Question 1

What is your estimate of price per share using the dividend discount model at 12/31/05?
A) $20.62
B) $21.65
C) $23.56
D) $24.74

Accepted Answer

D

Question 2

You have prepared a trend series for Company XYZ for three years, 2004-2006 inclusive, using 2004 as the base year. Below are selected data.
 $$\begin{array} { | l | c | c | c | } 
\hline & 2004 & 2005 & 2006 \
\hline \text { Sales } & 100 & 120 & 135 \
\hline \text { Net Income } & 100 & 118 & 128 \
\hline \text { Total Assets } & 100 & 119 & 130 \
\hline
\end{array}$$
-Which of the following ratios is not generally considered to be helpful in assessing short-term liquidity?
A) Acid test ratio
B) Current ratio
C) Days to collect receivables
D) Days goodwill held

Accepted Answer

The ratios that are commonly used to assess short-term liquidity are the acid test ratio, current ratio, and days to collect receivables. The days goodwill held ratio is not generally considered to be helpful in assessing short-term liquidity because it is a measure of how long a company holds onto its goodwill, which is an intangible asset that cannot be easily converted to cash. Therefore, D is the correct answer.

Question 3

Following is some financial information for Dell Inc.
 $$\begin{array} { | l | r | r | } 
\hline & { 2006 } & { 2005 } \
\hline \text { Revenues } & \$ 49,205 & \$ 41,444 \
\hline \text { Net income } & 3,043 & 2,645 \
\hline \text { Total assets } & 23,215 & 19,311 \
\hline \text { Shareholder's equity } & 6,485 & 6,280 \
\hline \text { Cash flow from operations } & 5,310 & 3,670 \
\hline \text { Basic earnings per share } & 1.21 & 1.03 \
\hline \text { Book value per share } & 2.61 & 2.46 \
\hline \text { Closing stock price } & 33.44 & 23.86 \
\hline
\end{array}$$
-What is Dell's asset turnover for 2006?
A) 2.12
B) 3.58
C) 3.65
D) 2.31

Accepted Answer

D

Question 4

You have prepared a trend series for Company XYZ for three years, 2004-2006 inclusive, using 2004 as the base year. Below are selected data.
 $$\begin{array} { | l | c | c | c | } 
\hline & 2004 & 2005 & 2006 \
\hline \text { Sales } & 100 & 120 & 135 \
\hline \text { Net Income } & 100 & 118 & 128 \
\hline \text { Total Assets } & 100 & 119 & 130 \
\hline
\end{array}$$
-While determining the most profitable company from the given number of companies, which of the following would be the best indicator of relative profitability?
A) Highest net income
B) Highest retained earnings
C) Highest return on equity
D) Highest operating margin

Accepted Answer

Return on equity (ROE) is a measure of profitability that indicates how much profit a company generates with the money shareholders have invested. It is calculated as net income divided by shareholders' equity. Therefore, ROE provides a better measure of relative profitability than just looking at net income, retained earnings or operating margin alone.

Question 5

Following is some financial information for Dell Inc.
 $$\begin{array} { | l | r | r | } 
\hline & { 2006 } & { 2005 } \
\hline \text { Revenues } & \$ 49,205 & \$ 41,444 \
\hline \text { Net income } & 3,043 & 2,645 \
\hline \text { Total assets } & 23,215 & 19,311 \
\hline \text { Shareholder's equity } & 6,485 & 6,280 \
\hline \text { Cash flow from operations } & 5,310 & 3,670 \
\hline \text { Basic earnings per share } & 1.21 & 1.03 \
\hline \text { Book value per share } & 2.61 & 2.46 \
\hline \text { Closing stock price } & 33.44 & 23.86 \
\hline
\end{array}$$
-What is Dell's profit margin for 2005?
A) 6.27%
B) 6.18%
C) 6.38%
D) 6.86%

Accepted Answer

The answer of Following is some financial information for Dell...

