Need help with the attached questions. Appreciate your help.

1. On the first day of the year, a company pays $120 for insurance coverage for the entire year, which reduces Cash by $120 and increases Prepaid Expenses by $120 at that instant. Six months into the year, how have Net Income, Cash, and Prepaid Expenses on the financial statements changed? Assume that ONLY the insurance expense has impacted the statements and that there have been no other changes. Also assume a 40% tax rate. 1.Net Income INCREASES by $36; Cash DECREASES by $24; Prepaid Expenses INCREASES by $60. 2.Net Income does not change; Cash INCREASES by $60; Prepaid Expenses DECREASES by $60. 3.Net Income DECREASES by $60; Cash INCREASES by $60; Prepaid Expenses DECREASES by $60. 4. Net Income DECREASES by $36; Cash INCREASES by $24; Prepaid Expenses DECREASES by $60. ============================================================================================================================================================================ 2.A company has 1 million shares outstanding at a market price of $10.00 per share. It is set to earn $9 million in net income for the next year. The company can repurchase 100,000 of its shares at a discount, for $5.50 per share, at the very beginning of this year. After the share repurchase, what is the company's projected earnings per share (EPS) for the year? Assume that the company is NOT earning anything on the cash it uses for the share repurchase. 1.$9.39. 2.$10.00. 3.$9.00. 4.$8.89. ============================================================================================================================================================================ 3.A company issues $500 worth of debt with an annual interest rate of 10% and principal repayment of 20% each year. Initially, Cash on the Balance Sheet increases by $500 and Debt increases by $500 on the other side to balance it. Exactly *one year* after the debt has been issued, how do the financial statements change? Assume a tax rate of 40%. Also assume that the interest expense is based on the beginning debt balance (i.e., do NOT average the beginning and ending balances). 1.Debt DECREASES by $100; Net Income DECREASES by $30; Cash DECREASES by $130. 2.Debt DECREASES by $100; Net Income DECREASES by $130; Cash DECREASES by $130. 3.Debt DECREASES by $100; Net Income does not change; Cash DECREASES by $100. 4.Debt DECREASES by $100; Net Income DECREASES by $30; Cash DECREASES by $100. ============================================================================================================================================================================ 4.A company purchases an asset with a useful life of 5 years and no salvage value for $100. The company depreciates this asset using the straight-line method, where the annual depreciation expense equals 20% of the initial purchase price. The company then sells the asset for $60 at the END of Year 3. The company has a tax rate of 40%. How does this asset sale change the company's financial statements compared to what they looked like immediately before the company sold it? 1.Net Income INCREASES by $12; Cash INCREASES by $52; PP&E DECREASES by $40. 2.Net Income does not change; Cash INCREASES by $40; PP&E DECREASES by $40. 3.Net Income INCREASES by $36; Cash INCREASES by $36; PP&E DECREASES by $60. 4.Net Income INCREASES by $12; Cash INCREASES by $52; PP&E DECREASES by $60. ============================================================================================================================================================================ 5.Suppose that a company has just purchased $100 of Inventory using cash, but has not yet turned the Inventory into products or sold it to customers. Now it turns the Inventory into products and sells it to customers for $200, but it only collects $100 from customers in upfront cash. It is still waiting to collect the remaining $100 in cash. How do the three financial statements from JUST BEFORE this event to JUST AFTER this event? Assume a 40% tax rate. 1.Net Income is unchanged; Cash is UP by $200; Inventory is DOWN by $200; Retained Earnings is unchanged. 2.Net Income is UP by $60; Cash is UP by $260; Inventory is DOWN by $100; Retained Earnings is UP by $60. 3.Net Income is UP by $60; Cash is UP by $60; Inventory is DOWN by $100; Retained Earnings is UP by $60. 4.Net Income is UP by $60; Cash is UP by $160; Inventory is DOWN by $100; Retained Earnings is UP by $60. ============================================================================================================================================================================ 6.A company issues $250 worth of Long-Term Debt with an annual interest rate of 7.6% and principal repayments of $15 each year. In the initial transaction, Cash on the Balance Sheet increases by $250 and Debt increases by $250 on the other side to balance it. Simultaneously, the company uses the debt issuance to purchase $250 worth of Long-Term Investments, which will generate Interest Income of $14 annually. Starting from JUST BEFORE the debt issuance and investment purchase to exactly ONE YEAR AFTER, how would the financial statements change? Assume that the interest expense is based on the beginning debt balance (i.e., do NOT average the beginning and ending balances). Also assume a tax rate of 40%. 1.Net Interest Income / (Expense) on the Income Statement would be $0; Cash Flow from Financing would INCREASE by $235; Cash would DECREASE by $15. 2.Net Interest Income / (Expense) on the Income Statement would be ($3); Cash Flow from Financing would INCREASE by $235; Cash would DECREASE by $18. 3.Net Interest Income / (Expense) on the Income Statement would be ($3); Cash Flow from Financing would INCREASE by $250; Cash would DECREASE by $15. 4.Net Interest Income / (Expense) on the Income Statement would be $3; Cash Flow from Financing would INCREASE by $235; Cash would DECREASE by $12. ============================================================================================================================================================================ 7.A company wants to increase its Earnings per Share (EPS) without doing anything useful, so it issues $200 of debt at a 5% interest rate and no principal amortization, and then uses the debt to repurchase $200 worth of shares. The company's share price at the time of this share repurchase was $10.00. It had 500 shares outstanding before the share repurchase took place, along with Net Income to Common of $600 (EPS of $1.20). Once again, assume a tax rate of 40% and an interest expense based on the beginning debt balance, and explain how the three financial statements would change from JUST BEFORE the share purchase to JUST AFTER it. 1.EPS would be up by ~$0.05; Cash would be unchanged; Treasury Stock would be down by $200; Retained Earnings would be unchanged. 