equity. It would like to minimize its need for external funding without decreasing its projected growth. Which of the following would reduce its need for additional funding?
An increase in the dividend payout ratio
An increase in days sales outstanding
An increase in accounts payable
A decrease in inventory turnover
Question 3. Question :
The treasurer of Simmons Corporation, a newly formed software company is trying to ascertain Simmons cash flows for the next three months. Expected sales are:
50% of sales are made for cash. Simmons expects to receive 25% in the month following the sale and 20% in the second month following the sale. The remaining 5% are expected to be un-collectible. Gross margin is 20%, and purchases are made one month prior to sale. Purchases are paid one month after received.
Cash outflows in March for purchases will be:
$240
$220
$200
$176
Question 4. Question :
Below is selected data for Gertup Corporation as of 12/31/05:
If sales increased by 10% per annum for the next 20 years, sales for year 2025 would be closest to:
$ 407,000
$ 124,459
$ 113,000
$ 55,500
Question 5. Question :
What is the correct order of the following steps in preparing a projected balance sheet (not all steps may be shown)?
I. Project future cash
II. Project future accounts receivable
III. Project future accounts payable
IV. Project future property plant and equipment
I, II, IV, III
II, IV, III, I
I, III, II, IV
I, III, IV, II
Question 6. Question :
The statement of cash flows for Georgey Company for 2004 and 2005 is as follows:
Which of the following statements is correct?
Restructuring is a major source of cash for Georgey
Accounts receivable increased in 2005
Depreciation is a major source of cash for Georgey
Major use of cash resulted in decreased leverage
:
Question 7. Question :
Hiruit company’s sales in December were $5,500. They expect sales to increase 10% in January and February and 15% in March. All of its sales are made on credit. The typical collection pattern is:
Gross margin is 30%. Inventory levels at the end of December are $900 and are expected to grow at the same rate as sales. Purchases are paid for the month after they are made. Net accounts receivable at the end of December are $400.
In March Hiruit should collect how much cash from sales made in March and previous months:
$7,653.25
$7,342.5
$7,030.1
$6,331.3
Question 8. Question :
Which of the following statements is incorrect?
It is possible for a profitable company to go out of business because of short-term liquidity problems
If a company has a current ratio greater than 2, it will never go out of business because of liquidity problems
The current ratio is always greater than or equal to the quick ratio
The accuracy of a cash flow forecast is inversely related to the forecast horizon.
Question 9. Question :
The reliability of a short-term cash forecast depends most heavily on the quality of:
Cost of goods sold forecast
Current ratio forecast
Sales forecast
Shares outstanding forecast
Question 10. Question :
Below is selected data for Gertup Corporation as of 12/31/05:
Due to competitive pressures, Gertup has had to increase credit terms to customers to maintain sales. This resulted in Gertup’s accounts receivable doubling from 12/31/04 to 12/31/05. The average accounts receivable turnover was 30 days. Without the increased credit terms accounts receivable turnover would have remained at 12/31/04 levels. The impact of the change in credit policy was:
: None as sales remained the same
Decrease liquidity, and decrease available cash
Increased current ratio and liquidity of the company
Current ratio stayed the same and liquidity remained constant
Points Received: 2 of 2
Comments:

The residual income model defines stock price as book value plus the present value of residual income. What is the effect on stock price in a given period if the firm’s cost of capital is greater than its return on equity?
Cannot be determined
No effect
Stock price increases
Stock price decreases
:
Question 2. Question :
Gupta Corporation has forecasted its need for external funding in the following year. It needs to raise $2M in either debt or equity. It would like to minimize its need for external funding without decreasing its projected growth. Which of the following would reduce its need for additional funding?
An increase in the dividend payout ratio
An increase in days sales outstanding
An increase in accounts payable
A decrease in inventory turnover
Question 3. Question :
The treasurer of Simmons Corporation, a newly formed software company is trying to ascertain Simmons cash flows for the next three months. Expected sales are:
50% of sales are made for cash. Simmons expects to receive 25% in the month following the sale and 20% in the second month following the sale. The remaining 5% are expected to be un-collectible. Gross margin is 20%, and purchases are made one month prior to sale. Purchases are paid one month after received.
Cash outflows in March for purchases will be:
$240
$220
$200
$176
Question 4. Question :
Below is selected data for Gertup Corporation as of 12/31/05:
If sales increased by 10% per annum for the next 20 years, sales for year 2025 would be closest to:
$ 407,000
$ 124,459
$ 113,000
$ 55,500
Question 5. Question :
What is the correct order of the following steps in preparing a projected balance sheet (not all steps may be shown)?
