FSA IFRS Test Questions

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Chapter 1 A Framework for Business Analysis and

Valuation Using Financial Statements
Chapter 1 Quiz
Your score is 55%.
Questions answered correctly first time: 6/16
You have completed the exercise.
Show questions one by one
1. Lemons problems arise in capital markets when
A. X Managers are better informed about the value of their business ideas
than investors
B. X Managers have an incentive to understate the value of their business
ideas
C. X Managers and investors have conflicting interests
D. X A, B, and C
E.
A and C
2. Consider the following statement: In countries with a model of strong legal

protection of investors rights, information intermediaries play a bigger role in
preventing lemons problems than in countries with a model of weak legal
protection of investors rights. This statement is:
A. :-) True
B.
False
3. Mandatory publication of audited financial statements is an imperfect solution

to incentive and information problems between managers and investors
because:
A. X Accounting profits are typically less informative about firms

economic performance than cash flows
B.
? The accounting standards governing the preparation of such

financial statements are typically too loosely defined
C. :-) Managers unintentionally as well as strategically introduce noise

into reported accounting performance through their accounting
decisions
D.
None of the above
4. Which of the following items is not a required component of European public

firms financial statements?
A. X A comprehensive income statement (or statement of total recognized

income and expense)
B. X An income statement
C. X A cash flow statement (or statement of cash flows)
D. X A balance sheet (or statement of financial position)
E.
All of the above items are required components
5. Consider the following statement: An economic resource whose future

benefits cannot be measured with a reasonable degree of certainty is not
considered to be an asset for accounting purposes. This statement is:
A. :-) True
B.
False
6. Which of the following statements is correct?
A. X Revenues cannot be recognized before cash is collected.
B. X Expenses cannot be recognized before the cash outflow has

occurred.
C. :-) Revenues cannot be recognized if cash collection is uncertain.
D.
E.
? Expenses will always be recognized before or when the cash

outflow occurs.
?
None of the above.
7. Consider the following statement: The extent to which financial statements

accurately reflect the consequences of managers operating, investment and
financing decisions is a function of characteristics of the accounting
environment and managers accounting strategy. This statement is:
A. :-) True
B.
False
8. Consider the following statement: Accounting conventions and regulations

that leave management no accounting discretion lead to more useful financial
statements than accounting conventions and regulations that do grant
accounting discretion. This statement is:
A. X True
B.
False
9. Consider the following statement: Financial reports of publicly listed firms are
prepared using accrual accounting rather than cash accounting. This
statement is:
A. :-) True
B.
False
10.Which of the following statements is true?
A. X The implementation of the Eight Company Law Directive in the

European Union has removed all systematic differences in the
effectiveness of external auditing across countries.
B. :-) One of the objectives of the Eight Company Law Directive in the
European Union is to set minimum standards for public audits that
improve auditor independence.
C.
D.
? All audits of public firms within the European Union must be

carried out in accordance with the set of Generally Accepted Auditing
Standards, as promulgated by the Public Company Accounting
Oversight Board.
?
None of the above
11. Which of the following statements is true?
A. X Managerial legal liability regimes are equally strict across the

member states of the European Union.
B. X Under a strict legal liability regime, managers tend to provide more
forward-looking disclosures than under a loose regime.
C. :-) Managerial legal liability regimes are less strict in Germany and the
UK than in the US.
D.
None of the above
12.One of the primary tasks of the Committee of European Securities Regulators

is to:
A. :-) Improve the consistency of public enforcement activities across

European countries.
B.
Publicly disclose all European public enforcement decisions.
C.
Develop a set of International Public Enforcement Standards.
D.
? Discipline European public companies for violations of

International Financial Reporting Standards.
13.Consider the following statement: The outcomes of business strategy analysis

affect the financial and prospective analyses but have no relevance for the
accounting analysis. This statement is:
A. X True
B.
False
14.Which of the following statements is correct?
A. X The accounting analysis follows the financial analysis

B. X The prospective analysis precedes the strategy analysis
C. :-) The prospective analysis follows the financial analysis
D.
The financial analysis precedes the strategy analysis
15.The outcomes of the strategy analysis affect the accounting analysis because
A. X The strategy analysis also includes an analysis of the firms

accounting strategy
B. X Firms with poor strategies are more likely to have low-quality
financial statements than firms with successful strategies
C. :-) A firms industry and competitive strategy affect which accounting
choices are appropriate.
D.
None of the above.
16.Two reasons for why financial statements tend to be less useful in the analysis
of privately held businesses than in the analysis of publicly held businesses
(within the EU) is that:
A. :-) (i) Private firms financial statements are strongly influenced by tax
rules and (ii) managers of private firms have less incentive to prepare
informative financial statements than managers of public firms.
B.
? Private firms financial statements (i) do not comply with tax rules
and (ii) are not publicly available.
C.
? Private firms (i) financial reporting is unregulated and (ii) financial

statements are not publicly available.
D.
None of the above.

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Chapter 2 Strategy Analysis

Quiz
Your score is 51%.
1. Industry profitability is a function of
A. X Rivalry among existing firms

B. X Competitive advantage of industry members
C. X Bargaining power of customers
D. X A, B, and other factors
E.
A, C, and other factors
2. Which of the following industry factors does not affect the nature of rivalry
among existing firms in the industry?
A. X Ratio of fixed to variable costs

B. X Concentration of competitors
C. X Industry growth
D.
First mover advantage
3. Which of the following industry factors does not affect the threat of new firms
entering the industry?
A. X Legal barriers
B. X Ratio of fixed to variable costs
C. :-) Price sensitivity of buyers
D.
First mover advantage
4. Which of the following industry factors does not affect the bargaining power of
buyers in the industry?
A. X Concentration of buyers relative to the concentration of sellers

B. :-) Ratio of fixed to variable costs
C.
Price sensitivity of customers
D.
None of the above
5. European airlines structural excess capacity (i.e., low load factors) negatively
affected the average profitability in the European airline industry between
1995 and 2004. This is an example of how
A. :-) The rivalry among existing firms affects industry profitability.

