Business Analysis and Valuation
Practice Questions
Course Introduction
Business Analysis and Valuation equips students with the foundational concepts and practical tools necessary to analyze financial statements, assess corporate performance, and determine firm value. The course explores a range of topics, including financial statement analysis, accounting quality assessment, strategic business analysis, forecasting future performance, and valuation methods such as discounted cash flow and market multiples. Through case studies and real-world examples, students learn how to critically evaluate financial reports, interpret corporate strategies, and apply analytical frameworks to support investment decisions, mergers and acquisitions, and other business activities. This course is essential for anyone seeking a career in finance, consulting, or corporate strategy.
Recommended Textbook
Financial Reporting Financial Statement Analysis and Valuation 8th Edition by
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Page 2
James M. Wahlen
Chapter 1: Overview of Financial Reporting, financial
Statement Analysis, and Valuation
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Q1) When identifying the strategies that a particular firm pursues to gain a competitive advantage it is important to determine if its products are designed to meet the needs of a specific market segment or are they intended for a _____________________________________________.
Answer: broader consumer market
Q2) Which of the following is a question an analyst would ask when assessing the quality of a firm's financial statements?
A) Are the company's products designed to meet a specific market segment?
B) Has the firm integrated forward into retailing to final consumers?
C) Is the firm diversified across several geographical markets?
D) Do earnings include nonrecurring gains or losses?
Answer: D
Q3) Another important step in financial statement analysis is to assess the quality of a firm's ________________________________________ and if necessary adjust them for such characteristics as sustainability or comparability.
Answer: financial statements
Q4) Normally,intense rivalries have a tendency to reduce ____________________.
Answer: profitability
Page 3
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Chapter 2: Asset and Liability Valuation and Income Measurement
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Q1) What level are inputs for estimating fair values are based on inputs that are readily available via prices for identical assets or liabilities in actively traded markets such as securities exchanges?
A) Level 1.
B) Level 2.
C) Level 3.
D) None of these.
Answer: A
Q2) b.Assuming that Plaxo Corporation decides to use accelerated depreciation for both financial and tax reporting purposes for 2011 would there still be a deferred tax liability?
Answer: The depreciation amounts would be exactly the same so there would be no deferred tax liability. a deferred tax liability only occurs when the accelerated depreciation method exceeds the straight line method of calculating depreciation expense.
Q3) Net income equals revenues plus ____________________ minus expenses and ____________________.
Answer: gains,losses
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Chapter 3: Income Flows Versus Cash Flows:
Understanding the Statement of Cash Flows
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Q1) The financial statements for Warren Company show the following: Cost of goods sold
$725,000
\[\begin{array} { | l | r | r | }
\hline & \text { Beginning Balance } & \text { Ending Balance } \\
\hline \text { Merchandise Irventory } & \$ 45,000 & \$ 56,000 \\
\hline \text { Accounts Receivable } & 53,000 & 50,000 \\
\hline \text { Accounts Payable } & 37,000 & 42,000 \\
\hline
\end{array}\]
Based on this information,cash paid for merchandise was
A) $736,000
B) $719,000
C) $731,000
D) $741,000
Answer: C
Q2) ____________________ ___________________ equals current assets minus current liabilities
Answer: Working capital
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Chapter 4: Profitability Analysis
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Q1) When calculating Basic earnings per share net income is adjusted by____________
Q2) Firms with high operating leverage have a higher proportion of _________________________ in their cost structure.
Q3) Refer to the information for Net Devices Inc.What is Net Devices' capital structure leverage ratio for 2011?
A) 3.89 B) 1.68
Q4) Return on assets can be a misleading ratio when analyzing technology firms because two important assets,______________________________ and ______________________________ do not appear on their balance sheets
Q5) Refer to the information for Net Devices Inc.What is the profit margin for ROA for Net Devices for 2010?
A) 7.26%
B) 4.22%
C) 5.00%
D) 3.97%
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Chapter 5: Risk Analysis
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Q1) The current ratio is one of the measures of__________ of the firm.
Q2) Which of the following can companies use as collateral for a loan?
