[SOLVED] CS finance ACCT7106 Practice Problems (post Session #6) 1. Corporate Form

ACCT7106 Practice Problems (post Session #6) 1. Corporate Form
Which of the following is an example of a conflict that can arise between shareholders and creditors?
1) The passing up of profitable projects because they are viewed as too risky?
2) The undertaking of highly risky projects.
3) Taking steps to both defer and minimize taxes payable.
4) Downplaying negative information and promoting positive news when the firm is preparing
to issue new securities.
Corporations are legal entities characterized by contractual arrangements between the involved parties. Conflicts arise between the various parties to a corporation because of market imperfections. Which of the following is NOT source of conflict?
1) Shareholders versus creditors.
2) Managers versus shareholders.
3) Shareholders versus government.
4) Managers versus government.
2. Roles of Management
Which of the following is NOT a reason for why the assumed objective for management is that of maximizing share price as opposed to maximizing profit?
1) Profit must be judged relative to the riskiness of the investment
2) Profit must be judged relative to the size of the investment
3) Profit is a number that can be manipulated by management
4) The investment is multi-period.
Which of the following is NOT a possible explanation for why management would take environmental and/or social considerations into account when it makes its strategic decisions?
1) Regulation
2) Share price
3) Managerial compensation contracts
4) To satisfy bondholders
Given that market value and book value are seldom, if ever, the same, which of the following is a reason why analysts and investors should be interested in the information provided in the companys Financial Statements?
1) They are based on GAAP
2) They provide insights into the companys operating policies
3) They have an historical perspective and can be verified
4) Analysts and investors are not interested in the companys Financial Statements

3. Market Efficiency
Which of the following does the concept of market efficiency imply?
1) All shares have the same price.
2) Prices reflect all available information.
3) Stock prices do not fluctuate.
4) Throwing darts at a page of stocks will yield the same return as a carefully selected portfolio.
Which of the following statements about the concept of market efficiency is TRUE? 1) In an efficient market, share price remains constant.
2) In an efficient market, all shares have the same price.
3) Technical analysts encourage semi-strong form efficiency.
4) Fundamental analysts encourage semi-strong efficiency.
If markets are semi-strong form efficient, which of the following situations is most likely to yield abnormal returns?
a) Analysing a companys earnings report
b) Identifying a pattern in a companys stock price
c) Obtaining insider information
d) Following the advice of your brokers newsletter
4. The discount rate
Which of the following statements about a stocks beta (j) is TRUE?
1) If j > 1, the stock is less volatile than the market.
2) If j = 0, the stock is the risk-free asset and therefore has a 0 price.
3) Ifj =1,ERj =ERM.
4) If j < 1, the stock is more volatile than the market. AA Ltd. and ZZ Inc. operate in the same industry and produce the same product. AA and ZZ have, however, adopted quite different production technologies. AA is a totally automated company with virtually all of its costs being fixed in nature. Alternatively, ZZs costs are largely variable. Which company will have higher operating leverage?1) AA Ltd.2) ZZ Inc.3) The two companies will have the same degree of operating leverage4) It isnt possible to determine which company will have the higher operating leverage basedon the information provided. Maple Ltd. currently has 10 million common shares outstanding. Maple has just paid a dividend of $0.25 per share this year and investment analysts have informed you that the dividends are expected to grow by 7% annually for the foreseeable future. The analysts have also informed you that the shares are expected to be selling at a price of $4.50 in one years time, the beta on the Maple shares is 1.10, the market price of risk is 6% and the risk-free rate of return is 3%. Based on this information, what is the appropriate discount rate to use in estimating the intrinsic value of Maples common shares?1) 6.60% 2) 6.30% 3) 9.60% 4) 9.90%5. Valuation Bundy Inc. paid a dividend of $0.11 per share last year. Investment analysts have indicated that the historical growth rate in dividends of 3% is expected to continue for the foreseeable future. They have also informed you that Bundys beta is 1.2, the risk-free rate of return is 4% and the market price of risk is 7%. What is the current market price of a share of Bundy Inc.?1) $1.205 2) $1.170 3) $0.914 4) $1.349 Trail Ltd. reported net income of $4 million for its most recent fiscal year (20X0). Analysts expect the earnings to grow at a constant rate of 4% per year for at least the next 10 years. The most recent balance sheet dated 20X0 indicates that the current book value of shareholders equity is $60 million. Trail has a policy of paying out 30% of earnings as dividends and retaining the balance for reinvestment. Trail does not intend to issue new shares or retire any shares for at least the next 10 years. Based on this information, what are Trails abnormal earnings for the year 20X3, assuming that the analysts have also indicated that the appropriate discount rate for determining the value of the shares is 8%?1) $4,499,4562) $ 300,5443) $ 775,7824) $1,349,837 Based on their forecasts of earnings and dividends, analysts have determined that the abnormal earnings on a per share basis for Nelson Ltd over the next three years should be $1.20, $1.40, and $1.50. The analysts then believe that Nelsons abnormal earnings will grow at an annual rate of 1% in perpetuity after the third year. They have also determined that the appropriate discount rate for use in determining the value of Nelsons common shares is 7.5%. Using the abnormal earnings valuation model, based on these figures, what is the current price of Nelsons common shares assuming that its current book value is $8 per share?1) $22.297 2) $30.297 3) $30.111 4) $19.795 Apex Financial Ltd. is interesting in investing in the shares of Scion Systems Inc. Scions current dividend is $0.50 per share and its shares are selling at $41.22. The required rate of return on the shares is 6%. Based on its extensive investigation, Apex believes that Scion will generate free cash