B.
The threat of new entrants affects industry profitability.
C.
The threat of substitute products affects industry profitability.
D.
The bargaining power of buyers affects industry profitability.
E.
The bargaining power of suppliers affects industry profitability.
6. The price sensitivity of customers in the hotel industry
A. X Varies depending on what day of the week it is.

B. :-) Is positively affected by the availability of web booking systems and
the resulting price transparency in the industry.
C.
D.
? Is negatively affected by the lack of hotels in a particular

geographical area.
?
None of the above
7. Consider the following statement: Discount retailers follow a cost leadership

strategy. This statement is
A. :-) True
B.
False
8. Consider the following statement: In industries with high rivalry among

existing firms, the optimal competitive strategy is to be a cost leader. This
statement is
A. X True
B.
False
9. Consider the following statement: Very few firms are successful in combining
a cost leadership strategy with a differentiation strategy because both
strategies require different and typically irreconcilable core competences.
This statement is
A. :-) True
B.
False
10.Consider the following statement: Firms following a cost leadership strategy

tend to earn higher margins on their products or services than firms following a
differentiation strategy. This statement is
A. X True
B.
False
11. Managers choice whether or not to diversify activities across geographical

areas or product segments is part of the
A. :-) Corporate strategy decision

B.
Competitive strategy decision
C.
None of the above
12.Economic theory indicates that the optimal corporate strategy and structure
minimizes the firms
A. X Production costs
B. X Service costs
C. X Book value of assets
D. :-) Transaction costs
E.
None of the above
13.The existence of conglomerates in emerging markets is partly the result of
A. X Low transaction costs in emerging labor markets

B. :-) High transaction costs in emerging capital markets
C.
High transaction costs in emerging production markets
D.
Low transaction costs in emerging production markets
E.
None of the above
14.Consider the following statement: Single-segment businesses have lower

transaction costs than multi-segment businesses. This statement is
A. X True
B.
False
15.Consider the following statement: A firms industry choice, competitive

positioning and corporate strategy all influence the difference between the
firms actual and required return on capital. This statement is
A. :-) True
B.
False
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Chapter 3 Overview of Accounting Analysis

Quiz
Your score is 50%.

1. The objective of accounting analysis is typically not to
A. X Identify areas in the financial statements that are most strongly

affected by managements discretionary accounting choices.
B. X Identify accounting choices that are most critical to a firms
accounting performance.
C. :-) Asses whether the financial statements fully comply with accounting
conventions and regulations.
D.
Understand managements reporting incentives and strategy.
E.
Undo the financial statements from distortions.
2. Consider the following statement: International Financial Reporting Standards

(IFRS) are typically considered to be more principles-based than US Generally
Accepted Accounting Principles (US GAAP). This statement is
A. :-) True
B.
False
3. Consider the following statement: The use of rules-based standards rather

than principles-based standards decreases the verifiability of financial
statements but increases the extent to which financial statements reflect the
economic substance of a firms transaction. This statement is
A. X True
B.
False
A. X Managers of firms that are close to violating accounting-based debt

covenants have an incentive to manage earnings and working capital
ratios downwards.
B. X In share-for-share mergers managers of the acquiring firm have an
incentive to understate their firms accounting performance.
C. X Both statements are true.
D.
None of the above statements is true.
A. :-) Managers have an incentive to understate accounting performance

shortly before a large option award is granted to them.
B.
? Managers who aggressively manage their firms taxes have an

incentive to consistently overstate their firms accounting performance.
C.
Both statements are true.
D.
None of the above statements is true.
6. Which of the following is not a potential red flag pointing to questionable

accounting quality?
A. X Unexplained transactions that boost profit

B. X Unexpected large asset write-offs
C. :-) Volatility in the difference between reported profits and cash flows
D.
Poor internal governance mechanisms
E.
All of the above are potential red flags
7. Which of the following is not a potential red flag pointing to questionable

accounting quality?
A. X An increasing gap between a firms reported profit and its tax profit
B. X An increasing gap between a firms reported profit and its cash flow
from operating activities
C. X Unusual increases in inventories in relation to sales increases
D. :-) The use of accelerated depreciation methods
E.
All of the above are potential red flags
8. Under IFRS firms can classify their operating expenses in the income
statement either by function or by nature. Which of the following two
statements about operating expense classification is true?
Statement I: Under the classification by nature firms distinguish cost of sales
from selling, general and administrative (SG&A) expenses.
Statement II: The International Financial Reporting Standards require that
firms classifying their operating expenses by nature in the income statement
disclose their operating expenses by function in the notes to the financial
statements.
A. X Statement I is true; statement II is not true.

B. X Statement I is not true; statement II is true.
C. X Both statements are true.
D.
Both statements are not true.
9. Which of the following accounting policies is most likely to be a key accounting

policy of Carrefour, one of the worlds largest retailers?
A. X Accounting for payables
B. X Accounting for legal claims

C. X Accounting for revenues
D.
Accounting for property
10.Which of the following factors is not relevant in evaluating a firms accounting

strategy?
A. X Managements incentives to manage earnings

B. :-) The presence of mandatory changes in accounting policies
C.
Average accounting choices in the industry
D.
Accuracy of past accounting estimates
E.
The presence of voluntary changes in accounting policies
11. Consider the following statements about standardization of financial

statements.
Statement I: The income statement items Result from associate companies
or Equity income from associates must be classified as Minority Interest.
Statement II: The balance sheet item Provision for post-employment benefits
must be classified as Non-current debt.
A. X Statement I is true; statement II is not true.

