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Contents
A................................................................................................................................................................................... 2
B....................................................................................................................................................................................5
C................................................................................................................................................................................... 5
D................................................................................................................................................................................... 7
E.................................................................................................................................................................................... 7
F.................................................................................................................................................................................... 7
G...................................................................................................................................................................................8
I..................................................................................................................................................................................... 8
L.................................................................................................................................................................................. 11
M................................................................................................................................................................................. 13
N.................................................................................................................................................................................. 13
O................................................................................................................................................................................. 14
P.................................................................................................................................................................................. 15
R.................................................................................................................................................................................. 16
S.................................................................................................................................................................................. 16
T.................................................................................................................................................................................. 16
U.................................................................................................................................................................................. 22
V.................................................................................................................................................................................. 23
W................................................................................................................................................................................ 24
X.................................................................................................................................................................................. 28
Y.................................................................................................................................................................................. 28

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A
31. According to Generally Accepted Accounting Principles, costs are:
C. matched with revenues.
34. An increase in which one of the following will cause the operating cash flow to increase?
A. depreciation
35. A firm starts its year with a positive net working capital. During the year, the firm acquires more short-term debt
than it does short-term assets. This means that:
E. the ending net working capital can be positive, negative, or equal to zero.

9. Although the three capital budgeting methods are equivalent, they all can have difficulties making computation
impossible at times. The most useful methods or tools from a practical standpoint are:
E. Both B and C.

20. An increase in total assets:

D. must be offset by an equal increase in liabilities and shareholders' equity.
54. Accounting profits and cash flows are:
C. generally not the same since GAAP allows for revenue recognition separate from the receipt of cash flows
5. A(n) ____ asset is one which can be quickly converted into cash without significant loss in value.
D. liquid
44. A proxy fight occurs when:
B. a group solicits proxies to replace the board of directors.

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2. A current asset is:

C. an item currently owned by the firm that will convert to cash within the next 12 months.

6. A business owned by a single individual is called a:

B. sole proprietorship.

28. A general partner:

B. has more management responsibility than a limited partner.

29. A partnership:
C. terminates at the death of any general partner.

12. A business entity operated and taxed like a partnership, but with limited liability for the owners, is called a:
A. limited liability company.

14. A conflict of interest between the stockholders and management of a firm is called:
C. the agency problem.

15. Agency costs refer to:

D. the costs of any conflicts of interest between stockholders and management.

16. stakeholder is:

E. any person or entity other than a stockholder or creditor who potentially has a claim on the cash flows of the firm.

9. A business created as a distinct legal entity composed of one or more individuals or entities is called a:
A. corporation.

7. A business formed by two or more individuals who each have unlimited liability for business debts is called a:
C. general partnership.

39. Assets are listed on the balance sheet in order of:

A. decreasing liquidity.

1. An analyst valuing a social media company argues that a conventional DCF valuation will
understate the value of the company because it does not consider the fact that the online advertising
market is very large and that there is an option embedded in these companies which will make their
values greater than the DCF value. Do you agree?

Maybe, if the social media company can use its user base to enter new markets that are unknown at the moment.
The key, though, is that having the user base gives you partial exclusivity that cannot be matched easily by others.

1. A key input into option pricing models is the expected volatility in the underlying asset’s value. In
valuing a Alzheimer’s drug patent as an option, which of the following approaches can you use to
estimate the volatility in the “underlying” asset?

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a. The implied standard deviation in the options traded on stocks of publicly traded
pharmaceutical companies, funded primarily with equity.

2. Assume now that you have decided to employ an option pricing approach to value a patent on a drug
to treat Alzheimer’s. You believe that, if the drug were introduced today, it would generate expected
cash flows of $ 150 million/year for the next 15 years, and that the cost of commercially developing the
drug today is $2 billion. If the risk free rate is 3% and the cost of capital for pharmaceutical companies
is 10%, what would you use as the value of the underlying asset (S) in the option pricing model?
a. $ 1,141 million

1. An option gives the buyer the right to buy (call) or sell (put) an asset at a fixed price. As the
underlying asset becomes more volatile, which of the following will happen to your option values
(holding all else constant).
a. Both call & put options will become more valuable

1. A consumer product company plans to cut prices on its products with the intent of generating more
sales. Which of the following is the most likely set of consequences from this action?
a. Lower margins, Lower EV/Sales

1. Assume that you are doing a valuation, where you are comparing the price to book ratio of GenSys
Bank to other banks. GenSys has a price to book ratio of 2.00 and a return on equity of 16%. The
average price to book ratio across all banks is 1.20 but you have run a regression of price to book
against return on equity across banks and arrived at the following:
PBV = 0.72 + 80 (ROE)
Based on this regression, which of the following conclusions would you draw?
a. Gensys is fairly valued

2. A stock that trades at less than book value is cheap, because you can liquidate the company
and get the book value of equity.
a. False

1. Allwyn Inc. is a stable growth, dividend-‐paying firm that is expected to pay out 60% of its
expected earnings per share of $1.50 next year as dividends. If the earnings are expected to grow 3%
a year in perpetuity and the cost of equity is 9%, what PE ratio would you expect the firm to have?
c. 10.00

1. Assume that Zisco Inc., a technology company, has 200 million shares outstanding, trading at
$8/share. The company also has 10 million options outstanding, with an exercise price of $4/share
and an option value of
$7.5/option. What is the total market value of equity in Zisco?

a. $1.675 billion
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1. A key input into your terminal value is the expected growth rate in perpetuity. Assuming that you are
valuing a company in a currency with a risk free rate of 3%. Which of the following growth rates is not
feasible?
a. 4% in perpetuity

2. Avalon Inc. is a high growth publicly traded firm that is expected to become a stable growth firm
after 5 years. You have estimated an expected after-‐tax operating income of $60 million in year 6
and believe that the firm will generate a return on capital of 12% in perpetuity. If the cost of capital is
10% and the expected growth rate in perpetuity after year 5 is 3%, what will the terminal value be at the
end of year 5?
a. $642.86 million

1. Aspic Inc. is a US-‐based company that operates in two countries: the United States and Mexico.
The total equity risk premium is 5% for the United States and 9% for Mexico. Which of the following
estimates of the equity risk premium would you use for Aspic?
a. 6.6%; the weighted average based upon the value that the company attaches to its
operations in the countries (60% US, 40% Mexico)

2. Alfred Inc. is a publicly traded sporting goods company. The company has $ 250 million in book
value of debt, reported interest expenses of $ 12.5 million in the most recent year and has an average
maturity of 5 years for the debt. The pre-‐tax cost of debt for the firm is currently 4%. What is your best
estimate of the market value of debt outstanding at the firm? (You can assume annual interest payments
and a marginal tax rate of 40%)
a. $261.12 million

16. A key difference between the APV, WACC, and FTE approaches to valuation is:
E. how debt effects are considered; i.e. the target debt to value ratio and the level of debt.