Question 6

Wilco Company reports the following: $$\begin{array} { | l | c | c | } 
\hline & 2005 & 2004 \
\hline \text { Retained Earnings } & \$ 2,000,000 & \$ 1,300,000 \
\hline \text { Common Stock } & \$ 500,000 & \$ 500,000 \
\hline \text { Paid-in Capital } & \$ 3,000,000 & \$ 3,000,000 \
\hline \text { Net Income for year } & \$ 900,000 & \$ 400,000 \
\hline
\end{array}$$ Dividend payout ratio for 2005 was:
A) 27%
B) 12%
C) 22.2%
D) Not determinable

Accepted Answer

The dividend payout ratio is the portion of net income paid out as dividends, expressed as a percentage. It can be calculated using the formula:

Dividend Payout Ratio = Dividends / Net Income

Since the problem does not provide information on the dividends paid, we cannot directly calculate the dividend payout ratio. However, we can use the information provided to infer that the company has retained earnings of $2,000,000 for 2005, compared to $1,300,000 for 2004. This means that the company has retained more earnings in 2005, which suggests that they may have paid out less dividends or retained more profits.

Therefore, we can conclude that the dividend payout ratio for 2005 is likely lower than the previous year. Since the only answer choice that represents a lower ratio than the previous year is C (22.2%), we can choose it as the best option.

Question 7

The Management Discussion and Analysis Section of the annual report:
A) is required by the SEC.
B) is optional but normally included in the annual report.
C) is required by the SEC only if the company has suffered from unfavorable trends or there are significant uncertainty concerning liquidity of the company.
D) is required by the SEC only if they have a qualified audit opinion.
You are analyzing a large stable company. For the year ending 12/31/05 the company reported earnings of $58,900K and book value at the end of 2005 was $371,700K. You expect earnings to grow at 5% a year in perpetuity, and the dividend payout ratio of 70% to continue. The company borrows at 8%, and has a cost of equity of 12%. The company has 25,000K shares outstanding.

Accepted Answer

The Management Discussion and Analysis (MD&A) section is required by the SEC for all publicly traded companies to provide insights into the financial condition, changes in financial condition, and results of operations.

Question 8

You have prepared a trend series for Company XYZ for three years, 2004-2006 inclusive, using 2004 as the base year. Below are selected data.
 $$\begin{array} { | l | c | c | c | } 
\hline & 2004 & 2005 & 2006 \
\hline \text { Sales } & 100 & 120 & 135 \
\hline \text { Net Income } & 100 & 118 & 128 \
\hline \text { Total Assets } & 100 & 119 & 130 \
\hline
\end{array}$$
-Which of the following statements is incorrect?
A) Net Income in 2006 increased by 28% compared to 2004.
B) XYZ's net income to sales (return on sales) increased in 2006 compared to 2004.
C) XYZ's net income to sales (return on sales) decreased in 2006 compared to 2004.
D) Assets have increased over time.

Accepted Answer

The answer of You have prepared a trend series for...

Question 9

$371,700 + ( 58,900 \times 1.05 - ( .12 \times 371,700 ) )$/$( .12 - .05 )$
_______________________________________________________________
$$25,000$$
-Which of the following is not a common tool used in financial statement analysis?
A) Random walk analysis
B) Ratio analysis
C) Common size statement analysis
D) Trend series analysis

Accepted Answer

Random walk analysis is not a common tool used in financial statement analysis. The other options - ratio analysis, common size statement analysis, and trend series analysis - are commonly used in financial statement analysis.

Question 10

Following is some financial information for Dell Inc.
 $$\begin{array} { | l | r | r | } 
\hline & { 2006 } & { 2005 } \
\hline \text { Revenues } & \$ 49,205 & \$ 41,444 \
\hline \text { Net income } & 3,043 & 2,645 \
\hline \text { Total assets } & 23,215 & 19,311 \
\hline \text { Shareholder's equity } & 6,485 & 6,280 \
\hline \text { Cash flow from operations } & 5,310 & 3,670 \
\hline \text { Basic earnings per share } & 1.21 & 1.03 \
\hline \text { Book value per share } & 2.61 & 2.46 \
\hline \text { Closing stock price } & 33.44 & 23.86 \
\hline
\end{array}$$
-What is Dell's P/E ratio for 2006?
A) 27.63
B) 12.81
C) 23.65
D) 9.70

Accepted Answer

The P/E ratio is calculated by dividing the closing stock price by the basic earnings per share. For 2006, it is 33.44 / 1.21 = 27.63.

