Fin 3321 – Fall - 2015
Exam 1
Moore
Exam 1 – Fin 3321 - Fall – 2015 - Conflict
Printed Name:
____________________
Company you are valuing:____________
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of Student Conduct is in force during this exam. Students providing or accepting unauthorized
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statement and agree to abide by the stipulated terms.
Student’s Signature:
______________________________
Clearly Circle the BEST response for each of the following questions:
Multiple Choice (2 Points Each) – 14 Point Problem
1. According to classical financial theory, the objective of the firm’s management should be:
a. Maximize the book value of assets
b. Minimize the market value of liabilities
c. Maximize revenues
d. Minimize expenses
e. Maximize shareholder wealth
2. Which of the following is Correct regarding accrual accounting?
a. Accrual accounting is the information basis of inputs for most classical finance models
b. Accrual accounting attempts to measure the period in which cash flows occur
c. Accrual accounting attempts to measure the cash flow consequences of transactions in
the period cash flows occur.
d. Accrual accounting is a natural consequence of implementing the Matching Principle.
3. Accounting Conventions and Regulations is part of which main element in Figure 1-2?
a. Business Environment
b. Business Strategy
c. Capital Markets
d. Accounting Environment
e. Accounting Strategy
4. Which is the third step in a structured equity security analysis and valuation project?
a. Prospective Analysis
b. Accounting Analysis
c. Financial Analysis
d. Business Strategy Analysis
e. Implementing Valuation Models
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Fin 3321 – Fall - 2015
Exam 1
Moore
5. Identify the proper sequence in which following items would be presented on the income
statement is:
1. Interest Expense
2. Gross Profit
3. Advertising Expense
4. Operating Income
5. Comprehensive Income
a.
b.
c.
d.
e.
6. An
a.
b.
c.
d.
e.
2,
1,
3,
2,
1,
1,
5,
2,
3,
2,
3,
2,
4,
4,
3,
4,
4,
1,
1,
5,
5
3
5
5
4
industry having a high degree of price competition would be characterized by:
Low Industry Concentration, Low Legal Barriers to Entry, High Product Differentiation
Few Exit Barriers, Low First mover advantage, Low Product Differentiation
High Industry Concentration, High Distribution Access, Low Firm Excess Capacity
Low Concentration, Low Product Differentiation, Low First Mover Advantage
Supply < Demand, No First Mover Advantage, High Fixed to Variable Cost Ratio
7. Which of the following would lead to the lowest degree of industry price competition?
a. Low Industry Concentration, Low Legal Barriers to Entry, Low Product Differentiation
b. Few Exit Barriers, High First Mover Advantage, Low Product Differentiation
c. Low Industry Concentration, Low Distribution Access, Low Customer Switching Costs
d. High Industry Concentration, High Fixed-Variable Cost Ratio, Hi product differentiation
e. Supply > Demand, High Legal Barriers to Entry, High Industry Concentration
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Fin 3321 – Fall - 2015
Exam 1
Moore
Short Problem 2 – Overs and Unders (10 Points)
Analyze the following transactions (omissions or incorrect accounting treatments) and assess
whether the accounts are Overstated, Understated, or No Effect. Fill in the appropriate boxes
as (O), (U), (N). Base your analysis on Proper GAAP. Number 5 relates to impact on the
GAAP stated Financials resulting from the decision not to Hedge.
Assets
1
The company used too
large a discount rate to
estimate the present value
of future payments on
capital leases. Just
consider the recognition of
the lease being signed.
2
The company sells a 3
year extended warranty on
its products. Customers
pay the warranty at the
time of purchase. The
company booked the
entire amount as revenue
at the time of sale.
3
The company capitalized
all Super Bowl Luxury
Box/Suite costs as a
deferred marketing cost.
4
A technology company did
not impair goodwill
associated with an
acquired division whose
product became obsolete.
5
The U.S. based company,
an exporter, did not markto-market its Euro-based
Accounts receiveable in a
year when the dollar was
strengthening.
Liabilities
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Equity
Revenues
Expenses
Net
Income
Fin 3321 – Fall - 2015
Exam 1
Moore
Short Problem 3 – Goodwill and M&A Activity (5 Points)
Acquirer Company buys Target Company. Target’s pre-acquisition balance sheet at
historical cost showed Total Assets at $730,000 and Total Liabilities at $420,000. Upon
acquisition, Acquirer revalued Target’s identifiable assets at $1,350,000 and liabilities at
$380,000.