27. As seen on an income statement:

D. depreciation reduces both the pretax income and the net income.

44. According to generally accepted accounting principles (GAAP), revenue is recognized as income when:
B. the transaction is complete and the goods or services are delivered.

52. A firm has $300 in inventory, $600 in fixed assets, $200 in accounts receivable, $100 in accounts payable, and
$50 in cash. What is the amount of the current assets?
B. $550

3. A leveraged buyout (LBO) is when a firm is acquired by:

B. a small group of equity investors financing the majority of the price by debt.

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B
25. Book value:
B. is based on historical cost.

1. Carpe Inc. is a publicly traded company that is considering merging with Diem Inc., another
publicly traded company in the same business, motivated by the potential for cost savings from
business overlap. The combination is expected to save $30 million in after-‐tax operating cash flows
(increasing operating income) next year, with a growth rate of 2% a year in perpetuity. The following
table lists the costs of equity and capital for the two companies and the merged entity:

Carp Diem Carpe Diem (combined)

e
Cost of equity 10.00 12.00% 10.50%
%
Cost of capital 9.00 10.80% 9.60%
%
What is the value of the cost savings synergy in this merger?
a. $394.74 million

1. Claremont Inc. is a company that has two divisions, both of which are in stable growth (growing
2% a year) and have a cost of capital of 10%. You have been provided with the following
information on the divisions (in millions):

Expected After-‐tax Operating Income next year Invested Capital

Food $150 $1,000
Chemicals $50 $1,000
Assume that if you continue to run the chemical business, your return on capital will stay at existing
levels and that you can divest the business for $ 800 million. What effect will the divestiture have on
company value?
a. Increase value by $ 425 million

2. Charisma Software is a technology company is expected to report after-‐tax operating income of $

1 billion next year, earned on an invested capital base of
$10 billion. The company is expected to grow 1% a year in perpetuity and has a cost of capital of 9%.
The firm wants to double its growth rate in perpetuity, while maintaining its current return on capital.
How much will the value of its operating assets change in dollar terms?
a. $1785.71 million

3. Caribou Enterprises is an all-‐equity funded company with a cost of equity of 9%; the risk free rate
is 3% and the equity risk premium is 6%. The company is considering borrowing money at 5% (pre-‐
tax) and pushing its debt to capital ratio to 20%. If the marginal tax rate is 40%, what will the new cost

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of capital be at 20%?
c. 8.52%

37. Cash flow to stockholders must be positive when:

A. the dividends paid exceed the net new equity raised.

47. Cash flow to stockholders is defined as:

D. cash dividends plus repurchases of equity minus new equity financing.

D
1. DBK Bank paid out $ 80 million in dividends on net income of $100 million in the most recent year.
The book value of equity for the firm is $800 million. Assuming that the bank maintains its current
payout ratio and return on equity in perpetuity, what is the expected growth in earnings per share in
perpetuity?
d. 2.5%

2. Delray Stores is a retail company that is facing a shrinking market. The firm generated $ 50 million
in after-‐tax operating income in the most recent year, but expects to shut down 10% of its stores, each
year for the next 5 years. Which of the following would you most expect to see in the next 5 years?
a. Decreasing operating income each year and after-‐tax cash flows > operating income

17. Dividends per share is equal to dividends paid:

B. divided by the total number of shares outstanding.

32. Depreciation:
A. is a noncash expense that is recorded on the income statement.

29. Dividends per share:

E. are equal to the amount of net income distributed to shareholders divided by the number of shares outstanding.

40. Debt is a contractual obligation that:

E. Both B and C.

4. Discounting the unlevered after tax cash flows by the _____ minus the ______ yields the ________.
D. cost of capital for the unlevered firm; initial investment; all-equity net present value.

16. Earnings per share is equal to:

A. net income divided by the total number of shares outstanding.

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30. Earnings per share

A. will increase if net income increases and number of shares remains constant.

F
1. Faraday Enterprises is a publicly traded company. It currently has 10 million shares trading at
$12/share and $150 million in book value of equity. The firm also has book value of debt of $ 75
million and market value of debt of $ 80 million. The cost of equity for the company is 9%, the pre-‐
tax cost of debt is 4% and the marginal tax rate is 40%. What is the cost of capital?
d. 6.36%

2. For an investment to be valued as a real option, which of the following would you need as
requirements?
a. All of the above

39. Financial managers should strive to maximize the current value per share of the existing stock because:
C. the current stockholders are the owners of the corporation.

48. Free cash flow is:

D. cash that the firm is free to distribute to creditors and stockholders.

19. Flotation costs are incorporated into the APV framework by:
B. subtracting them from the all equity value of the project.

1. Given your understanding of fair value accounting, which of the following best describes the
mission?
a. To estimate the relative value of assets in place

2. Gerard Enterprises is a publicly traded company. You are trying to estimate how much debt it has
outstanding, to compute a cost of capital. Which of the following items would you not include in debt
and why?
a. Deferred Tax Liabilities
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3. Genesis is a closed end mutual fund, with $250 million invested in publicly traded securities (net
asset value). The fund is an average risk fund (beta = 1) and has earned an annual return of 9% over the
last 5 years; the market return over the period was 12%. If you expect the market return in the future to
be 8% and Genesis to continue under performing the market by the same amount as it has for the last 5
years, estimate the discount that the fund will trade at (assuming no growth in the fund, in perpetuity).
b. 37.5%

I
1. If you are valuing fine art, the best approach to valuing a piece of fine art is to use:
a. Relative Valuation

7. In calculating the NPV using the flow-to-equity approach the discount rate is the:
B. cost of equity for the levered firm.

47. Insider trading is:

B. illegal.

11. In order to value a project which is not scale enhancing you need to:
A. typically calculate the equity cost of capital using the risk adjusted beta of another firm in the industry before
calculating the WACC.

