1. Under what condition would a firm's return on common equity (ROCE) be equal to its return on net operating assets (RNOA)?

A. The SPREAD is zero, that is, return on net operating assets (RNOA) equals net borrowing cost (NBC).

B. The operating liability leverage spread (OLSPREAD) is zero, that is, ROOA equals the implicit borrowing rate for operating liabilities.

C. Operating liability leverage (OLEV) is zero, that is, the firm has no operating liabilities.

D. None of the above

2. High P/E ratios tend to indicate that a company will ______, ceteris paribus.

A. grow quickly

B. grow at the same speed as the average company

C. grow slowly

D. not grow

3. The following number were calculated from the financial statements for a firm for 2012 and 2011:

2012 2011

Return on common equity (ROCE) 15.2% 13.3%

Return on net operating assets (RNOA) 11.28% 12.75%

Net borrowing cost (NBC) 2.9% 3.2%

Average net financial obligations(millions) $2,225 $241

Average common equity(millions) $4,756 $4,173

How much of the change in ROCE from 2011 to 2012 is due to financing activities?

A. 3.44%

B. 3.37%

C. -1.47%

D. 1.9%

4. ________ are more useful in predicting future cash flows

A. operating cash flow

B. investing cash flow

C. financing cash flow

D. Accrual accounting earnings

5. Which of the following is not an indicator of accounting Manipulation?

A. Loss on sale of discontinued business segments

B. A drop in profitability after a period of good profitability

C. A change in accounting principles or estimates

D. A firm meets analysts' earnings expectations, but just so.

6. A firm with book value of $15.60 per share and 100 percent dividend payout is expected to have a return on common equity of 15% per year indefinitely in the future. Its cost of equity capital is 10%. Calculate the intrinsic price to book ratio.

A. 1.5

B. 2.0

C. 3.5

D. 0.80

7. What is the most meaningful basis for comparison when judging the adequacy of return on capital employed (ROCE)?

A. Compare it to the yield on gilts

B. Compare it to ROCE of firms from other industry sectors

C. Compare it to bank interest rates

D. Compare it to ROCE of similar firms

8. Activities involve trading with customers and suppliers in product and input markets is called

A. Financing activities

B. Operating activities

C. Investing activities

D. None of the above

9. A firm has a return on common equity of 13.4 percent, a net after-tax borrowing cost of 4.5 percent, and a return of 11.2 percent on net operating assets of $405 million. What is the firm's financial leverage?

A. 0.140

B. 0.001

C. 3.045

D. 0.328

10. Which of the following could explain a decrease in net operating asset turnover for a company?

A. Switching from straight line to accelerated depreciation for financial reporting purposes

B. An increase in the financial leverage of the company

C. Addition of a new plant for production purposes

D. Decrease cost of production inputs

11. Earnings management is

A. when management makes changes in the operations of the firm to ensure that earnings do not increase or decrease too rapidly.

B. when management makes changes in the operations of the firm to ensure that earnings do not increase too rapidly.

C. when management makes changes in the operations of the firm to ensure that earnings do not decrease too rapidly.

D. the practice of using flexible accounting rules to improve the apparent profitability of the firm.

12. The goal of fundamental analysts is to find securities

A. whose intrinsic value exceeds market price.

B. with a positive present value of growth opportunities.

C. with high market capitalization rates.

D. All of these are correct.

13. The following are ROCE forecasts made for a firm at the end of 2010.

2011 2012 2013

Return on common equity(ROCE) 12.0% 12.0% 12.0%

ROCE is expected to continue at the same level after 2013. The firm reported book value of common equity of $3.2 billion at the end of 2010, with 500million shares outstanding. If the required equity return is 12 percent, what is the per-share value of these shares?

A. $6.40.

B. $6.22

C. $5.60

D. $5.30

14. Which of the following statement is the advantage of residual earnings model?

A. incorporates the value already recognized in the balance sheet (the book value); forecasts the income statement and balance sheet.