B. :-) Statement I is not true; statement II is true.
C.
Both statements are true.
D.
Both statements are not true.
12.Which of the following statements is correct?
A. :-) General and Administrative Expense is an income statement line

item that firms use under a classification of operating expenses by
function.
B.
? Raw Materials is an income statement line item that firms use

under a classification of operating expenses by function.
C.
? Marketing and Selling Expense is an income statement line item

that firms use under a classification of operating expenses by nature.
D.
? Cost of Services is an income statement line item that firms use

under a classification of operating expenses by nature.
13.Which of the following relationships between income statement line item and
standard income statement account is correct?
A. :-) Servicing and maintenance > SG&A (by function)

B.
Dividend income > Interest income
C.
Asset impairments > Cost of sales (by function)
D.
Share-based payments > Investment income
14.Which of the following relationships between balance sheet line item and
standard balance sheet account is correct?
A. X Amounts due from affiliates > Trade receivables

B. X Goodwill > Non-current tangible assets
C. :-) Work-in-progress > Inventories
D.
Provision for post-employment benefits > Other current liabilities
15.Which of the following relationships between cash flow statement line item and
standard cash flow statement account is correct?
A. X Depreciation and amortization > Non-operating losses (gains)

B. :-) Deferred tax expense > Non-current operating accruals
C.
? Stock bonus awards > Net investments in operating working

capital
D.
? Capital expenditures > Net investments in operating working

capital
16.[About Appendix A] When firms adopt IFRS (International Financial Reporting

Standards) for the first time they apply the new standards retrospectively. This
implies that they
A. X Use IFRS only for transactions that occurred during the prior and
current year
B. X Use IFRS only for transactions that occurred during the current year
C. :-) Use IFRS for all past transactions, i.e., apply IFRS as if they had
applied IFRS all along (with some exceptions)
D.
None of the above

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Chapter 4 Implementing Accounting Analysis

Quiz
Your score is 50%.
1. Company As non-current assets have a residual value of zero, a beginning
book value of 5,000, and an initial cost of 10,000. Company A uses an
annual depreciation percentage of 10%. Its statutory (and effective) tax rate is
30 percent. What adjustments would an analyst make to company As
beginning equity and non-current assets if she assumes that company As
depreciation percentage should be 12%?
A. X Decrease non-current assets by 1,000; decrease equity by 1,000

B. X Decrease non-current assets by 2,000; decrease equity by 2,000
C. :-) Decrease non-current assets by 1,000; decrease equity by 700
D.
? Decrease non-current assets by 2,000; decrease equity by

1,400
2. Company As non-current assets have a residual value of zero, a beginning

book value of 5,000, and an initial cost of 10,000. Company A uses an
annual depreciation percentage of 10%. Its statutory (and effective) tax rate is
30 percent. What adjustments would an analyst make to company As current
years tax expense if she assumes that company As depreciation percentage
should be 12%?
A. :-) Decrease tax expense by 60

B.
Increase tax expense by 60
C.
Decrease tax expense by 30
D.
Increase tax expense by 30
E.
No adjustment
3. An analyst makes an adjustment for understated depreciation, increasing

Company ABCs Accumulated Depreciation (on PP&E) by an amount of 10
million. The Companys tax rate is 40 percent. In the financial statements, this
adjustment
A. X Decreases net non-current assets by 10 million and decreases

equity by 10 million.
B. X Increases net non-current assets by 10 million and increases equity
by 10 million.
C. :-) Decreases net non-current assets by 10 million, decreases equity
by 6 million, and decreases other non-current liabilities by 4 million.
D.
? Decreases net non-current assets by 10 million, decreases equity

by 6 million, and decreases net debt by 4 million.
4. Incorrectly treating finance leases as operating leases in the financial

statements helps firms to
A. X Overstate asset turnover and overstate leverage

B. X Overstate profit margins and understate asset turnover
C. X Understate asset turnover and overstate leverage
D.
Overstate asset turnover and understate leverage
5. A pharmaceutical company spends 5,000, 6,000, and 4,000 on research in

2008, 2009, and 2010, respectively. Assume that research investments have
an expected life of two years and occur evenly throughout the year. If an
analyst decides to capitalize all research expenditures and uses the straightline method to amortize research assets, her estimate of the book value of the
pharmaceuticals research asset at the end of 2010 equals
A. X 15,000
B. X 10,000
C. :-) 4,500
D.
6. A pharmaceutical company spends 5,000, 6,000, and 4,000 on research in

2008, 2009, and 2010, respectively. Assume that research investments have
an expected life of two years and occur evenly throughout the year. If an
analyst decides to capitalize all research expenditures and uses the straightline method to amortize research assets, her estimate of the pharmaceuticals
research amortization expense in 2010 equals
A. X 4,000
B. X 5,000
C. X 5,200
D.
5,250
7. A car manufacturer recognizes the sale of 40,000 cars in its income statement.
The cars have a total selling price of 450,000 and a total cost of 350,000. All
cars have been prepaid but not yet shipped to the customer. The car
manufacturers statutory and effective tax rate is 0 percent. The recognition of
this sale leads to the following distortions:
A. X No overstatement/understatement of net profit and equity;

overstatement of total assets and total liabilities by 350,000.
B. X Overstatement of net profit and equity by 100,000; overstatement of
total assets by 350,000; overstatement of total liabilities by 250,000.
C. X Overstatement of net profit and equity by 100,000; overstatement of
total assets by 100,000.
D.
? Overstatement of net profit and equity by 100,000;

understatement of total assets by 350,000; understatement of total
liabilities by 450,000
8. On December 31, 2010, a company reported the following values for its
allowances for doubtful accounts:
Allowance for doubtful accounts 31/12/2010
Balance at the beginning of the year 30,000
Provision for bad debts (=bad debt expense) 2,000
Write-offs 5,000
Balance at the end of the year 27,000
Gross trade receivables on December 31, 2010 and January 1, 2010 were
80,000 and 100,000, respectively. The companys tax rate equals 30
percent. If an analyst decides that the companys allowance for doubtful
accounts should have been 25 percent of gross trade receivables on 31
December 2010 and 1 January 2010, the adjustments to the income
statement would be to
A. X Zero
B. :-) Decrease the bad debt expense by 2,000, increase the tax
expense by 600, and increase net profit by 1,400.
C.
? Increase the bad debt expense by 5,000, decrease the tax

expense by 1,500, and decrease net profit by 3,500.
D.
? Increase the bad debt expense by 3,000, decrease the tax

expense by 900, and decrease net profit by 2,100.
9. An analyst has decided to capitalize the operating leases of Company A.