53. In a limited partnership:

B. each limited partner's liability is limited to the amount he put into the partnership.

2. If you use relative valuation in investing, which of the following assumptions are you making about
markets?
a. Markets are right on average but that they are wrong in pricing individual assets
3. Intrinsic and relative valuations, done right, should deliver the same value for an asset.
a. False

1. If you buy into the notion that equity in deeply troubled firms can be viewed as options, in which
of the following highly levered, money losing companies will equity be most highly valued?
a. A company in a risky business with predominantly long term debt

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2. In asset-‐based valuation, you try to value a company by valuing its individual assets and adding
up these asset values to arrive at the value of the company. In which of the following scenarios is asset-‐
based valuation likely to work best?
a. Mature companies with separable, stand alone assets

3. In liquidation valuation, you are trying to value a company in liquidation, where you plan to sell its
assets to the highest bidders. Which of the following is best valuation approach in making this estimate?
a. A relative valuation of assets in place

2. If you use the price to sales ratio to compare the pricing of companies in a sector where there are wide
differences in debt ratios, you will tend to find that companies with a lot of debt look cheap (even if
they are not),
a. True

3. If you are dividing the market capitalization by book value to arrive at a price to book value ratio
for a company, which of the following will you use as your measure of book value?
a. Book value of common equity

1. Infrastructure companies often trade at low multiples of EV to EBITDA. Which of the following
is the best explanation for this phenomenon?
a. They have high net capital expenditures (difference between capital expenditures and
depreciation)

2. In computing the EV/EBITDA multiple, we estimate the enterprise value of a firm by adding together
the values of debt and equity and netting out cash. Which of the following is the reason for netting out
cash in computing this multiple?
a. The income from cash is not part of EBITDA
3. In recent years, analysts have shifted away from PE ratios to EV/EBITDA multiples in large
segments of the equity markets. Which of the following is a sensible reason for this shift? (The
others may be reasons but they may not be sensible).
a. EV/EBITDA can be compared across companies that use different depreciation methods

1. If you are looking for a cheap stock on a PE ratio basis, which of the following
combinations is the best one for you?
a. Low PE, high growth, low risk, high payout

1. In the last example, what would the EV/EBITDA multiple for Oneida be, just as a parent company?
d. 9.25

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1. Investments that are less liquid are usually valued lower than otherwise similar liquid investments.
Which of the following is a way of incorporating the effect of illiquidity on value.
a. Use the same discount rate for the illiquid asset (as you would for a liquid asset) and reduce
the DCF value by an illiquidity discount.
b. Use a higher discount rate for the illiquid asset and don’t adjust the DCF value.

1. If you invest in complex firms, you know far less than when you value in simple firms. However,
as you get more diversified, the lack of knowledge will become less important because it will get
averaged out in your portfolio.
a. False

1. If you are asked to value an acquisition, using relative valuation, which of the following will
yield the best estimate of relative value?
a. The multiple for the peer group, adjusted for differences on risk, growth & cash flows
between the target company and the peer group.

3. In the melded country risk premium approach, you estimate the country risk premium by
multiplying the country default spread by the volatility of equity markets, relative to the volatility in
government bonds in that market. Assume that your estimate for a mature market equity risk premium
is 6%, that the default spread for Indonesia is 2% and that the standard deviation of Indonesian equities
is 24% (while the standard deviation of the Indonesian government bond is 12%). Estimate the total
equity risk premium for Indonesia
b. 10%

1. If you have to estimate a regression beta for a publicly traded US technology company, listed on the
NASDAQ, whose largest stockholders are global mutual funds, which of the following will yield your
best estimate of the regression beta?
a. A regression of the stock returns against the MSCI

2. In the most recent year, Revco Inc. reported capital expenditures of $ 80 million and depreciation &
amortization of $ 60 million. It also spent $ 100 million in acquisitions, paying $40 million in cash and
$ 60 million in stock. Estimate the net capital expenditures for the firm for use in computing the free
cash flow to the firm.
a. $ 20 million

3. It is true that in a discounted cash flow valuation, the terminal value accounts for a large proportion
(60% or more) of the value. It follows that the assumptions you make about terminal value are the most
critical determinants of value.
a. False

L
1. Lipscott Inc. is a publicly traded company that has $100 million in bank loans on its books, with a
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stated interest rate of 3% and $150 million in publicly traded bonds, with a coupon rate of 3.6%. The
company currently has a bond rating of BBB, with a default spread of 1.5% over the risk free rate. If
the current T.Bill rate is 1%, the ten-‐year T.Bond rate is 3.5% and the marginal tax rate is 35%, what is
the pre-‐tax cost of debt?
b. 5.00%

Lester Inc. has 5 million shares outstanding, trading at $20/share. The company has one convertible
bond, with a face value of $ 100 million, a ten-‐year maturity and a coupon rate of 2%; the bond has a
market value of $120 million. If the current cost of equity for the firm is 10% and the pre-‐tax cost of
debt is 5%, what is the cost of capital for the firm? (The marginal tax rate is 40%)
c. 7.55%

23. Liquidity is:

D. valuable to a firm even though liquid assets tend to be less profitable to own.

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1. Lixit Inc. is a publicly traded company that reported $100 million in revenues in the most recent
fiscal year that ended on December 31. You are valuing the company in April and know that
the company reported $30 million in revenues for the first quarter, up from the $22 million it
reported in revenues in the same quarter of the previous year. In valuing Lixit today, which of
the following numbers would you use for your base year revenues, if you want an updated
valuation?
a. $108 million

2. Livewire Inc. is a technology company that reported a pre-‐tax operating loss in the most recent year
of $10 million, after expensing R&D expenses of $30 million during the year. The company reported
invested capital of $40 million at the end of the most recent year. You are told that the R&D typically
takes 3 years to pay off in this business, and that Livewire had R& D expenses of $24 million, $18
million and $12 million in each of the last 3 years. Assuming that you decide to capitalize R&D
expenses, what is the pre-‐tax return on capital for Livewire?
a. 2.17%

3. Loomix Inc,is a company that has a history of losing money and has accumulated
$100 million in net operating losses. You expect the company to generate an operating loss of $50
million next year, followed by pre-‐tax operating profits of
$75 million and $125 million in the following two years. If your marginal tax rate is 40%, how much
will Loomix pay cumulatively as taxes in the next three years?

a. $20 million

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4. Most analysts and appraisers get their equity risk premium by looking at the past: the historical risk
premium is the difference between what you would have earned invested in stocks over a past period
over what you would have earned on a risk free investment. Which of the following are problems with
this approach?
a. The estimate is “subjective”, since it depends upon the time period and averaging approach used.
b. The estimate is backward looking
c. The estimate has substantial standard error
d. The estimate moves counter intuitively: down after crisis and up after prosperity
e. All of the above

49. Managers are encourage to act in shareholders' interests by:

E. All of the above.

55. Martha's Enterprises spent $2,400 to purchase equipment three years ago. This equipment is currently valued at
$1,800 on today's balance sheet but could actually be sold for $2,000. Net working capital is $200 and long-term debt
is $800. Assuming the equipment is the firm's only fixed asset, what is the book value of shareholders' equity?
C. $1,200
E. The answer cannot be determined from the information provided

Book value of shareholders' equity = $1,800 + $200 - $800 = $1,200

4. Net working capital is defined as:

E. current assets minus current liabilities.

46. Net capital spending is equal to:

B. the net change in fixed assets.

7. Noncash items refer to:

D. expenses charged against revenues that do not directly affect cash flow.

20. Non-market or subsidized financing ________ the APV ___________.

C. increases; by increasing the NPV of the loan

2. Now assume that you have plugged in the right values into an option pricing model and are
looking at the following output from the model.
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d1 = 0.5036, N(d1) = .6937 d2 = -‐0.7664, N(d2) =