A) prepaid insurance
B) prepaid rent
C) property, plant, and equipment
D) retained earnings
Q3) One common problem with the current ratio is that it is susceptible to "window dressing." If prior to the end of the accounting period Saxon Company has a current ratio of 1.5 and management wishes to boost its current ratio it may decide to
A) pay off accounts payable prior to year end.
B) purchase more inventory on account.
C) purchase short-term investments with cash.
D) purchase more inventory with cash.
Q4) Bankruptcy prediction research has identified three broad factors influencing long-term solvency risk,which of the following is not one of the factors?
A) Investment factors
B) Financing factors
C) Operating factors
D) Credit factors
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Chapter 6: Accounting Quality
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Q1) During July 2012 Ralston Company decides to dispose of one of its subsidiaries which qualifies for accounting as a discontinued operation.At the July 2012 measurement date Ralston Company estimates that it will report net losses of $1,500,000 dollars from the measurement date until the disposal date which is expected to be in April 2013.In addition,Ralston estimates that it will lose $300,000 on the sale of the segment.How much gain or loss on discontinued operations will Ralston report in its 2012 income statement (net of income taxes)?
A) $1,500,000 loss
B) $0
C) $1,800,000 loss
D) $300,000 loss
Q2) A company may try to paint a favorable picture of itself by accelerating the timing of revenues or estimating the collectible amounts too aggressively.In these cases the quality of accounting information declines because it does not represent the company's true economic condition and may not be sustainable.List four conditions which might suggest that a company is recognizing revenues too early?
Q3) The _________________________ is the date on which a firm commits itself to a formal plan to dispose of a business segment.
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Chapter 7: Financing Activities
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Q1) The acceptable method of accounting for stock options is the _________________________ method.
Q2) An agreement in which a purchaser agrees to pay specified amounts periodically to a seller for products or services is known as a ________________________________________.
Q3) Convertible preferred stock has both the attributes of _______ and _____________________________________.
Q4) Using the information provided by Santa Corporation calculate the company's 2012 fixed asset ratio.
A) 3.0
B) 3.65
C) 3.23
D) 5.21
Q5) Under an operating lease agreement the lessee recognizes ______________________________ each period that the leased asset is used.
Q6) Discuss the method of accounting for employee stock options.In your answer discuss the how the accounting has changed during recent years.
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Chapter 8: Investing Activities
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Q1) Unrealized holding gains and losses from investments classified as available for sale are reported in _____________________________________________.
Q2) United owns Estada,a European based subsidiary for which the Euro is the functional currency.Estada had a net asset position at January 1,2012 of 1,200,000 Euros and reported income of 350,000 Euros for 2012,which was earned evenly throughout the year.In addition,Estada paid 100,000 Euros of dividends at December 31,2012.The following were in effect during 2012: \[\begin{array} { l l }
\text { January 1, } 2012 & 1 \text { Euras } = \$ 0.99 \\
\text { Average far 2012 } & 1 \text { Euras } = \$ 0.98 \\ \text { December 31,2012 } & 1 \text { Euras } = \$ 1.10 \end{array}\]
Determine the amount of the unrealized translation gain or loss United should record for 2012 with respect to Estada.
Q3) The functional currency of a foreign unit whose receivables and payables are denominated in foreign currency and not usually remitted to parent company is the
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Chapter 9: Operating Activities
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Q1) Which of the following best describes the accounting treatment for derivative instruments not held for purposes of hedging?
A) Record as an asset or liability and recognize changes in fair value in other comprehensive income.
B) Do not record as an asset or liability, record income from the transaction at maturity and recognize in earnings.
C) Record as an asset or liability, recognize changes in fair value currently in earnings.
D) Record as an asset or liability if off-balance sheet risk is material.
Q2) U.S.GAAP requires firms to report the assets and liabilities of defined benefit plans
Q3) All of the following are events that can change the projected benefit obligation (PBO)during a period except:
A) The payment of retirement benefits.
B) Amendments to the pension plan agreement
C) The interest accumulated on the liability.
D) All of these can change the PBO.
Q4) ___________________________________ is primarily a question of timing.