flows of $1.10 per share next year, $1.40 per share the following year, $1.75 per share in three years, following which the flows are projected to grow at an average rate of 2% per year. Based on this information, which of the following statements is correct?1) Apex should not invest because the shares are currently overpriced2) Apex should invest because the shares are currently underpriced3) Apex should not invest because the shares are correctly priced and there is no upsidepotential4) Apex should invest because it will exactly earn its required rate of return6. External Environment Which of the following statements about treasury risk management is NOT true?1) Treasury risk management is concerned with protecting a company against unanticipatedchanges in interest rates2) Treasury risk management is concerned with protecting a company against unanticipatedchanges in the GDP3) Treasury risk management is concerned with protecting a company against unanticipatedchanges in commodity prices4) The focus of treasury risk management is on fluctuations in the firms profit, ROE, and/ormarket value. Which of the following factors is NOT a focus when analysing the way in which a companys prospects are affected by the external environment within which it operates?1) social causes2) technological change3) trade liberalisation4) reputation7. Industry FactorsWhich of the following statement is TRUE about the bargaining power of a companys suppliers?1) If the supplier is more powerful, it will typically charge the company a higher price2) Its bargaining power will be greater if the costs of switching to a new supplier are lower3) It bargaining power will be lower if it offers a differentiated product4) Its bargaining power will be greater if there are a number of potential suppliers to choosefrom. Which of the following statements is TRUE?1) A companys customers are more price sensitive if they have high profit margins2) A companys customers are more powerful if there is a large number of large number ofpotential customers that the company can sell to3) The threat that a new company will enter an industry sector is higher when customerswitching costs are low4) A substitute product is less of a threat when the customers switching costs are lowWhich of the following statements about the degree of rivalry among companies within an industry is TRUE?1) Rivalry is lower when industry growth is high2) Rivalry is higher when exit barriers are low3) Rivalry is higher when there are very few companies in the industry4) Rivalry is lower when the rivals are committed to the business Which of the following statements about a companys strategy is NOT true?1) A cost leadership strategy is most appropriate when the product is standard2) A differentiation strategy typically results in premium pricing3) One source of cost advantage for a cost leadership strategy is through extensive advertising4) Factors that support a differentiation strategy include investment in R&D and superiorcustomer service.8. Understanding the Financial Statements Which of the following statements is NOT true about accrual accounting?1) Depreciation on fixed assets is an accrual account2) Earnings based on accrual accounting provides a better basis for forecasting than cash flowfrom operations3) Accrual accounting simply changes the timing of when items are recognised during the lifeof the company4) Accrual accounting recognises revenue when it is received and expenses when they arepaid. Which of the following statements relating to the Statement of Changes in Equity is TRUE?1) The clean surplus relation is always satisfied using Net Profit After Tax2) The only items included in the clean surplus relation are the companys earnings and itsdividends3) Clean surplus is a requirement for the Financial Statements to articulate4) The only items that appear in the Shareholders Equity account are contributed capital,retained earnings, and non-controlling interest. Which of the following statements about the Revenue Realization and Matching principles is NOT true?1) Revenue is recognised when the earnings process is complete2) Revenue can only be recognised when it occurs in an arms-length transaction3) An expense can only benefit the current period whereas an expenditure can be of benefitacross multiple accounting periods4) An item of cost (an expenditure) must either be recognised in the Financial Statements asan asset or an expense Which of the following statements relating to measurement of the value of an item appearing in the Financial Statements is TRUE?1) The notions of Fair Value, Realisable Value and Present Value are largely viewed as beingthe same2) The value of property, plant and equipment (pp&e) always appears in the Balance Sheet athistorical cost3) When a company is deemed to have significant influence over an investee company but notcontrol, it should account for the investee using the consolidation method4) The amortised value of goodwill should appear in the Balance Sheet.9. Reformulating the Financial StatementsWhen reformulating the Balance Sheet and Income Statement, which of the following statements about the classification of items relating to finance leases is TRUE?1) Finance lease assets are classified as operating assets and lease interest is treated as afinancial expense2) Finance lease assets are classified as financial assets and lease interest is treated as anoperating expense3) Finance lease assets are classified as operating assets and lease interest is treated as anoperating expense4) Finance lease assets are classified as financial assets and lease interest is treated as afinancial expense In1) Financial obligation2) Operating Liability3) Shareholders Equity4) Financial Assetreformulating the Balance Sheet, what is the appropriate classification for dividends payable? When a company has recorded a Gain as a result of buying another company in the same industry for less than the fair value of its net assets, how should this item be classified when the Income Statement is reformulated?1) Core other operating income2) Core operating income from sales3) Financial income4) Unusual operating income Which of the following is a levered amount?1) Comprehensive Income2) Cost of Goods Sold3) Interest expense4) Sales Which of the following is NOT an objective of reformulating the financial statements?1) To separately display operating and financing activities2) To separate current and non-current operating assets3) Alter the classification of some items4) To separate operating income based on whether it is recurring and driven by sales