.2217
What is the “right” interest rate on the debt?
c. 12.91%

1. Now assume that you are looking at the income statement for Abel Stores. The business reported $
500,000 in after-‐tax operating income last year, but you note that the owner (who fills multiple roles in
the business) has not charged herself a salary. You believe that it will take two hired employees to do the
work that the owner used to do and that you would have to pay $150,000 to hire these employees.
If your tax rate is 40%, estimate the “adjusted” after-‐tax operating income for last year.
b. $410,000

1. Now assume that you are doing a relative valuation of Wyckham Inc. and have been provided with
the EBITDA (in millions) and the median EV/EBITDA of in each business:

Business EBITD EV/EBITDA multiple for sector

A

Steel 300 8

Chemicals 200 5

Technology 100 6
If the company has $1 billion in debt outstanding and $500 million in cash, what is the value of equity
in the company?
a. $3,500 million

1. Now, assume that you decide to value the employee options in Rallye Inc., using an option-‐pricing
model and arrive at a value of $1.00 for each option. What is the value of equity per share, if you
decide to use the “option value” approach?
a. $4.75/share

1. Nevis Enterprises reported a return on invested capital of 15% in the most recent year and a
reinvestment rate of 60%. The firm expects its return on capital to rise to 18% over the next 5 years
on both existing investments and new investments. What will the compounded average annual
expected growth rate be over the five years?
b. 14.51%

1. Nowitzki Inc. is a publicly traded company that owns 60% of Bowden Inc, another publicly traded
firm. You have valued the operating assets of Nowitzki by discounting the cash flows (from Pagano’s
consolidated financials) at the cost of capital to arrive at a value of $1 billion for the operating assets.
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Nowitzki reports debt of $200 million and cash of $100 million on its consolidated balance sheet. While
Nowitzki also shows a minority interest of $120 million on the balance sheet, you believe that the
intrinsic value of all of Bowden’s equity is closer to $500 million. Estimate the value of equity for
Nowitzki.
a. $700 million

O
2. Oneida Inc. is a publicly traded company with a 60% cross holding in Cyclops Inc., also a publicly
traded company. You are given the following information from Oneida Inc’s consolidated financials and
Cyclop’s financials:

Oneid Cyclop
a s
Market Cap 5000 2000
Debt 1000 400
Cash 800 100

EBITDA 900 500

Minority interest 400 0
(The market cap number is the share price times number of shares. All of the other numbers come
from financial statements).
What is the EV/EBITDA multiple for Oneida on a consolidated basis?
c. 6.67

51. One of the reasons why cash flow analysis is popular is because:
D. it is difficult to manipulate, or spin the cash flows.

1. One argument that is used by those who use multiples/relative valuation is that there are fewer assumptions in
relative valuation than in intrinsic valuation. Is this true or false?
a. False
2. One alternative to a regression beta is to use a sector-‐average beta or bottom-‐up beta. In computing
this sector-‐average beta, you have to come up with a list of comparable firms. Assume that you are
trying to compute the beta for a Argentine steel company. Which of the following is likely to yield the
best estimate?
a. A simple average of betas of 85 emerging market steel companies
3. One concern with using sector-‐average betas, even if you adjust for financial leverage, is that
you are assuming that the operating leverage for your firm is similar to that of the other firms. Assume
that 70% of the costs in your company are fixed costs, whereas only 50% of the costs in the average
company in the sector are fixed costs. If the unlevered beta for the sector is 0.80, what would you
expect the unlevered beta for your company to be?
a. Higher than 0.80

P
1. Pokemon Inc. is a toy manufacturer that reported after-‐tax operating income of
$50 million in the most recent year. At the start of the year, the company reported book value of equity
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of $400 million, book value of debt of $250 million and a cash balance of $150 million. The company
also reported capital expenditures of $75 million, depreciation of $ 30 million and a decrease in non-‐
cash working capital of $5 million. Assuming that it plans to maintain its current return on invested
capital and reinvestment rate, what is the expected growth in operating income?
b. 8.00%

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2. Publicly traded companies often accumulate cash that is usually invested in riskless, liquid securities
that yield low returns. Which of the following is a good reason for punishing companies that hold cash
(by discounting the cash)?
a. The company has a good track record on operating investments and you are afraid that the
company will not invest the cash

3. Pagano Holdings is a publicly traded company with a 10% minority holding in Gigante Enterprises.
You have discounted Pagano’s free cash to the firm back at Pagano’s cost of capital and arrived at a
value of $250 million for Pagano’s equity. Assume that Gigante Holdings has an aggregate book value
of equity of $100 million and that you estimate the “intrinsic” value of its equity to be $200 million.
Estimate the value of equity for Pagano Holdings.
a. $270 million

R
1. Roomba Inc. is a manufacturer of vacuum cleaners and you have estimated a FCFF of $50 million
for firm for the most recent year. Roomba’s total debt decreased from $100 to $85 million during the
course of the year and it reported interest expense of $10 million for the year. If Roomba’s tax rate is
30%, estimate the FCFE for the most recent year.
a. $ 28 million

S
1. Sigma Casino is a publicly traded firm that is burdened with too much debt and is in significant
financial trouble. It has 10-‐year zero coupon bonds that are trading at 50% of face value and a
DCF valuation of the firm as a going concern has generated a value of $6/share for the equity. If the risk
free rate is 3% and you expect the equity to be worth nothing if the company folds, what would you be
willing to pay per share for Sigma Casino?
d. $4.03

22. Since the implementation of Sarbanes-Oxley, the cost of going public in the United States has:
A. increased.

48. Sole proprietorships are predominantly started because:

D. All of the above.

10. The APV method to value a project should be used when the:
A. project's level of debt is known over the life of the project.

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6. The financial statement summarizing a firm's accounting performance over a period of time is the:
A. income statement.

18. To calculate the adjusted present value, one will:

B. add the additional effects of financing to the all equity project value.

1. The financial statement showing a firm's accounting value on a particular date is the:
B. balance sheet

2. The acronym APV stands for:

D. adjusted present value.

26. The WACC approach to valuation is not as useful as the APV approach in leveraged buyouts because:
B. the capital structure is changing.