Using information in the notes to the companys 2011 financial statements, she
has determined that the present value of future minimum lease payments, at a
discount rate of 10 percent, on December 31, 2011 equals 500 million. All
lease contracts last another 5 years on December 31, 2011. As expected at
the beginning of the year, the company reports an operating lease expense in
its income statement for 2012 of 80 million. The companys tax rate equals
30 percent. The company does not engage in any new operating leases in
2012. The following information is also available from Company As financial
statements (all ratios use beginning-of-the-year balance sheet values)
Net debt to net capital (at beginning of 2012) 0.55
Return on beginning equity in 2012 0.10
Net assets (at beginning of 2012) 3,400 million
The effect of capitalizing Company As operating leases on its leverage ratio
(net debt to net capital) equals
A. :-) An increase from 0.55 to 0.61 (rounded).

B.
An increase from 0.55 to 0.74 (rounded).
C.
An increase from 0.55 to 0.82 (rounded).
D.
A decrease from 0.55 to 0.51 (rounded).
10.An analyst has decided to capitalize the operating leases of Company A.

Using information in the notes to the companys 2011 financial statements, she
has determined that the present value of future minimum lease payments, at a
discount rate of 10 percent, on December 31, 2011 equals 500 million. All
lease contracts last another 5 years on December 31, 2011. As expected at
the beginning of the year, the company reports an operating lease expense in
its income statement for 2012 of 80 million. The companys tax rate equals
30 percent. The company does not engage in any new operating leases in
2012. The following information is also available from Company As financial
statements (all ratios use beginning-of-the-year balance sheet values)
Net debt to net capital (at beginning of 2012) 0.55
Return on beginning equity in 2012 0.10
Net assets (at beginning of 2012) 3,400 million
The effect of capitalizing Company As operating leases on its return on
beginning equity equals
A. X An increase from 0.10 to 0.15 (rounded).

B. X An increase from 0.10 to 0.13 (rounded).
C. :-) A decrease from 0.10 to 0.07 (rounded).
D.
A decrease from 0.10 to 0.05 (rounded).
11. Company B reduces the discount rate it uses to estimate its post-employment
benefit obligation from 8 percent (at the beginning of fiscal year 2009) to 7
percent (at the beginning of fiscal year 2010). Analysts following company B
believe that this reduction is unjustified. According to these analysts company
B
A. :-) Understates its 2010 interest cost, overstates its 2010 service cost;
overstates the cumulative actuarial gains at the beginning of 2010.
B.
? Understates its 2010 interest cost, overstates its 2010 service

cost; overstates the fair value of plan assets at the beginning of 2010.
C.
? Overstates its 2010 interest cost, understates its 2010 service

cost; understates the cumulative actuarial gains at the beginning of
2010.
D.
? Understates its 2010 interest cost, understates its 2010 service

cost; understates the fair value of plan assets at the beginning of 2010.
12.Under IFRS the pension expense recognized in the income statement may not
be equal to the economic cost of the post-employment benefit plan because
A. :-) Firms can recognize of current actuarial gains or losses in other

comprehensive income.
B.
? Firms can recognize past service cost in other comprehensive

income.
C.
? Firms can recognize unexpected plan contributions in other

comprehensive income.
D.
Both A and B are correct
E.
Both A and C are correct
13.Recent international rules (IFRS 9) for the recognition of fair value gains or
losses on equity securities, which replace IAS 39, imply that gains or losses
are no longer recycled. This means that
A. X Fair value gains or losses that have been recognized in net profit can
no longer be reversed in later periods.
B. :-) Fair value gains or losses will no longer be recognized in
comprehensive income while being unrealized and recognized in net
profit upon realization.
C.
None of the above

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Chapter 5 Financial Analysis

Quiz
Your score is 66%.
1. To assess the efficiency of a firms investment management, an analyst would
analyze the firms
A. X Net profit margin

B. :-) Operating asset turnover
C.
Financial spread
D.
Net financial leverage
2. To assess the efficiency of a firms operating management, an analyst would

analyze the firms
A. :-) Net profit margin

B.
Operating asset turnover
C.
Financial spread
D.
Net financial leverage
3. One difference between the traditional and the alternative approach to

decomposing return on equity is that
A. X The traditional approach defines leverage as debt-to-equity, whereas

the alternative approach defines leverage as assets-to-equity.
B. X Only the traditional approach explicitly shows the impact of financial
spread on return on equity.
C. :-) The approaches use different definitions of profit margins and asset
turnover.
D.
? One approach uses beginning-of-year balance sheet items to

calculate ratios, whereas the other approach uses end-of-year balance
sheet items.
4. At the end of fiscal year 2012, company Z discloses the following balance
sheet:
Assets
Cash 500,000
Non-cash current assets 800,000
Non-current assets 1,300,000
Minority Equity Investments 300,000
Total 2,900,000
Equity and Liabilities
Current debt 300,000
Other current liabilities 700,000
Non-current Debt 1,400,000
Deferred tax liability 150,000
Equity 350,000
Total 2,900,000
The company needs a cash balance of 300,000 for its operations. Company
Zs net non-current operating assets equal
A. X 1,400,000
B. X 1,300,000
C. :-) 1,150,000
D.
2,900,000
5. At the end of fiscal year 2012, company Z discloses the following balance
sheet:
Assets
Cash 500,000
Non-cash current assets 800,000
Non-current assets 1,300,000
Minority Equity Investments 300,000
Total 2,900,000
Equity and Liabilities
Current debt 300,000
Other current liabilities 700,000
Non-current Debt 1,400,000
Deferred tax liability 150,000
Equity 350,000
Total 2,900,000
The company needs a cash balance of 300,000 for its operations. Company
Zs operating working capital and investment assets equal
A. :-) 400,000 and 500,000, respectively

B.
100,000 and 500,000, respectively
C.
D.
6. At the end of fiscal year 2010, company X discloses the following income
statement:
Sales 6.500,000
Operating expense (4,800,000)
Interest income 600,000
Interest expense (900,000)
Tax expense (490,000)
Net profit 910,000
Company Xs interest expense after tax and net operating profit after taxes
equal
A. :-) 585,000 and 1,105,000, respectively

B.
195,000 and 1,105,000, respectively
C.
D.
300,000 and 1,105,000, respectively
7. Company A discloses the following information:

- Return on equity = 15 percent
- Net operating and investment profit after taxes (NOPAT + NIPAT) = 500,000
- Business assets = 4,000,000
- Effective interest rate after tax = 8 percent
Company As financial leverage (debt-to-equity ratio) is
A. X Between 40 and 49.9 percent