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Chapter 10: Forecasting Financial Statements
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Q1) Sparky's forecasts that sales will grow by 25% in 2013 and that its cost of goods sold to sales ratio will be the same in 2013 as it was in 2012.If these assumptions prove correct and Sparky's inventory turnover ratio for 2013 is 4.5 what will be the level of inventory at the end of 2013?
A) $31,353
B) $26,475
C) $40,000
D) $42,314
Q2) In developing forecasts of expenses the analyst must take into consideration that expenses can be broken down into ________________________ or ______________________ components.
Q3) Using Sparky's financial information what is the company's inventory turnover ratio for 2012?
A) 0.69
B) 1.00
C) 3.35
D) 4.03
Q4) A company that has a cost structure in which its costs grow at a lesser rate than its sale enjoys ___________________________________.
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Chapter 11: Risk-Adjusted Expected Rates of Return and the Dividends Valuation Approach
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Q1) Which of the following is not a problem with using a dividend-based valuation formula
A) dividends are arbitrarily established
B) dividends represent a transfer of wealth to shareholders
C) some firms do not pay a regular periodic dividend
D) it is a challenge to forecast the final liquidating dividend
Q2) If dividend projections include the effect of inflation,then the discount rate used should be a ____________________ rate.
Q3) The historical discount rate of the firm may be a good indicator of the appropriate discount rate to apply to the firm in the future,when all of the following conditions hold true except:
A) The current risk of the firm is the same as the expected future risk of the firm.
B) Expected future interest rates are likely to equal current interest rates.
C) The existing capital structure of the firm is the same as the expected future capital structure of the firm.
D) The current mix of debt and equity financing is equal.
Q4) Explain the theory behind the dividends valuation approach.Why are dividends value-relevant to common equity shareholders?
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Chapter 12: Valuation: Cash-Flow-Based Approaches
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Q1) Discuss under which scenario it is appropriate to use free cash flows for all debt and equity capital stakeholders.
Q2) Steady-state growth in ___________________________________ could be driven by long-run expectations for growth attributable to economy-wide inflation,general economic productivity,the population,or long-run growth in industry's sales.
Q3) Explain "free" cash flows.Describe which types of cash flows are free and which are not.How do free cash flows available for debt and equity stakeholders differ from free cash flows available for common equity shareholders?
Q4) What is Houston's free cash flow for common equity holders for year 2012?
A) $564
B) $399
C) $324
D) $412
Q5) The risk-adjusted discount rate used to compute the present value of all the projected free cash flows for common equity shareholders equals the
Q6) What is the purpose of a free cash flow analysis?
Q7) Provide the rationale for using expected free cash flow in valuation.
Page 14
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Chapter 13: Valuation: Earnings-Based Approaches
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Q1) If an analyst expects a firm to generate net income each period exactly equal to required earnings,then the value of the firm will be equal to the ______________________________ of common shareholders' equity.
Q2) The residual income_____________________________ valuation model uses __________________ and the book value of common shareholders' equity as the basis for valuation.
Q3) Economists sometimes argue that earnings are not a _________________________ attribute on which to base valuation.
Q4) What are the four components that make up dirty surplus accounting according to the FASB? .
Q5) When debating the issue of whether to use free cash flows or earnings in a valuation model,economists sometimes argue that ____________________ can be subject to purposeful management by a firm and thus make them less useful.
Q6) What is the rationale for using expected earnings as a basis for valuations?
Q7) Explain residual income.What does residual income represent? What does residual income measure?
Q8) What is meant by the term clean surplus accounting?
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Chapter 14: Valuation: Market-Based Approaches
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Q1) A company with a PEG ratio of less than one would be interpreted as having a stock price
A) are underpriced given earnings and expected earnings growth
B) that is low relative to the company's growth prospects
C) that is high relative to the company's growth prospects
D) That is overvalued
Q2) A company is expected to have a value of $142,857 at the start of next period and investors require a 14 percent return on equity capital.Using the assumptions of the price-earnings ratio,what would be the company's earnings for the current year?
A) $20,000
B) $14,286
C) $2,800
D) $12,500
Q3) Which of the following normally does not introduce measurement error into the calculation of P/E ratios?
A) differences in firm specific growth rates
B) restructuring losses
C) transitory gains
D) deferred taxes
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