22. The non-market rate financing impact on the APV is:

D. calculated by the NPV of the loan using both debt rates.

1. The flow-to-equity (FTE) approach in capital budgeting is defined to be the:

C. discounting of the levered cash flows to the equity holders for a project at the required return on equity.

36. The cash flow to creditors includes the cash:

C. outflow when interest is paid on outstanding debt.

28. The earnings per share will:

A. increase as net income increases.

41. The carrying value or book value of assets:

A. is determined under GAAP and is based on the cost of the asset.

49. The cash flow of the firm must be equal to:

D. cash flow to stockholders plus cash flow to debtholders.

5. The acceptance of a capital budgeting project is usually evaluated on its own merits. That is, capital budgeting
decisions are treated separately from capital structure decisions. In reality, these decisions may be highly interwoven.
This may result in:
D. firms accepting some negative NPV all equity projects because changing the capital structure adds enough
positive leverage tax shield value to create a positive NPV.

13. The flow-to-equity approach to capital budgeting is a three step process of:
C. calculating the levered cash flow after interest expense and taxes, the cost of equity capital for a levered firm, and
then discounting the levered cash flows by the cost of equity capital.

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14. The term (B x rb) gives the:

A. cost of debt interest payments per year.

15. The weighted average cost of capital is determined by:

C. adding the weighted average after tax cost of debt to the weighted average cost of equity.

6. The APV method is comprised of the all equity NPV of a project and the NPV of financing effects. The four side
effects are:
B. cost of issuing new securities, cost of financial distress, tax subsidy of debt and other subsidies to debt financing.

17. The Sarbanes Oxley Act of 2002 is intended to:

D. protect investors from corporate abuses.

3. The long-term debts of a firm are liabilities:

B. that do not come due for at least 12 months.

50. The Securities Exchange Act of 1934 focuses on:

D. insider trading.

51. The basic regulatory framework in the United States was provided by:
D. A and B.

52. The Securities Act of 1933 focuses on:

C. issuance of new securities

21. The Sarbanes Oxley Act was enacted in:

D. 2002.

18. The treasurer and the controller of a corporation generally report to the:
E. chief financial officer.

13. The primary goal of financial management is to:

B. maximize the current value per share of the existing stock.

8. The division of profits and losses among the members of a partnership is formalized in the:
D. partnership agreement.

10. The corporate document that sets forth the business purpose of a firm is the:
E. articles of incorporation.

11. The rules by which corporations govern themselves are called:

D. bylaws.
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34. The articles of incorporation:

C. set forth the number of shares of stock that can be issued.

35. The bylaws:

D. mandate the procedure for electing corporate directors.

36. The owners of a limited liability company prefer:

C. being taxed personally on all business income.

1. The person generally directly responsible for overseeing the tax management, cost accounting, financial
accounting, and information system functions is the:
C. controller.

40. The decisions made by financial managers should all be ones which increase the:
D. market value of the existing owners' equity.

2. The person generally directly responsible for overseeing the cash and credit functions, financial planning, and
capital expenditures is the:
A. treasurer.

3. The process of planning and managing a firm's long-term investments is called:

D. capital budgeting.

4. The mixture of debt and equity used by a firm to finance its operations is called:

E. capital structure

5. The managment of a firm's short-term assets and liabilities is called:

A. working capital management.
53. Total assets are $900, fixed assets are $600, long-term debt is $500, and short-term debt is $200. What is the
amount of net working capital?
B. $100

Net working capital = $900 - $600 - $200 = $100

8. The appropriate cost of debt to the firm is:

C. the market borrowing rate after tax.

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3. There is a basis for the argument that equity in a publicly traded company can be viewed as a call option on the
company’s assets. For this argument to be made, which of the following would need to hold?

a. All of the above

1. The option to abandon refers to the choice that a company has to abandon or scale down an
investment, if the cash flows do not measure up to expectations. In which of the following cases will
the option to abandon be most valuable?
a. A long term, large, risky investment to a small company

1. The essence of real options is that you learn from what is happening around you and adapt your
behavior based upon what you learn. You can capture this in an option pricing model but you can also
capture it using decision trees.
a. True

1. The key person discount is the discount attached to a private business to reflect the expected loss in
cash flows, as a result of a key person (often the owner) leaving. Assuming that you are the owner of
the business and are trying to sell the business, which of the following actions would you take to reduce
the key person discount?
a. Both

1. The key driver of revenue multiples is profit margins. Which of the following measures of profit
margin is the most direct determinant of price to sales ratios?
a. Net Profit margin

1. The conventional wisdom is that if a company increases its growth rate, the PE ratio should go
up. When is this not true?
a. When the company earns a ROE < Cost of equity

1. The distribution for any multiple will tend to be asymmetric. Given that a multiple cannot be less
than zero but is unconstrained on the upside, which of the following would you expect to see in the
summary statistics?
a. The average should be higher than the median
2.
The PE ratio usually cannot be computed when a company has negative earnings. Assume that you
have a sample of 100 firms and that 30 of these firms have negative earnings. Let’s say that you
compute a market cap weighted PE ratio for the 70 firms with PE ratios and an aggregate PE ratio by
dividing the total market capitalization of all firms in the sector by the total net income of all firms in
the sector. Which one will yield the lower value?
a. The weighted average PE ratio across the money making firms
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1. Tinga Inc., a poorly run restaurant chain, is currently fairly valued, based on the expectation that it
would generate $25 million in after-‐tax operating income next year, growing at 2% a year. The company
has $500 million in invested capital and is expected to maintain its current return on investment capital;
its cost of capital is 8%. You believe that you can run the firm better and double its after-‐ tax operating
income without adding any invested capital. Assuming that you can maintain your return on capital in
perpetuity as well, how much of a control premium (in percentage terms, over and above current value)
would you be willing to pay for Tinga?
c. 167%

2. Telsome Publishing is a small, publicly traded firm and has reported the following earnings over the
last five years:

Earnings
(in
Year millions)
Current $180.00
Year -1 $100.00
Year -2 $150.00
Year -3 $115.00
Year -4 $120.00
Year -5 $90.00
What is the geometric average annual growth rate over the last five years?
b. 14.87%

1. Tymba Inc. generated $20 million in after-‐tax operating income on revenues of

$100 million during the course of the most recent year. You expect revenues to grow 10% a year next
year and margins to stay stable. The firm’s non-‐cash current assets are $40 million and its non-‐
debt current liabilities are $50 million, and non-‐cash working capital as a percent of revenues is
expected to remain unchanged next year. If the net cap ex is expected to be $10 million next year, what
is your estimate of the FCFF for the next year?
a. $13 million

4. The biggest enemy of good valuation is bias. To minimize bias in valuation, you should
a. Read/review what other people think about the value of a company
b. Meet with the management of the company
c. Look at the market price
d. Get paid more to do the valuation
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e. None of the above

5. The annual standard deviation in stock returns is about 20%. Assuming that annual returns are
independent of each other, how many years of historical data will you need to lower the standard error
in your estimate to 1%?
a. 400 years