B. :-) Between 50 and 59.9 percent
C.
Between 60 and 69.9 percent
D.
8. Company B discloses the following information:

- Return on operating assets = 10 percent
- Net operating profit after taxes = 500,000
- Sales = 3,000,000
- Equity = 2,000,000
Company Bs operating asset turnover is
A. X Between 40 and 49.9 percent

B. X Between 50 and 59.9 percent
C. :-) Between 60 and 69.9 percent
D.
9. Industry peers C and D disclose the following information:

Company C Company D
Operating asset turnover 5.6 2.3
Return on operating assets 10 percent 10 percent
Which of the two companies is more likely to follow a cost leadership strategy?
A.
Company C
B. X Company D
10.Company E discloses the following information:

- Inventories = 800,000
- Cost of sales = 4,500,000
- Business assets = 3,000,000
Company Es days inventories is
A.
Between 30 and 39.9 days
B.
C.
D. :-) Between 60 and 69.9 days
11. If a firms return on equity is 20 percent, its return on business assets is 14

percent, its sales growth rate is 15 percent, and its dividend payout ratio is 50
percent, its sustainable growth rate equals
A.
7 percent
B.
7.5 percent
C. :-) 10 percent
D. X 15 percent
12.At the end of fiscal year 2010, company Y discloses the following information:
Net operating and investment profit after taxes (NOPAT + NIPAT) 1,100,000
Interest expense after tax (= interest paid) 500,000
Net investment in operating working capital (increase) 700,000
Net investment in non-current assets (increase) 900,000
Non-operating losses 90,000
Depreciation and amortization expense 910,000
Increase in debt 550,000
Dividends paid 300,000
Company Ys free cash flow available to debt and equity is
A.
200,000 (positive)
B.
1,050,000 (positive)
C.
500,000 (positive)
D. :-) (500,000) (negative)
13.At the end of fiscal year 2010, company Y discloses the following information:
Net operating and investment profit after taxes (NOPAT + NIPAT) 1,100,000
Interest expense after tax (= interest paid) 500,000
Net investment in operating working capital (increase) 700,000
Net investment in non-current assets (increase) 900,000
Non-operating losses 90,000
Depreciation and amortization expense 910,000
Increase in debt 550,000
Dividends paid 300,000
Company Ys free cash flow available to equity is
A.
200,000 (positive)
B. :-) (450,000) (negative)

C. X (500,000) (negative)
D.
500,000 (positive)
<= Index =>
<= Index =>
Chapter 6 Prospective Analysis: Forecasting

Quiz
Your score is 23%.
1. Which of the following items are required to produce a forecasted future
condensed income statement?
A. X Tax rate; NOPAT margin; sales growth; interest rate on ending debt
B. X Tax rate; asset turnover; NOPAT margin; sales growth
C. X NOPAT margin; sales growth; return on beginning investment assets;
interest rate on beginning debt; leverage ratio
D.
? Tax rate; NOPAT margin; sales growth; return on beginning

investment assets; interest rate on beginning debt
2. Consider the following statement: Sales growth tends to revert faster to its
economy-wide average than operating asset turnover. This statement is
A.
True
B. X False
3. Consider the following statement: Return on operating assets tends to revert

faster to its economy-wide average than financial leverage. This statement is
A.
True
B. X False
4. Consider the following statement: Financial leverage tends to revert faster to

its economy-wide average than financial spread. This statement is
A.
True
B. :-) False
5. In cyclical industries, sales growth
A.
Tends to move in line with economy-wide growth
B. X Tends to approach zero

C. X Tends to be negative during economic upturns
D. X Consistently exceeds economy-wide growth
6. Company A reports the following series of quarterly earnings: Q1 = 0.250; Q2

= 0.300; Q3 = 0.280; Q4 = 0.270; Q5 = 0.250; Q6 = 0.320; Q7 = 0.290; Q8 =
0.285. An analyst assumes that company As quarterly earnings perfectly
follow the time-series process described by the Foster model. Under this
assumption, the analysts forecast of quarter 9 earnings is
A. X 0.2550
B.
0.2425
C.
0.2750
D. :-) 0.2625
7. Consider the following statement: The Foster model does not take into
account that quarterly earnings may exhibit a seasonal pattern. This
statement is
A. X True
B.
False
<= Index =>
<= Index =>
Chapter 7 Prospective Analysis: Valuation Theory and

Concepts
Quiz
Your score is 38%.
1. An analyst produces the following series of annual dividend forecasts for

company A: Expected dividend (end of) year t+1 = 10; Expected dividend
(end of) year t+2 = 20; Expected dividend (end of) year t+3 = 10. The
analyst further expects that company As dividends will be zero after year t+3.
Company As cost of equity equals 10 percent. Under these assumptions, the
analysts estimate of company As equity value at the end of year t is
A. X 31.16
B. :-) 33.13
C.
36.36
D.
40
2. An analyst predicts that company Bs dividend at the end of year t+1 will equal
10. The analyst further expects that after year t+1 company Bs dividends will
grow indefinitely at a rate of 2 percent. Company Bs cost of equity equals 7
percent. Under these assumptions, the analysts estimate of company Bs
equity value at the end of year t is
A. X 100.00
B.
111.11
C.
142.86
D. :-) 200.00
3. An analyst produces the following set of forecasts for company C:

Year t+1 Year t+2 Year t+3
Net profit 100 120 60
Ending book value of business assets 1,030 1,060 1,000
Ending book value of debt 720 740 800
At the end of year t, company Cs book values of business assets and debt
are 1,000 and 700, respectively. The analyst expects that after year t+3 net
profit will be 0 and the book values of business assets and debt will remain
constant (i.e., at their year t+3 levels). Company Cs cost of equity is 10
percent. Under these assumptions, the analysts estimate of company Cs

equity value at the end of year t is
A.
228.17
B. X 321.94
C. :-) 307.96
D. X 345.45
4. An analyst produces the following set of forecasts for company D:

NOPAT 250 220 100
Ending book value of operating assets 800 860 800
At the end of year t, the book value of company Ds operating assets is 900
and the market value of its net debt is 300. Company D has no investment
assets. The analyst expects that after year t+3 NOPAT will be 0 and the book
value of operating assets will remain constant (i.e., at its year t+3 level).
Company Ds WACC is 8 percent. Under these assumptions, the analysts
estimate of company Ds equity value at the end of year t is
A.
288.26
B. X 368.67
C. X 499.48
D. X 588.26
5. Consider the following statement: The abnormal earnings growth valuation

model differs from the free cash flow and abnormal earnings valuation models
in that it is not mathematically equivalent to the dividend discount model. This
statement is
A. X True
B.
False
6. Consider the following statement: The discounted abnormal NOPAT growth

model defines the value of operating assets as the sum of the capitalized nextperiod NOPAT forecast and the present value of forecasted NOPAT beyond
the next period. This statement is
A.
True
B. X False
7. Consider the following information about company Es performance and

financial position in year t:
Net profit = 50
Beginning book value of business assets = 300
Beginning book value of equity = 90
Cost of equity = 10 percent
Company Es abnormal earnings in year t are
A. X 50
B.
45
C. :-) 41
D. X 20
8. Consider the following statement: A disadvantage of the abnormal earnings

valuation model is that it produces lower equity value estimates for firms that
use conservative accounting policies (such as accelerated depreciation) than
for firms that use aggressive accounting policies (such as straight-line
depreciation). This statement is
A. X True
B.
False
9. An analyst produces the following set of forecasts for company F:

Dividend payout ratio 50% 50% 50%
At the end of year t, the book value of company Fs equity is 500. Company F
has no debt and its cost of equity is 10 percent. The analyst expects that in
year t+4, company F will liquidate all its assets at their book values and pay
out the proceeds to its equity holders. Under these assumptions, the analysts
estimate of company Fs equity value at the end of year t is
A. X 112.70
B. X 249.69
C. :-) 612.70
D.
1056.66
10.Consider the following information about company Gs performance and

financial position in year t and t+1:
Net profit year t = 60; net profit year t+1 = 80
Beginning book value of equity year t = 900
Dividend year t = 20; dividend year t+1 = 50
Company Gs abnormal earnings growth in year t+1 is
A. X (70)
B. :-) 16
C.
20
D.
30
11. Company Hs current return on (beginning) equity is 12 percent. An analyst

assumes that the companys ROE will grow indefinitely at a rate of 2 percent.
Company Hs cost of equity is 10 percent. Under these assumptions, the
analysts estimate of company Hs equity value-to-book multiple is
A. X 1.00
B. X 1.10
C. X 1.12
D.
1.25
12.In the current year, company Is net profit is 20, its beginning book value of
equity is 100, and its ending book value of equity is 110. An analyst predicts
that company Is next years net profit will be 50. The analyst further assumes
that company Is cost of equity is 10 percent and its abnormal earnings growth
follows the following process:
Abnormal earnings growth in year t+1 = 0.5 x abnormal earnings growth in
year t
Under these assumptions, the analysts estimate of company Is equity value
is
A. X 500.00
B. X 515.83
C. :-) 741.67
D.
2590.00
13.Consider the following information about three industry peers:

ROE Price-to-book ratio Price-earnings ratio
Peer 1 20% 0.2 5
Peer 2 10% 1 10
Peer 3 25% 1 5
Which of the following statements about these industry peers is correct?
A. :-) Investors expect that the return on equity of the currently best
performing peer is not sustainable in the future.
B.
? Investors expect that the return on equity of the currently worst

performing peer will improve in the future.
C.
? Investors expect that peer 1s future abnormal earnings growth will

be positive.
D.
Statements A and C are correct.
E.
None of the above statements is correct.
14.Consider the following statement: The equity value-to-book ratio is a function

of (a) future returns on equity, (b) future book value of equity growth rates, and
(c) the cost of equity. This statement is
A. :-) True
B.
False
<= Index =>
<= Index =>
Chapter 8 Prospective Analysis: Valuation

Implementation
Quiz
Your score is 61%.
1. A large European, debt-free company has an estimated equity beta of 1.4. The
risk-free rate and the market risk premium in the companys home country are
4 percent and 5 percent, respectively. This companys cost of equity is
A. X 5 percent
B. X 9 percent
C. :-) 11 percent
D.
12 percent
2. Some researchers argue that the firm size effect on the cost of equity capital
has disappeared. This would imply that
A. X The cost of equity capital of small firms is no longer systematically

lower than that of large firms.
B. X The equity beta of small firms is no longer systematically greater
than that of large firms.
C. X The equity beta of small firms is no longer systematically lower than
that of large firms.
D.
None of the above
3. Company As market values of debt and equity are 150 and 200,
respectively. The company has a statutory and effective tax rate of 30 percent,
an equity beta of 1.5 and an infinitely low probability of bankruptcy. Based on
this information, company As business asset beta is
A. X 0.86
B. :-) 0.98
C.
1.01
D.
2.29
4. Company Bs current equity beta, debt beta, and cost of equity are 1.6, 1.0
and 12 percent, respectively. The current (and expected future) tax rate and
risk-free rate are 35 percent and 4 percent, respectively. Company B currently
has a debt-to-equity ratio of 50 percent. The company plans to increase its
debt-to-equity ratio to 100 percent (leaving its debt beta unchanged). After this
increase in leverage, company Bs cost of equity will be
A. X 10.04 percent
B. X 12.00 percent
C. :-) 13.96 percent
D.
20.00 percent
5. Company Cs cost of equity and cost of debt are 12 and 8 percent,

respectively. The current tax rate is 40 percent. Company C has a debt-toequity ratio of 50 percent. Company Cs weighted average cost of capital is
A. X 8.40 percent
B. :-) 9.60 percent
C.
10.00 percent
D.
10.67 percent
6. An analyst produces the following series of annual dividend forecasts for

company D: Expected dividend (end of) year t+1 = 10; Expected dividend
(end of) year t+2 = 20; Expected dividend (end of) year t+3 = 10. The
analyst further expects that company Ds dividends will grow indefinitely at a
rate of 2 percent after year t+3. Company Ds cost of equity equals 10 percent.
Under these assumptions, the analysts estimate of company Ds equity value
at the end of year t is
A. :-) 128.93
B.
120.22
C.
108.26
D.
36.36
7. An analyst produces the following set of forecasts for company E:


Ending book value of business assets 1,030 1,060 1,000
Ending book value of debt 720 740 800
At the end of year t, company Es book values of business assets and debt are
1,000 and 700, respectively. The analyst expects that after year t+3,
company E will reach a competitive equilibrium, i.e., will earn zero abnormal
earnings. Company Es cost of equity is 10 percent. Under these assumptions,
the analysts estimate of company Es equity value at the end of year t is
A. X 307.96
B. X 443.20
C. :-) 458.23
D.
507.96
8. An analyst produces the following set of forecasts for company F:

Dividend payout ratio 50% 50% 50%
At the end of year t, the book value of company Fs equity is 500. Company F
has no debt and its cost of equity is 10 percent. The analyst expects that in
and after year t+4, company F will earn abnormal earnings on the sales it had
in year t+3, but earn zero abnormal earnings on incremental sales beyond that
level. Under these assumptions, the analysts estimate of company Fs equity
value at the end of year t is
A. X 142.75
B. X 385.90
C. :-) 413.22
D.
512.70
9. Consider the following information about company Gs performance and


If an analyst assumes that company Gs abnormal earnings will be zero in
year t+2 and beyond, her estimate of the companys terminal (equity) value at
the end of year t+1 under the abnormal earnings growth valuation method is
A.
B.
14
C.
(140)
D. :-) 140
10.Consider the following information about company Gs performance and

If an analyst assumes that company Gs abnormal earnings will remain
constant in year t+2 and beyond, her estimate of the companys terminal
(equity) value at the end of year t+1 under the abnormal earnings growth
valuation method is
A. :-) 0
B.
14
C.
(140)
D.
140
11. The value of Company Ks operating assets equals 545 million, the value of
its investment assets equals 45 million, the present value of its tax shield on
debt equals 64 million, and the value of its debt equals 245 million. This
implies that the value of Company Ks equity is
A.
899 million
B. :-) 409 million

C. X 345 million
D.
300 million
12.Consider the following statements:

Statement I: An (indirect) asset-based approach to valuing equity always
produces the same equity value estimate as a (direct) equity-based approach
to valuing equity.
Statement II: An (indirect) asset-based approach to valuing equity is more
accurate than the equity-based approach if (a) discount rates are held
constant but (b) leverage is expected to change significantly over the forecast
horizon.
A.
Only statement I is true
B.
Only statement II is true
C. :-) Both statements are false

<= Index =>
<= Index =>
Chapter 9 Equity Security Analysis

Quiz
Your score is 42%.
1. Which of the following statements about collective investment funds is correct?
A. X Income funds typically invest in companies that generate high

abnormal earnings.
B. X Growth funds typically invest in companies with high sales growth.
C. :-) Market neutral funds typically hold security portfolios with betas
close to zero.
D.
A, B, and C are correct.
2. Consider the following statement: According to the Efficient Markets

Hypothesis investment strategies that are purely based on publicly available
information cannot systematically generate positive abnormal returns. This
statement is
A.
True
B. X False
3. Consider the following statement: Active portfolio management relies more

heavily on financial statement analysis than passive portfolio management.
This statement is
A. :-) True
B.
False
4. Consider the following statement: Technical security analysis relies more

heavily on financial statement information than fundamental security analysis.
This statement is
A.
True
B. :-) False
5. Consider the following statement: In contrast with formal valuation methods,

informal valuation methods ignore financial statement information. This
statement is
A. X True
B.
False
6. On January 1, 2010, Company Zs share price is 11.25 per share. The

companys book value of equity per share is 5, expected net profit per share
for fiscal year 2010 is 5, and the cost of equity is 10 percent. What are the
markets expectations about the long-term abnormal earnings growth rate for
company Z?
A. X 0 percent
B. X 1 percent
C. :-) 2 percent
D.
3 percent
7. Which of the following statements is not correct? Research has shown that
A.
? Analysts forecasts and recommendations tend to be

systematically biased
B.
? Analysts tend to be more accurate in forecasting near-term

performance than in forecasting long-term performance
C.
? Analysts forecasts are generally more accurate than time-series

forecasts
D. :-) Analysts optimism (in forecasts and recommendations) has

substantially increased during the late 1990s
E. X None of the above
8. Consider the following statement: Past research findings have consistently

shown that collective investment and pension funds systematically outperform
the market index. This statement is
A. X True
B.
False
<= Index =>
<= Index =>
Chapter 10 Credit Analysis and Distress Prediction

Quiz
Your score is 66%.
1. Which of the following industries is the least debt intensive industry?
A. :-) Pharmaceutical industry

B.
Air transportation industry
C.
Electric services industry
D.
Hotel industry
2. Consider the following statement: Large firms tend to have higher leverage
than small firms because they have lower business risks (on average). This
statement is
A. :-) True
B.
False
3. Multiple bank borrowing is
A. X Most common in countries with strong legal protection of creditors.

B. :-) Most common in countries with weak legal protection of creditors.
C.
Not associated with the degree of legal protection of creditors.
4. Supplier financing is
A. X Most common in countries with strong legal protection of creditors.