Assume the Acquirer recognized goodwill of $600,000 in this transaction. What is the price
Acquirer paid for Target Company?
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Fin 3321 – Fall - 2015
Exam 1
Moore
Short Problem 4 – Information & Regulation Value (10 Points)
Assume that 75% of the driving population are Bad Drivers and that 25% are good drivers.
If given a choice, car drivers are willing to pay no more than their risk-neutral value of the
benefits of having insurance. All bad drivers are equal and have the same preferences.
The same holds for all good drivers. The risk neutral price for Good Drivers is identified
as PG and is equal to $800. The risk neutral price for Bad Drivers is identified as PB and
is equal to $2,000.
Assume there is only one insurance company and the government regulations stipulate the
price that can be charged by the company must be, on average, correct relative to the
social risk neutral price established by both pools of drivers.
Part 1 (4 Points)
Assume that insurance is voluntary and the government allows the insurance company
to collect information regarding the quality of the individual drivers that is perfect.
What price(s) obtains in this type of insurance market and who chooses to buy
insurance?
Part 2 (4 Points)
Assume that insurance is mandatory but the government prohibits the insurance
company from collecting any information regarding the quality of the individual drivers.
What price(s) obtains in this type of insurance market and who chooses to buy
insurance?
Part 3 (2 Points)
Compare and contrast the benefits (and social costs) of acquiring information and
having regulation. (who wins, who loses, and why?)
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Fin 3321 – Fall - 2015
Exam 1
Moore
Short Essay Problem 1 (write concisely, with bullet points and sentences, but
make your answer clear) (15 Points)
Company: ___________________________________
This Essay is directly related to the company your group is analyzing. For each of the 5
forces (Porter’s Model), conclude whether that item (force) leads to price-taking, pricesetting or mixed behavior in the industry (e.g. Existing Competition = hi, low or mixed) and
then provide 2 specific business activity examples for the industry that support this
conclusion for each “force”. (e.g. low industry concentration).
Also, identify the three relevant competitors your group is using for industry benchmarks:
1. ______________________________
2. ______________________________
3. ______________________________
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Fin 3321 – Fall - 2015
Exam 1
Moore
Short Essay Problem 2 (Use bullet points with complete sentences for clarity) (6 Points)
This Essay is directly related to the company your group is analyzing. Identify 3 (three)
specific value drivers for the industry you analyzed and explain, briefly, how these business
activities create value and lead to creating or maintaining competitive advantages. Provide
specific examples.
Short Essay Problem 3 (Use complete sentences for clarity) (5 Points)
In class, we discussed how companies may want to create GOODWILL when they spend
money on customer service, quality improvement, etc. This would be accomplished by
capitalizing these costs. The FASB and GAAP do object to this “substitution effect” for
Goodwill but a company would attempt this disclosure on a “Non-GAAP” basis in an 8-K.

Briefly explain why this is a justifiable approach to maintain an unimpaired goodwill
balance. (in the eyes of the company presenting non-GAAP measures). Next, what
type of financial performance should you be able to measure and observe if this
argument is correct? (Hint: Think of Tables 2-1 and 2-2)
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Fin 3321 – Fall - 2015
Exam 1
Moore
Take-Home Portion of Exam (60 Points plus 10 Bonus)
You must email the completed excel file (in .xls format) to my ttu email
address no later than 7am on Tuesday, September 29, 2015 to receive
any credit for these problems.
The submitted file must have the following name:
Exam1-Fin3321-Fall2015-YourLastName-YourFirstName.xls
Problem 1 (20 Points) – Capitalize Operating Leases
Problem 2 (20 Points) - Goodwill
Problem 3 (10 Points) – Capitalize R&D Expenses (just make the
schedules)
Problem 4 (20 Regular Points and 10 Bonus Points)
 Restate the 2010 Financials (20 Points) in good form
 Restate the 2011 Financials in good form (10 point Bonus
Problem)
 Only make adjustments to Goodwill and for Capitalizing
Operating Leases.
 Use the Trial Balance worksheet approach that Includes both
income statement and Balance Sheet accounts.
 Be sure to include the Debit and Credit checking of totals as well
as the income summary account. You will need to have both “asStated” and “Re-Stated” account figures. You may have to open
new accounts that appear when you re-state. Income summary
account must be used.
Take this page home with you
Your Personal 4-Digit Exam Code:
____
_____
____
_____
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