6. The implied equity risk premium is a forward-‐looking premium, estimated from the level of stock
prices (the index) today and expected earnings/cash flows in the future. Assume that you compute the
implied ERP at the start of a year and the market goes up 20% during the course of the year and that you
compute the implied ERP again at the end of the year. Assuming that the risk free rate and growth rate
do not change over the course of the year, which of the following would you expect to happen to the
implied ERP?
a. The ERP will go down, if the earnings/ cash flows went up by less than 20% during the year
7. The standard approach to estimating betas is to run a regression of returns of an individual stock
against returns on a market index. Which of the following is a problem with this approach?
a. It yields an estimate with significant standard error.
b. It is subject to estimation choices: different regression periods, return intervals and market indices.
c. It will not yield a “good” estimate for the future, if a company’s business mix has changed
recently.
d. It will not yield a “good” estimate for the future, if a company’s financial leverage has changed
over the regression period
e. All of the above.
8. There are variations on PE ratio, based upon whether you use earnings per share from the most
recent fiscal year, the last 12 months (trailing) or expected earnings per share in the next 12 months
(forward). In periods of economic health and earnings growth, which of the measures of PE will yield
the lowest value?
a. Next 12 months

42. Under GAAP, a firm's assets are reported at:

D. cost.

17. Using APV, the analysis can be tricky in examples of:

D. All of the above.

1. Using the output from question (3), what is the likelihood that this firm will go bankrupt
sometime over the next 8 years?

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f. 77.83%

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V
1. Voltar Inc. is a company with 600 million non- ‐voting shares and 400 million voting
shares. You have valued the company, run by the existing management, at
$ 10 billion but you believe that with new management, the company would have a
value of $12 billion. If the probability of management changing is 20%, what is the
value of each voting share?
a. $11.00/share

9. Valuation is a skill set that is necessary only for

a. Investment bankers who may want to assess the value of acquisitions or IPOs
b. Management consultants who want to provide good corporate finance advice
c. CFOs who want to understand what drives the value of their businesses
d. Investors who want to find cheap and expensive stocks
e. Entrepreneurs who have to negotiate with buyers and VCs about the values of their businesses
f. All of the above

10. Viaconda Inc. is a tourism company that reported $10 million in net income on a
book value of equity of $110 million in the most recent year; the company generated $ 1
million in after-‐tax interest income on a cash balance of $20 million. The company also
reported net capital expenditures of $4 million, an increase in working capital of $ 2 million
and an increase in total debt of $3 million during the year. Assuming that it maintains its
current non-‐cash ROE and equity reinvestment rate, estimate the expected growth in non-‐
cash net income in the future.
a. 3.33%

18. Which of the following are included in current assets?

I. equipment
II. inventory
III. accounts payable
IV. cash
A. II and IV only

12. Which capital budgeting tools, if properly used, will yield the same answer?
E. APV, WACC, and Flow to Equity

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When you are making a financial decision, the most relevant tax rate is the _____ rate.
C. marginal

26. When making financial decisions related to assets, you should:

A. always consider market values.

50. Which of the following are all components of the statement of cash flows?
A. Cash flow from operating activities, cash flow from investing activities, and cash flow from financing
activities

24. Which of the following accounts are included in shareholders' equity?

I. interest paid
II. retained earnings
III. capital surplus
IV. long-term debt
D. II and III only

21. Which one of the following assets is generally the most liquid?
C. accounts receivable

22. Which one of the following statements concerning liquidity is correct?

E. Balance sheet accounts are listed in order of decreasing liquidity.

19. Which of the following are included in current liabilities?

I. note payable to a supplier in eighteen months
II. debt payable to a mortgage company in nine months
III. accounts payable to suppliers
IV. loan payable to the bank in fourteen months
B. II and III only

23. Working capital management includes decisions concerning which of the following?
I. accounts payable
II. long-term debt
III. accounts receivable
IV. inventory
E. I, III, and IV only

42. Which of the following help convince managers to work in the best interest of the stockholders?
I. compensation based on the value of the stock
II. stock option plans
III. threat of a proxy fight
IV. threat of conversion to a partnership
C. I, II and III only

43. Which form of business structure faces the greatest agency problems?
D. corporation

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45. Which one of the following parties is considered a stakeholder of a firm?

A. employee

46. Which of the following are key requirements of the Sarbanes-Oxley Act?
I. Officers of the corporation must review and sign annual reports.
II. Officers of the corporation must now own more than 5% of the firm's stock.
III. Annual reports must list deficiencies in internal controls
IV. Annual reports must be filed with the SEC within 30 days of year end.
C. I and III only

41. Which one of the following actions by a financial manager creates an agency problem?
C. agreeing to expand the company at the expense of stockholders' value

24. Working capital management:

E. is concerned with the upper portion of the balance sheet.

25. Which one of the following statements concerning a sole proprietorship is correct?
D. The owner of a sole proprietorship may be forced to sell his/her personal assets to pay company debts.

26. Which one of the following statements concerning a sole proprietorship is correct?
A. The life of the firm is limited to the life span of the owner.

27. Which one of the following best describes the primary advantage of being a limited partner rather
than a general partner?
E. liability for firm debts limited to the capital invested

30. Which of the following are disadvantages of a partnership?

I. limited life of the firm
II. personal liability for firm debt
III. greater ability to raise capital than a sole proprietorship
IV. lack of ability to transfer partnership interest
D. I, II, and IV only

31. Which of the following are advantages of the corporate form of business ownership?
I. limited liability for firm debt
II. double taxation
III. ability to raise capital
IV. unlimited firm life
E. I, III, and IV only

32. Which one of the following statements is correct concerning corporations?

A. The largest firms are usually corporations.

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33. Which one of the following statements is correct?

B. Both sole proprietorships and partnerships are taxed in a similar fashion.

37. Which one of the following business types is best suited to raising large amounts of capital?
C. corporation

38. Which type of business organization has all the respective rights and privileges of a legal person?
D. corporation

38. Which equality is the basis for the balance sheet?

B. Assets = Liabilities + Stockholder's Equity

43. Which of the following statements concerning the income statement is true?
E. All of the above.

2. When you use a real options argument to value an asset that you have already valued
using a discounted cash flow model, which of the following will you expect to see as your
real option value?
a. A value greater than the DCF value
3. Which of the following payoff features best characterizes buying a call option?
a. Limited losses, potentially unlimited profits

3. When you use relative valuation, you are trying to price assets based upon what similar
assets are being priced at. In comparing across these assets, which of the following do you
have to do?
a. All of the above

1. Wayfarers Inc. is a risky technology company that is expected to have a cost of capital of
12% for the next 10 years. At the end of year 10, it is anticipated that the firm will become a
mature company, earning a return on invested capital equal to its stable period cost of capital
of 10% in perpetuity. If the expected after-‐tax operating income in year 11 is $80 million
and the expected growth rate in perpetuity is 3%, estimate the present value of the terminal
value at the end of year 10.
a. $257.58 million

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2. 19. Which one of the following statements is correct concerning the organizational structure
of a corporation?
B. The chief executive officer reports to the board of directors.

