Chapter 6, 7 AND 8
Ratio Classes to Consider (what do they measure, how computed, provide types?)
A. Turnover ratios
B. Leverage ratios
C. Return on investment ratios
D. Profitability ratios
1. What ratio and activity is measured by each of the following?
A. The product of net margin and asset turnover
B. The relationship of net income to sales
C. The relationship of total liabilities and book value of equity
D. The product of return on assets and financial leverage
2. A company pays a dividend on common stock, thereby reducing its cash balances. What
effect does payment of the dividend have on its leverage ratio and net profit margin?
Leverage
Net Profit Margin
(Debt/Equity)
(Net Income/Sales)
Increase (?)
Decrease(?)
No Effect (?)
3. What will $1,000 (compounding at 8 percent per year) grow to in 5 years?
4. The subject company has the following revenue trend. Calculate the compound annual
rate for 2009-2013?
Period Ending
Total Revenue
2008
2009
2010
2011
2012
12,348,000 12,562,000 12,843,000 13,893,000 14,190,000
2013
15,259,000
Betty Lou’s Balance Sheets for December 31, 2011 and 2012
Current assets
Fixed assets
Total assets
2011
$170
280
450
2012
$200
300
500
Current liabilities
Long-term debt
Equity
2011
$90
170
190
Betty Lou’s Income Statement for the year ended December 31, 2012
Revenue $350
Cost of goods sold 50
Gross margin ??
Operating expenses 80
Depreciation 30
Interest expenses 30
Taxes 64
5. Compute Betty Lou’s interest coverage ratio (time interest earned) for 2012?
6. Compute Betty Lou’s after tax return on average equity for 2012?
7. Compute Betty Lou’s after tax return on “ending” invested capital in 2011?
2012
$100
180
220
8. Following are selected financial ratios for the subject company and its RMA peers as of
the valuation date:
Subject Company
RMA Peers
Sales/inventory
11.2
11.6
Sales/net working capital
46.5
9.0
Cost of sales/payables
6.4
14.6
Comment on the following (on a relative basis):
A. To what extent is subject company is suffering financial stress and is leaning on suppliers?
B.
To what extent has the subject company reduced its accounts payable at the valuation
date?
C. Is there evidence the subject company’s net working capital had ballooned due to
temporary factors.
D. Is there evidence the subject company is more efficient in its management of inventory.
9. Which of the following are reasons for adjusting reported financial data (why?)?
A. To eliminate discretionary expenses of the business
B. To make historical statements more representative of expected future performance
C. To compare the subject to companies of different size
D. To separate out non-operating assets and their related income or expense
10. A subject company uses a shorter depreciation period for its equipment than is common
in the industry, but there is no indication that it actually achieves a lower useful life for the
equipment. Relative to the industry, the subject company’s:
A. Earnings are overstated, and the net book value of equipment is stated comparably.
B. Earnings are overstated, and the net book value of equipment is understated.
C. Earnings are overstated, and the net book value of equipment is overstated.
D. Earnings are understated, and the net book value of equipment is stated comparably.
11. The subject company reported the following results for years 20X1 to 20X4 ($000):
2011
2012
2013
2014
Revenue
$600
$610
$655
$675
Cost of goods sold
300
306
333
345
Operating expense
100
102
150
115
Pretax income
200
204
183
230
You have analyzed the company’s financial operations and discovered the following facts:
1. Expenses related to non-operating assets were $80,000 per year.
2. Income related to non-operating assets was $20,000 in each of 2013 and 2014.
3. Throughout the review period, the firm bought its raw materials from a firm owned by
related parties. On the open market, raw materials could have been purchased for $60,000
less per year.
4. In 2013 the firm recorded $35,000 of expense related to an unprecedented labor strike.
You are estimating the pretax income of the business in order to determine the fair market
value of 100 percent of the company. After appropriate adjustments are made, COMPUTE
firm A’s four-year average pretax income:
12. Be able to compute and distinguish/differentiate the following financial ratios:
a) Quick asset ratio
b) Inventory turnover based on ending inventory for the year
c) Inventory turnover based on average inventory for the year
d) Inventory turnover based on beginning inventory for the year
e) Be able to assess relative liquidity (draw conclusions relative to peers)
f) Be able to assess relative turnover ratios and draw conclusions relative to peers
g) Be able to link changes in ratios to changes in business activities (e.g. more franchises)
h) Be able to link coverage and leverage ratios(relative to peers)
13. Be able to understand different elements of risk: (which are specific and general)
a) Business risk
b) Investment risk
c) Country risk
d) International risk
e) Exchange rate risk
f) Political risk
14. Fully understand how the 5-forces model works and be able to analyze scenarios.
15.
understand differences in the cost leadership and product differentiation strategies
16.
Know what a Focus Strategy is and how it works
17.
Understand the benefits of SWOT analysis for an appraiser.
18.
Be able to analyze financial ratios in terms of meaning and implications
(DuPont Ratio elements; interpreting changes in ratios like change in ROI)
19.
What are the appropriate sources of information for economic research on a business
given the size, nature and location of the firm?
New Material for March 3, 2015
Chapter 5
Chapter 5-4
20.
Which of the following aspects of the economic and political environment would likely
be the LEAST important for a local manufacturer of Cotton Clothing:
A. Local labor pool
B. Global demand for Cotton
C. Foreign competitors entering the U.S. market
D. Consumer spending
Chapter 5-3/4
21.
What is the purpose of Analyzing Industry Conditions and in what way does the
Appraiser Use the results of this Analysis.
A.
To determine the effect of industry trends on the risk of the subject company
B.
To determine and justify the extent to which industry financial ratios should be
adjusted
C.
To determine the appropriate adjustments to the reported profitability of the
subject company
D.
To determine the appropriate pricing multiples used for guideline companies
Chapter 6
Chapter 6-1
22. All of the following are examples of Porter’s five competitive forces EXCEPT:
A.
B.
C.
D.
E.
Threat of new entrants
Bargaining power of customer
Level of regulatory control
Rivalry amongst existing firms
Threat of Substitute Products
Chapter 6-2
23.
In the five factor analysis, factors which increase competitive rivalry in an industry
include:
A.
B.
C.
D.
E.
F.
G.
H.
High switching costs for customers
Rapid market growth
Large number of competitors
High levels of product differentiation
Low levels of product differentiation
Steep Learning Curves
High Fixed-to-Variable cost ratios
Low Barriers to Entry in an Industry
Chapter 6-6
24.
Market conditions affecting the impact of substitutes include which of the following?
A.
B.
C.
D.
E.
F.
G.
Number of customers relative to sellers
Relative price of substitutes
Relative quality of substitutes
Switching costs to customers
Relative Performance of substitutes
Concentration in the Industry
Bargaining Power of Suppliers
Chapter 6-4
25.
In the following list, identify which party is the supplier and which party would likely
have greater bargaining power (and why).
A.
B.
C.
D.
E.
F.
G.
Timber producers and paper companies
Drug industry and hospitals
Tire industry and automobile manufacturers
Travel agents and airlines
Crude oil producers and Crude Oil Refiners
Cotton Mills and Textile Producers
Casual Dining Restaurants and People Going out for Dinner
Chapter 6-6
26.
Overall, suppose that cost leadership is a valid. Identify which of the following
activities create value (Value Drivers or Key Success Factors).
A.
B.
C.
D.
E.
F.
G.
Aggressive construction of facilities on an efficient scale
Tight control of costs and overhead
Elimination of marginal customer accounts
Developing a design or brand image
Extensive Research and Development
Streamlining Distribution Channels
Reducing labor costs through outsourcing or moving offshore.