I. Project future cash
II. Project future accounts receivable
III. Project future accounts payable
IV. Project future property plant and equipment
I, II, IV, III
II, IV, III, I
I, III, II, IV
I, III, IV, II
Question 6. Question :
The statement of cash flows for Georgey Company for 2004 and 2005 is as follows:
Which of the following statements is correct?
Restructuring is a major source of cash for Georgey
Accounts receivable increased in 2005
Depreciation is a major source of cash for Georgey
Major use of cash resulted in decreased leverage
:
Question 7. Question :
Hiruit company’s sales in December were $5,500. They expect sales to increase 10% in January and February and 15% in March. All of its sales are made on credit. The typical collection pattern is:
Gross margin is 30%. Inventory levels at the end of December are $900 and are expected to grow at the same rate as sales. Purchases are paid for the month after they are made. Net accounts receivable at the end of December are $400.
In March Hiruit should collect how much cash from sales made in March and previous months:
$7,653.25
$7,342.5
$7,030.1
$6,331.3
Question 8. Question :
Which of the following statements is incorrect?
It is possible for a profitable company to go out of business because of short-term liquidity problems
If a company has a current ratio greater than 2, it will never go out of business because of liquidity problems
The current ratio is always greater than or equal to the quick ratio
The accuracy of a cash flow forecast is inversely related to the forecast horizon.
Question 9. Question :
The reliability of a short-term cash forecast depends most heavily on the quality of:
Cost of goods sold forecast
Current ratio forecast
Sales forecast
Shares outstanding forecast
Question 10. Question :
Below is selected data for Gertup Corporation as of 12/31/05:
Due to competitive pressures, Gertup has had to increase credit terms to customers to maintain sales. This resulted in Gertup’s accounts receivable doubling from 12/31/04 to 12/31/05. The average accounts receivable turnover was 30 days. Without the increased credit terms accounts receivable turnover would have remained at 12/31/04 levels. The impact of the change in credit policy was:
: None as sales remained the same
Decrease liquidity, and decrease available cash
Increased current ratio and liquidity of the company
Current ratio stayed the same and liquidity remained constant
Points Received: 2 of 2
Comments:

Which of the following is least likely to affect analysis of earnings persistence?
Managerial compensation
Changes in accounting principle
Cyclicality of business
Seasonality of business
:
Question 2. Question :
Horace Corporation has $200,000 of convertible 5% bonds. Each $500 bond is convertible into 50 shares of common stock. The bonds were sold at par and are currently trading at par, and the required return on nonconvertible bonds of similar risk is 11%. Common stock is trading at $ 23 per share.
The total leverage ratio of a company will:
increase if operating leases are capitalized
increase if a company sells its receivables
increase if a company sells more equity
increase if a company pays suppliers more quickly
Question 3. Question :
If a firm capitalizes a lease instead of treating the lease as an operating lease, the effect on the current ratio and the debt-to-equity ratio will be to:
Option A
Option B
Option C
Option D
Question 4. Question :
A primary motivation for a company financing its business activities through debt is not
Trading on the equity
Reducing earnings variability
Tax-deductibility of interest
Avoiding earnings dilution
Question 5. Question :
ABC company is planning a major expansion for which it needs $5 million in external funding. It has various options as how to finance this expansion. Which of the following is correct?
Future ROA will be higher if it uses all equity financing than if it uses some debt financing
Future net income will be higher if it uses common stock rather than preferred stock to finance expansion
Future ROA is independent of the form of financing
Future net income is independent of the form of financing
Question 6. Question :
Below is information for year ended 12/31/05 for Company A and Company B.
Return on assets for Company A and B for 2005 are:
Option A
Option B
Option C
Option D
Question 7. Question :
Which of the following statements are correct with respect to the times interest earned ratio?
I. It is independent of operating income
II. It is independent of the interest rate paid on debt
III. It is independent of the tax rate
IV. It is independent of the amount of dividends paid
I, II and III
I and III
I and IV
III and IV
Question 8. Question :
Hupta Corporation
Net income is expected to increase by 10% for the next year, and dividend payout ratio is expected to remain constant. After 2006, residual earnings are expected to decrease to zero. Using the earnings-based valuation method what is the value per share of Hupta stock as of 12/31/05?
$33.60
$33.27
$32.73
$30.00
Question 9. Question :
Which of the following is not included the definition of earnings persistence?
: Stability of the earnings
Magnitude of the earnings
Predictability of the earnings
The earnings’ trend
Question 10. Question :
A company has significant uncapitalized operating leases. This company has positive net income. If these were capitalized the effect on the following ratios would be:
Option A
Option B
Option C
Option D