3. 20. Which one of the following is a capital budgeting decision?

B. deciding whether or not to open a new store

4. 45. Which of the following is not included in the computation of operating cash flow?
B. Interest paid

1. Which of the following would you do if you were valuing the entire business?
a. Discount cash flows before debt payments at the cost of capital

1. When you value assets, you are implicitly assuming that

a. The market is sometimes wrong, but that it corrects itself eventually

2. Which of the following approaches can be used to estimate he risk adjusted value of an asset in an
intrinsic valuation (more than one answer can apply)?
a. Discounting the expected cash flows at a risk-‐adjusted discount rate
b. Discounting the certainty equivalent cash flows at a risk free rate
3. Which of the following would you do if you were valuing the equity in a business?
a. Discount cash flows after debt payments at the cost of equity
4. Which of the following assets is best suited for intrinsic valuation?
a. An asset with uncertain cash flows over any life period

5. Which of the following assets is best suited for relative valuation?

a. An asset that is similar to other assets, many of which are traded at regular intervals.

6. What would you use as your risk free rate if you were valuing a Peruvian company in Peruvian Sol?
(You can still assume that the Peruvian sovereign CDS is trading at 1%.)
a. The rate on a Peruvian 10-‐year Sol denominated bond minus the Peruvian CDS spread (6%-‐1%

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=5%)

1. In valuation, your risk free has to be a long term, default-‐free rate. When valuing a company in US
dollars, we often use the 10-‐year US T. bond rate as the risk free rate. In the last few years, there have
been questions about whether the US treasury is really default-‐free. If you share these concerns, which of
the following will you do, assuming that you are still estimating cash flows in US dollars?

a. Estimate a default spread for the US government and reduce the treasury bond rate by that
spread

8. Your _____ tax rate is the amount of tax payable on the next taxable dollar you earn.
E. marginal
9. Your _____ tax rate is the total taxes you pay divided by your taxable income.
D. average

1. You are a better candidate for using discounted cash flow valuation, if you are a long-‐
term investor who believes that markets make mistakes in pricing individual companies and
that these mistakes get corrected over time.
a. True

2. You are a better candidate for using relative valuation, if you are a portfolio manager with
clients with short time horizons and you are judged on a relative basis (against other
portfolio managers).
a. True

1. You have just valued Liszt Software, a small technology company, with a proprietary
patent for the next 15 years. You have computed a DCF value of $100 million for the
company, but believe that the patent could give you an entrée into a larger market. Based
upon what you know today, you believe that the cost of expansion into the larger market is
$500 million but that the present value of the cash flows from expansion is $300 million. A
simulation of this present value yields a standard deviation of 25% and the risk free rate is

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3%. What are the inputs that will you use to value the option to expand?
a. S = 300 = PV of cash flows, if you expand today
b. K = 500 = Cost of expansion today
c. r = 3%
d. t = 15 (Years of patent life left)
e.  = 25% (from simulation)
f. y (Cost of delay) = 1/15 (You will lose one year of patent life by waiting) Bonus: The
value that I get for d1, d2 and the option are below: d1 = -‐0.6115, N(d1) = 0.2704
d2= -‐1.5798, N(d2) = 0.0571
Value of the option to expand = $11.65 million. You would add this to your DCF value.

1. You are a US consumer product company that is interested in investing in Brazil. Based
on your assessment of the Brazilian market, you believe that the present value of the cash
flows from investing in the market today is $100 million and that the cost of entry is $150
million. However, the market is a very large one and you believe that if the initial
investment does better than expected, your expansion potential is large. Which of the
following would you do?
a. Invest, but only if the expansion potential comes with exclusivity.

3. You have been asked to value a portfolio of patents that is owned by a technology
company and are considering using option pricing in the endeavor. In which of the
following cases is using a real options approach likely to yield a much higher value than
using a discounted cash flow approach?
a. A non-‐viable patent with 12 years to expiration in a risky business

1. You have completed your discounted cash flow valuation of Abel Stores, using a total beta
and adjusted operating income, and arrived at a value of $ 4.2 million for the equity in the
firm. While you have a base liquidity discount of 20% that you usually apply to equity value
in a private company, you believe that the discount should be smaller at Abel Stores. Which
of the following is a good reason for attaching a smaller discount?
a. Abel Stores has more revenues than the typical companies that you value

2. You are trying to compute the levered beta that you will use to value Abel Stores. The
company has a book value of equity of $600 million and a book value of debt of $ 600
million. If the typical apparel store company trades at three times book value of equity and
the market value of debt = book value of debt, what is the debt to equity ratio that you will
use to compute the levered beta for Abel Stores? (The marginal tax rate is 40%)
b. 33.33%

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3. You are valuing Abel Stores, a small, privately owned apparel store for sale to another
private individual, who will be investing all of his wealth in the business. The unlevered beta
for publicly traded apparel stores is 1.20 and the average R-‐squared across the apparel
stories (with the market) is 0.36. What is the unlevered beta that you will use, in
estimating the cost of equity in this transaction?
c. 2.00

1. You are trying to value Wyckham Inc., a conglomerate operating in three businesses,
with projected after-‐tax operating income (in millions) in the next period.
Business Expected EBIT (1-‐t) ROIC Cost of capital
Steel $150 9% 8%
Chemicals $100 12% 9%
Technology $ 50 15% 13%
The companies are in stable growth, growing 3% a year in perpetuity. What is the sum of
the parts value for Wyckham Inc.?
a. $3,650 million

1. You are looking at valuing the brand name of a consumer product company that has an
enterprise value of $2.5 billion on revenues of $ 1 billion. If companies in the same sector
that produce generic substitutes trade at an EV/Sales ratio of 1.5, what is the approximate
value of brand name at the company?
a. $1 billion

2. You are a venture capitalist, who is interested in investing in Lam Media, a social media
company. You expect revenues to be $600 million in 3 years and believe that you can sell
the company for three times revenues at the end of year 3. The cost of capital for the
company is 15%, it has no cash or debt and there is a 20% chance that the firm will not make
it (in which case you will get nothing for the assets). Ignoring cash flows in the next 3 years,
what is your estimate of the value of equity in the company today (in millions)?
b. $ 946.8

1. You are looking at a group of mature insurance companies, with the intent of finding an
undervalued company. Which of the following combinations would you be looking for?
a. Low price to book, low risk, high return on equity

1. You are reading an analyst reports that claims that banks collectively are cheap, because
they are trading at 0.80 times book value of equity. You believe that the truth is that banks
are perceived as riskier than they used to be. If the current return on equity for banks is 10%
and the expected growth rate in perpetuity is 2%, what is the cost of equity that investors are
attaching to banks? (Assume that banks collectively are in stable growth)

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b. 12%

1. You have run a regression of EV/EBITDA multiples across all companies in the market
and arrived at the following:
EV/EBITDA = 5+80*(Growth rateRevenues)-‐20*(Cost of capital)-‐12*(Effective tax rate)
Astor Inc. is a publicly traded company with EBITDA of $100 million and enterprise value
of $ 480 million; it has an expected growth rate in revenues of 6% for the next 5 years and a
cost of capital of 10%. Assuming that this stock is fairly priced, what is Astor’s effective tax
rate?
c. 25%

1. You are trying to value Zimco Telecom Inc., a money losing company that reported
EBITDA of -‐$80 million in the most recent year on revenues of $ 1 billion. You expect
revenues to grow 6% a year for the next 5 years and the EBITDA/Revenue margin to
improve to 8% by year 5. If healthy telecom companies trade at a multiple of 6 times
EBITDA and you choose to apply this multiple to the fifth year’s expected EBITDA,
estimate the value of equity per share today. (You have a cost of capital of 12% for the next
5 years, a cash balance of $ 50 million, debt outstanding of $200 million and 12 million
shares outstanding today.)
c. $17.87

1. You are comparing the PE ratios for pharmaceutical firms and have chosen to run a
regression of PE ratios against expected growth rates at these companies:
PE = 4.0 + 80 (Expected growth rate in EPS)

(Thus, if your expected growth rate is 10%, your PE = 4.0 + 80 (.10) = 12)
Assume that you are looking at a company that is trading at a PE ratio of 16 and has an
expected growth rate of 20%. Given the regression, which of the following conclusions
would you draw?
a. The stock is under valued by 20%

1. You have just completed a discounted cash flow valuation of Rallye Inc. a publicly
traded company, and have estimated a value of $500 million for the equity in the company.
The company has 100 million shares trading at $5 a share, and 25 million employee options
with an exercise price of $5/share. Estimate the value of equity per share using
a. The fully diluted share approach
b. The treasury stock approach Explain
the difference.

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1. You have finished a discounted cash flow valuation of a company, discounting free cash
flows to the firm at the cost of capital to arrive at a value of $ 2 billion. You have also valued
individual assets on the company’s balance sheet. Which of the following assets would you
add to your estimated value to arrive at the value of the overall business?
a. None of the above

1. You are forecasting the operating earnings for TalkMedia, a young, high growth social
media company.

Last year 1 2 3 4
Revenues $100 $200 $320 $450 $600
Operating Margin -‐10% -‐5% 0% 5% 10%
Operating Income -‐$10.00 -‐$10.00 $0.00 $22.50 $60.00
The firm currently has invested capital of $50 million. If the sales-‐to-‐capital ratio is 2.00,
what will the pre-‐tax return on capital be in year 4?
c. +20%
3. You are using a dividend discount model to value a bank, which is expected to generate a
15% return on equity in perpetuity. The company paid dividends of
$40 million on net income of $100 million in the most recent year and is expected to
maintain high growth for the next 3 years, before settling into stable growth, growing 3% a
year in perpetuity. If the cost of equity is 9%, estimate the terminal value at the end of year
3.
a. $1778.51 million

1. You are valuing two companies. Company A is a mature company, with a long and stable history.
Company B is a young, start-‐up with substantial uncertainty about the future and little history. Which of
the following statements would you subscribe to?
a. I will be able to value Company A more precisely than Company B, but there will be a bigger
payoff to valuing Company B.

2. You are trying to compute the change in working capital to use in computing free cash
flow to the firm for Zapata Inc. The firm’s total working capital increased from $100 million
last year to $120 million this year. However, this working capital includes cash and short
term debt; last year’s cash balance had $ 30 million in cash and $15 million in short term
debt, whereas this year’s cash balance has $20 million in cash and $25 million in short term
debt. What effect did working capital have on your cash flow this year?
a. Decreased cash flow by $40 million

3. You have been asked to value the chemical division of a multi business conglomerate and have been
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provided with the cash flows for the division.

What discount rate would you use to discount this cash flow?

Year 1 Year 2 Year 3

Earnings before interest and taxes (1-‐ tax rate) $100 $105 $110
-‐ Reinvestment in chemical business $20 $22 $25
Cash flow $80 $83 $85

a. The cost of capital for the chemical business

4. You are valuing a Spanish company in Euros. Which of the following would you use as your risk free
rate in your valuation?
a. The lowest of the 10-‐year, euro denominated government bond rates (1.5%)

5. You are valuing a Peruvian company in US dollars. The Peruvian government has a CDS (Credit
Default Swap) that is trading at 1%. Which riskfree rate would you use in your valuation?
a. The rate on a 10-‐year US treasury bond (2%)

6. You are analyzing Sterling Stores, a retail company. The company reported $25 million in
pre-‐tax operating income in the most recent year and invested capital of $125 million. The
operating income, though, was computed after operating lease expenses that amounted to
$25 million in the most recent year and the company has commitments to make $20 million
in lease payments every year for the next 8 years. Assuming that Sterling Stores has a pre-‐
tax cost of debt of 4% and that you decide to capitalize operating leases, what is the pre-‐tax
return on capital is for Sterling Stores?
d. 12.77%

Điền vào chỗ trống

10. _____ refers to the cash flow that results from the firm's ongoing, normal business activities.
A. Cash flow from operating activities

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11. _____ refers to the changes in net capital assets.

B. Cash flow from investing

12. _____ refers to the difference between a firm's current assets and its current liabilities.
C. Net working capital

13. _____ is calculated by adding back noncash expenses to net income and adjusting for changes in
current assets and liabilities.
D. Cash flow from operations
14. _____ refers to the firm's interest payments less any net new borrowing.
E. Cash flow to creditors
15. _____ refers to the firm's dividend payments less any net new equity raised.
E. Cash flow to stockholders

Note:

b. A stock dividend: Value neutral, no cash flow change

c. Impairment of goodwill from a past acquisition (not tax deductible): Value neutral,
no effect on cash flows, past mistake (sunk cost)
d. A non-‐cash restructuring charge (which is not tax deductible): Value neutral, no
effect on cash flows, past mistake (sunk cost)
e. Impairment of goodwill from a past acquisition (a portion is tax deductible):
Value increasing, Tax savings lead to higher cash flows
f. A non-‐cash restructuring charge (which is tax deductible): Value increasing,
Tax savings lead to higher cash flows.
g. A corporate name change with no change in business focus: Value neutral
h. A corporate name change with change in business focus: Value changing, increase or
decrease depends upon returns in new business

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