2.EPS would be up by ~$0.04; Cash would be down by $6; Treasury Stock would be down by $200; Retained Earnings would be down by $6. 3.EPS would be up by ~$0.04; Cash would be down by $6; Treasury Stock would be down by $6; Retained Earnings would be down by $200. 4.EPS would be up by ~$0.06; Cash would be up by $6; Treasury Stock would be down by $200; Retained Earnings would be up by $6. ============================================================================================================================================================================ 8.You are working on a 3-statement model for this same airline company, and you decide to project the number of aircraft and the fleet composition separately. Your co-worker sees this and says that you are wasting time because these assumptions will barely make a difference next to the direct revenue and expense assumptions. Which of the following answer choices represent the BEST ways to respond to your co-worker? 1.We need this level of detail because the number of aircraft of each type will DIRECTLY influence fuel spending and other expenses. 2.More aircraft are required if the company's Available Seat Kilometers (ASK) or Available Seat Miles (ASM) increase, and so we need to link those figures. 3.More aircraft also result in higher CapEx; if we didn't track the number of aircraft, we could not link CapEx to the number of aircraft purchased. 4.If we did not project the aircraft fleet composition, it would be nearly impossible to make estimates for the operating lease and capital lease (AKA finance lease) expenses each year. ============================================================================================================================================================================ 9.How would the Balance Sheet and Cash Flow Statement drivers and projections differ in an interim 3-statement projection model compared to the same drivers and projections in an annual model? 1.You would not link items like Accounts Receivable or Prepaid Expenses to revenue and expense line items on the interim Income Statement since they trend with annual revenue and expenses, not interim-period revenue and expenses. 2.You may still link items such as Accounts Receivable and Prepaid Expenses to Income Statement line items, but you'll have to annualize the interim figures or use the LTM numbers instead. 3.If the company only discloses an item on an annual basis, you may have to divide it into the appropriate figures for the interim periods (e.g., take annual amortization and divide it by 2 to get the half-year figures). 4.It's less justifiable to hold percentages such as Receivables % LTM Revenue constant in the projection period since the business may be seasonal. 5.You may have to reflect that the company only pays out dividends in certain interim periods, or that it defers taxes in certain periods and then pays them in cash later on. ============================================================================================================================================================================ 10.Suppose that you are analyzing a company's historical financial statements, and you find that its Return on Capital Employed (ROCE) has increased from 10% to 25% over the past three years. Why might this be LESS impressive than it initially appears? 1.This increase might simply be the result of significant de-leveraging or a large cash build-up, since you subtract Net Cash when calculating Capital Employed in the ROCE calculation. 2.The company might have grown its operating profit simply through unsustainable borrowing during this period. 3.The company could have grown via acquisitions funded by equity issuances, which would have diluted existing shareholders. 4.The company might have switched from operating leases to capital leases to avoid the operating lease capitalization adjustment found in the ROCE calculation. ============================================================================================================================================================================ 11.The same former consultant colleague has now turned his attention to the valuation multiples you have calculated in your analysis. He asks why you are using Equity Value for metrics such as Net Income and Levered Free Cash Flow, but Enterprise Value for metrics like EBITDA and Revenue. How might you respond to his questions? 1.Whenever a metric *includes* the net interest expense, it corresponds to Equity Value because the debt investors \"have been paid\" with that interest expense and do not receive any more of the company's cash flow as payment. 2.It's because metrics such as Net Income and Levered Free Cash Flow reflect Capital Expenditures (CapEx), either directly or indirectly, whereas metrics such as EBITDA and Revenue exclude CapEx altogether. 3.It's because metrics like Net Income and Levered FCF are after taxes, so they correspond to Equity Value. You only use Enterprise Value with pre-tax metrics because the company's capital structure may affect its taxes, and you want to exclude the impact of both capital structure and taxes. 4.Whenever a metric includes the change in Working Capital, as the FCF-based metrics do, it should be paired with Equity Value. Net Income is an exception, but even there you may still adjust for Working Capital in the calculations ============================================================================================================================================================================ 12.Why do you add Noncontrolling Interests (formerly known as Minority Interests) and subtract Equity Investments (AKA Associate Companies) when calculating Enterprise Value (EV)? 1.You do this to ensure that you're making an apples-to-apples comparison in the valuation multiples (e.g., EV / EBITDA should reflect either 0% or 100% of these stakes in other companies in both the numerator and denominator). 2.Neither of these items is accounted for in Equity Value (implicitly or explicitly), but we need to factor them into Enterprise Value in order to include all the investor groups. 3.You only add and subtract these items when valuing a company on a standalone basis - you don't factor them in when calculating valuation multiples in an M&A scenario because these items almost always remain as-is on the Balance Sheet. 4.While you could take this approach, it is actually better to adjust the metrics in the denominator of valuation multiples, such as EBITDA and Free Cash Flow, and make them reflect the company's ownership stakes in other companies. ============================================================================================================================================================================ 13. Which of the following answer choices represent the CORRECT steps when you calculate EBITDA for a company based on its Income Statement (IS) and Cash Flow Statement (CFS)? 1.Start with Operating Income on the IS; add back D&A from the CFS, and then add back all the other non-cash charges from the CFS. 2.Start with Operating Income on the IS; add back D&A from the CFS, and then add back true, non-recurring charges that have impacted Operating Income. 3.Start with Operating Income on the IS; add back D&A from the IS, and then add back true, non-recurring charges that have affected Operating Income. 4.None of the above - since EBITDA is a non-GAAP metric, it's best to rely on the company's internal EBITDA figures as disclosed in its annual and interim reports. ============================================================================================================================================================================ 14.You want to compare the financial performance of several companies, and you're considering using either EBITDA or EBIT as the primary \"profitability metric.\" In which of the following situations is EBITDA the better metric to use? 1.One company in the set has high CapEx and Depreciation, and you want to approximate its cash flow as well as the cash flow of the other companies. 2.All the companies in the set have very low CapEx and D&A as a % of revenue, and you want to exclude capital expenditures from your analysis. 3.In your set of companies, CapEx and Depreciation as percentages of revenue vary greatly and you want to normalize the set. 4.You are using a set of companies where some firms rent their properties, while others own them. ============================================================================================================================================================================ 15. Although the P / E multiple is often used by retail investors and is commonly cited in the financial press, we don't view it as particularly meaningful for most companies. Why? 1.It is capital-structure-dependent and is therefore affected by Cash and Debt levels and the interest rates on both of those. 2.It is affected by effective tax rates, which could differ substantially from one company to the next. 3.It is affected by non-cash charges such as Depreciation, which can also vary greatly between different companies. 4.All of the above. ============================================================================================================================================================================ 16. Which of the following answer choices represent DIFFERENCES between Levered Free Cash Flow (AKA Free Cash Flow to Equity) and Unlevered Free Cash Flow (AKA Free Cash Flow to Firm)? 1.Unlevered FCF is not used in a DCF analysis because it gives a misleading picture of the company's cash flow; Levered FCF is much more common there. 2.Unlevered FCF corresponds to Enterprise Value, but Levered FCF corresponds to Equity Value. 3.Both Unlevered FCF and Levered FCF reflect normal operating expenses, but only Levered FCF includes the impact of CapEx. 4.Unlevered FCF excludes net interest expense and debt repayments entirely, whereas Levered FCF includes both the net interest expense and debt principal repayments. 5.Unlevered FCF represents what's available to ALL the investors in the company, whereas Levered FCF is only what's available to common equity investors. ============================================================================================================================================================================ 17. You have selected a set of comparable companies for use in valuing a company you are analyzing. You notice there is almost no correlation between the revenue, EBITDA, and Net Income growth rates and the corresponding multiples for each of those metrics in this set of companies. Why might this be the case? 1.The premise of this question is incorrect because multiples are correlated with the corresponding margins (e.g., the EBITDA margin or Net margin), not the growth rates. 2.Some of the companies in this set might have made acquisitions or divestitures that distort their financial metrics. 3.This result might indicate that you have selected the incorrect set of comparables and that the companies within are not similar. 4.The most likely explanation is that many of these companies are releasing deceptive information in their filings, which can distort their financial metrics. 5.Your set might contain big conglomerates or other diversified businesses that are difficult to value with metrics and multiples applied to the entire business. ============================================================================================================================================================================ 18. Two companies have very similar financial profiles: historical revenue growth rates of 10-15% and historical EBITDA margins of approximately 20%. The revenue and EBITDA figures are also within 5-10% of each other, and they are in the same industry and sub-industry. However, one company is trading at an LTM EV / EBITDA multiple of 10x and the other company is trading at a 6x multiple. How could this happen? 1.Even though the historical financials are similar, expectations for future revenue growth rates or future margins might be very different. 2.This outcome might be because of a cyclical industry downturn that is affecting one company, but not the other company. 3.One company might be using capital or capital expenditures far more efficiently than the other one, which is not reflected in metrics such as EBITDA since CapEx is excluded. 4.One company, or both companies, might be genuinely mispriced and misunderstood by the market. 5.This result happens most often when the investor base for one company is significantly different than the investor base for the other company. ============================================================================================================================================================================