B. can be used with a wide variety of accounting principles

C. forecasts of residual earnings can be validated in subsequent audited financial statements

D. All of the above

15. How is it possible for a firm to be profitable and still go bankrupt?

A. the Firm has positive net income but has failed to generate cash flow operations

B. Receivables and payables have a rocky marriage

C. A company puts itself and the connected people at risk by extending credit and selling to people who cannot pay

D. all of the above

16. Cash inflows arise from _____ assets, ________ liabilities, and ___________ stockholders' equity.

A) increasing; increasing; decreasing

increasing; decreasing; decreasing

C) decreasing; increasing; increasing

D) decreasing; increasing; decreasing

17. What is a creditor's objective in performing an analysis of financial statements?

A. To decide whether or not the borrower has the ability to repay interest and principal on borrowed funds.

B. To determine the firm's capital structure.

C. To determine the company's future earnings stream.

D. To decide whether or not the firm has operated profitably in the past.

18. Quality of loan loss provisions is flash point for

A. Real estate

B. Banking industry

C. Retailing

D. Automobiles

19. Which of the following is potential source of noise or bias occur in accounting data?

A. Adequacy of notes to the financial statements

B. Disclosures about the accounting used

C. Identify critical accounting estimates

D. Different accounting methods lead to different reported earnings figures

20. Which of the following item IFRS does not allow to be recognised as extraordinary items.

A. Write-down (write-off) of accounts receivable

B. Gain on account of sale of discontinued business segments

C. Loss on account of uncontrollable natural calamities such as earthquakes, floods, hailstorms, etc.;

D. Loss on sale of discontinued business segments

21. The share of a firm trade on stock market at a total of $1.2 billion, and its debt trades at $600million. What is the market value of the firm (its enterprise market value)?

A. $1800million

B. $1700million

C. $1600million

D. $1500million

22. Which of the following could cause return on net operating assets to increase, all other things equal?

A. A decrease in interest rate on debt

B. Increase in days accounts receivable are outstanding

C. Increase in inventory turnover

D. Decrease in gross margin

23. unrealized gains and losses on financial assets is

A. Core income

B. Transitory income

C. Financial income

D. None of the above

24. Why do analysts compare cash flow from operations with earnings to assess the quality of the earnings?

A. The difference between earnings and cash flow from operations is explained by the accruals, and the accruals are the "soft" part of earnings that can be manipulated.

B. Cash flow from operating activities is an important benchmark to determine the financial success of a company's core business activities.

C. The cash flows from operations are generally considered the most important because they deal with cash that it is generated by businesses primary activities.

D. Cash is the most liquid asset and can be used immediately to perform economic actions.

25. Any earnings in excess of the cost of capital can be termed

A. book value

B. market value

C. comprehensive earnings

D. abnormal earnings

26. which of the following items are NOT operating assets?

A. cash in a checking account used to pay bills

B. accounts receivable

C. finance receivable for an automobile firm

D. short-term equity investment

27. What is an investor's objective in financial statement analysis?

A. To determine if the firm is risky.

B. To determine the stability of earnings.

C. To determine changes necessary to improve future performance.

D. To determine whether or not an investment is warranted by estimating a company's future earnings stream.

28. FCF and DDM valuations should be ____________ if the assumptions used are consistent.

A. very different for all firms

B. similar for all firms

C. similar only for unlevered firms

D. similar only for levered firms

29. Which of the following statement is the advantage of Abnormal Earnings Growth Analysis?

A. Aligned with what people forecast

B. Focuses directly on the most common multiple used, the P/E ratio, so easy to understand

C. Embeds the properties of accrual accounting by which revenues are matched with expenses to measure value added from selling products.

D. All of the above

30. If the intrinsic value of a stock is greater than its market value, which of the following is a reasonable conclusion?

A. The stock has a low level of risk.

B. The stock offers a high dividend payout ratio.

C. The market is undervaluing the stock.

D. The market is overvaluing the stock.