Question 11

Which of the following would not be considered a source of financing?
A) Notes receivable
B) Common stockholders' equity
C) Retained earnings
D) Debentures

Accepted Answer

Notes receivable are not a source of financing, but rather a form of investment or asset. The other options (common stockholders' equity, retained earnings, and debentures) are all sources of financing.

Question 12

Which of the following is likely to be the most informative source if you were interested in a company's business plan or strategy?
A) Auditor's letter
B) Management discussion and analysis
C) Proxy statement
D) Footnotes

Accepted Answer

The management discussion and analysis section typically provides information on a company's business plan, strategy, and goals. The auditor's letter provides information on the accuracy of the financial statements, the proxy statement provides information on corporate governance, and footnotes provide additional detail on the financial statements.

Question 13

You have prepared a trend series for Company XYZ for three years, 2004-2006 inclusive, using 2004 as the base year. Below are selected data.
 $$\begin{array} { | l | c | c | c | } 
\hline & 2004 & 2005 & 2006 \
\hline \text { Sales } & 100 & 120 & 135 \
\hline \text { Net Income } & 100 & 118 & 128 \
\hline \text { Total Assets } & 100 & 119 & 130 \
\hline
\end{array}$$
-Which of the following statements concerning financial ratios is incorrect?
A) Accounting principles and methods used by a company will not affect financial ratios.
B) The informational value of a ratio in isolation is limited.
C) A ratio is one number expressed as a percentage or fraction of another number.
D) Calculation of financial ratios is not sufficient for a complete financial analysis of a company.

Accepted Answer

Accounting principles and methods used by a company can significantly affect financial ratios. For example, the use of different depreciation methods or inventory valuation methods can result in different financial ratios. It is important to consider these differences when comparing ratios between companies or over time for the same company.

Question 14

Liquidity of a company is generally defined as a measure of:
A) the ability of a company to pay its employees in a timely manner.
B) the ability to pay interest and principal on all debt.
C) the ability to pay dividends.
D) the ability to pay current liabilities.

Accepted Answer

Liquidity is the ability of a company to pay its debts and obligations as they come due. Current liabilities are debts and obligations that are due within one year, and a company's ability to pay these current liabilities is a key indicator of liquidity. Therefore, option D - the ability to pay current liabilities - is the best choice.

Question 15

When conducting comparative analysis by reviewing consecutive balance sheets,
A) all items on the balance sheet in Year t must be divided by their corresponding value in Year t-1 and subtract 1.
B) all items on the balance sheet in Year t-1 must be subtracted from their corresponding value in Year t.
C) all items on the balance sheet in Year t must be divided by net income in Year t-1.
D) Both A and B are correct.

Accepted Answer

Both A and B are correct methods for conducting comparative analysis. A involves calculating the percentage change, while B involves calculating the absolute change.

Question 16

A common size income statement would typically be prepared by dividing:
A) all items on income statement in Year t by their corresponding value in Year t-1.
B) all items on income statement in Year t by their corresponding balance sheet accounts in Year t.
C) all items on income statement in Year t by net income in Year t-1.
D) all items on income statement in Year t by sales in Year t.

Accepted Answer

A common size income statement is prepared by dividing all items on the income statement in Year t by their corresponding sales in Year t. This allows for a comparison of the relative proportions of each expense or revenue item to overall sales, making it easier to identify trends and areas for improvement.