B. :-) Most common in countries with weak legal protection of creditors.
C.
Not associated with the degree of legal protection of creditors.
5. Consider the following statement: One mechanism that commercial lenders

use to reduce credit risk is to lengthen the maturity of the loans they extend.
This statement is
A.
True
B. :-) False
6. In cases where a borrowers cash needs are difficult to anticipate, it is most

likely to make use of
A. X Term loans
B. X Lease financing
C. :-) Open lines of credit
D.
Mortgage loans
7. Which of the following types of collateral is generally the most desirable form
of security?
A.
Inventory
B.
Real estate
C.
Equipment
D. :-) Receivables
8. Consider the following information about company As performance and

financial position in year t:
Earnings before interest and taxes = 95;
Depreciation = 5
Interest = 5
Taxes = 27
Preference dividends = 0
Debt repayment = 20
Company As fund flow coverage ratio in year t equals:
A.
4.00
B. X 3.80
C. X 3.60
D. :-) 2.98
9. Which of the following is not a financial covenant that is commonly used in

loan contracts?
A. X Maintenance of a minimum fund flow coverage ratio

B. X Maintenance of a maximum ratio of total liabilities to net worth
C. :-) Maintenance of a minimum return on assets
D.
Maintenance of a minimum net working capital balance
10.Consider the following statement: The number of European firms that

receives an A rating typically exceeds the number of European firms that
receives an AA rating. This statement is
A. :-) True
B.
False
11. Which of the following variables is positively associated with a firms debt
rating?
A. X Net debt to net capital

B. X Firm size
C. X NOPAT to net capital
D. X A, B and C
E.
B and C
12.Company X has a significantly lower Altman Z score than company Y. This

implies that
A. :-) Company Xs bankruptcy probability exceeds company Ys

bankruptcy probability
B.
? Company Ys bankruptcy probability exceeds company Xs

bankruptcy probability
<= Index =>
<= Index =>
Chapter 11 Mergers and Acquisitions
Quiz
Your score is 30%.
1. Consider the following statement: A merger between a pharmaceutical firm
with a strong research department and a pharmaceutical firm with a strong
sales force is a typical example of mergers that aim to take advantage of
economies of scale. This statement is
A. X True
B.
False
2. Consider the following statement: Mergers that help to provide low-cost

financing to a financially constrained target are more likely to occur if the
degree of information asymmetry between the targets management and
public capital markets is high. This statement is
A. :-) True
B.
False
3. Consider the following statement: In the EU, mergers that increase productmarket rents are more likely to be disallowed by the European Commission
than mergers that do not. This statement is
A. :-) True
B.
False
4. Which of the following motivations for mergers is typically not valued by the
acquirers shareholders?
A. X Capturing tax benefits that arise from operating tax loss

carryforwards
B. X Improving target management
C. X Increasing product-market rents
D.
Reducing business risk through diversification of operations
5. Which of the following statements is not correct?
A. X Acquisition premiums tend to be greater in hostile takeovers than in

friendly takeovers
B. :-) Acquisition premiums tend to be greater in share-for-share mergers
(i.e., equity-financed takeovers) than in cash-financed takeovers
C.
? Acquisition premiums tend to be greater if the target company is

located in a country with strict takeover rules than if the target company
is located in a country with weak takeover rules
6. Consider the following statement: An advantage of using price-earnings

multiples to estimate the value of a target to the acquirer is that it focuses on
the near-term benefits of the merger. This statement is
A. X True
B.
False
7. Acquisitions financed with debt or surplus cash are more likely to occur if
A. X The acquiring firm is close to financial distress

B. X There is low information asymmetry regarding the acquisition
benefits between the acquirers management and its shareholders
C. :-) If the acquiring firm has a primary shareholder who controls

between 40 and 60 percent of the equity votes
D.
None of the above
8. Consider the following statement: A potential acquisition is more likely to be

completed if the target company has not implemented golden parachutes for
its management. This statement is
A. X True
B.
False
9. Which of the following mechanisms can be used as takeover defenses?
A. X A voting cap
B. X The issuance of depository receipts
C. X Squeeze-out rules
D. X A, B, and C
E.
A and B
10.Which of the following rules have been included in the EU Takeover Directive
to prevent management entrenchment and protect minority shareholders
during European takeovers?
A. X The board-neutrality rule

B. X The equal-treatment rule
C. X The maximum-bid rule
D. :-) A and B
E.
A and C
<= Index =>

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<= Index =>

Chapter 1 A Framework for Business Analysis and

2. Consider the following statement: In countries with a model of strong legal

3. Mandatory publication of audited financial statements is an imperfect solution

A. X Accounting profits are typically less informative about firms

? The accounting standards governing the preparation of such

C. :-) Managers unintentionally as well as strategically introduce noise

None of the above

4. Which of the following items is not a required component of European public

A. X A comprehensive income statement (or statement of total recognized

All of the above items are required components

5. Consider the following statement: An economic resource whose future

6. Which of the following statements is correct?

A. X Revenues cannot be recognized before cash is collected.

B. X Expenses cannot be recognized before the cash outflow has

? Expenses will always be recognized before or when the cash

None of the above.

7. Consider the following statement: The extent to which financial statements

8. Consider the following statement: Accounting conventions and regulations

10.Which of the following statements is true?

A. X The implementation of the Eight Company Law Directive in the

? All audits of public firms within the European Union must be

None of the above

11. Which of the following statements is true?

A. X Managerial legal liability regimes are equally strict across the

None of the above

12.One of the primary tasks of the Committee of European Securities Regulators

A. :-) Improve the consistency of public enforcement activities across

Publicly disclose all European public enforcement decisions.

Develop a set of International Public Enforcement Standards.

? Discipline European public companies for violations of

13.Consider the following statement: The outcomes of business strategy analysis

14.Which of the following statements is correct?

A. X The accounting analysis follows the financial analysis

The financial analysis precedes the strategy analysis

A. X The strategy analysis also includes an analysis of the firms

None of the above.

? Private firms (i) financial reporting is unregulated and (ii) financial

None of the above.

Chapter 2 Strategy Analysis

A. X Rivalry among existing firms

A, C, and other factors

A. X Ratio of fixed to variable costs

First mover advantage

First mover advantage

A. X Concentration of buyers relative to the concentration of sellers

Price sensitivity of customers

None of the above

A. :-) The rivalry among existing firms affects industry profitability.

The threat of new entrants affects industry profitability.

The threat of substitute products affects industry profitability.

The bargaining power of buyers affects industry profitability.

The bargaining power of suppliers affects industry profitability.

6. The price sensitivity of customers in the hotel industry

A. X Varies depending on what day of the week it is.

? Is negatively affected by the lack of hotels in a particular

None of the above

7. Consider the following statement: Discount retailers follow a cost leadership

8. Consider the following statement: In industries with high rivalry among

10.Consider the following statement: Firms following a cost leadership strategy

11. Managers choice whether or not to diversify activities across geographical

A. :-) Corporate strategy decision

Competitive strategy decision

None of the above