Question 17

$$\frac { ( 58,900 \times 1.05 \times 0.7 ) / ( .12 - .05 ) } { 25,000 }$$
-What is your estimate of price using the residual income valuation model at 12/31/05?
A) $20.62
B) $21.65
C) $23.56
D) $24.72

Accepted Answer

The answer of \[\frac { ( 58,900 \times 1.05 \times...

Question 18

Following is some financial information for Dell Inc.
 $$\begin{array} { | l | r | r | } 
\hline & { 2006 } & { 2005 } \
\hline \text { Revenues } & \$ 49,205 & \$ 41,444 \
\hline \text { Net income } & 3,043 & 2,645 \
\hline \text { Total assets } & 23,215 & 19,311 \
\hline \text { Shareholder's equity } & 6,485 & 6,280 \
\hline \text { Cash flow from operations } & 5,310 & 3,670 \
\hline \text { Basic earnings per share } & 1.21 & 1.03 \
\hline \text { Book value per share } & 2.61 & 2.46 \
\hline \text { Closing stock price } & 33.44 & 23.86 \
\hline
\end{array}$$
-What is Dell's profit margin for 2006?
A) 6.27%
B) 6.18%
C) 6.38%
D) 6.86%

Accepted Answer

Profit margin is calculated by dividing net income by revenues and multiplying by 100 to get a percentage. So, for 2006: 
Profit margin = (3,043 / 49,205) x 100% = 6.18%
Therefore, the answer is choice B.

Question 19

If a company receives an unqualified audit opinion it means the auditors:
A) did not complete a full audit and therefore do not feel qualified to give an opinion on financial statements.
B) are providing assurance that the company will remain financially viable for at least the next year.
C) are providing assurance that the company's financial statements fairly present company's financial performance and position.
D) are providing assurance that the company's financial statements are free from misstatement, fraudulent accounting and fairly indicate future performance.

Accepted Answer

An unqualified audit opinion means that the auditors have provided assurance that the company's financial statements fairly present the company's financial performance and position. It indicates that the financial statements are free from material misstatements and the information provided is complete and accurate. It does not address the company's financial viability or future performance.

Question 20

You have prepared a trend series for Company XYZ for three years, 2004-2006 inclusive, using 2004 as the base year. Below are selected data.
 $$\begin{array} { | l | c | c | c | } 
\hline & 2004 & 2005 & 2006 \
\hline \text { Sales } & 100 & 120 & 135 \
\hline \text { Net Income } & 100 & 118 & 128 \
\hline \text { Total Assets } & 100 & 119 & 130 \
\hline
\end{array}$$
-From the above information, you can infer that:
A) rate of sales growth has decreased.
B) net income to sales (return on sales) is increasing over time.
C) asset turnover is decreasing over time.
D) None of the above

Accepted Answer

The trend analysis shows that sales increased from 100 in 2004 to 120 in 2005, and then to 135 in 2006. This indicates a decreasing rate of sales growth over time, since the increase from 2004 to 2005 was greater than the increase from 2005 to 2006. Therefore, option A is the correct inference. Option B cannot be inferred since we do not have enough information about the relative change in net income and sales. Option C cannot be inferred as we do not have enough information about the change in the total assets turnover ratio.

Quiz 1: Overview of Financial Statement Analysis

What is your estimate of price per share using the dividend discount model at 12/31/05?

The Management Discussion and Analysis Section of the annual report:

$371,700 + ( 58,900 \times 1.05 - ( .12 \times 371,700 ) )$ / $( .12 - .05 )$ _______________________________________________________________ $25,000$ -Which of the following is not a common tool used in financial statement analysis?

Which of the following would not be considered a source of financing?

Which of the following is likely to be the most informative source if you were interested in a company's business plan or strategy?

Liquidity of a company is generally defined as a measure of:

When conducting comparative analysis by reviewing consecutive balance sheets,

A common size income statement would typically be prepared by dividing:

$\frac { ( 58,900 \times 1.05 \times 0.7 ) / ( .12 - .05 ) } { 25,000 }$ -What is your estimate of price using the residual income valuation model at 12/31/05?

If a company receives an unqualified audit opinion it means the auditors: