FSA 3321 – Summer 1 (2008)
Exam 1
Moore
First Examination – Finance 3321
Summer 2008 (Moore)
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Clearly Circle the BEST response for each of the following questions:
1. Which of the following is not considered a financial intermediary?
a. Commercial Banks
b. Investment Banks
c. Mutual Funds
d. Bond Raters
e. Insurance Companies
2. Which of the following is considered an information intermediary?
a. Insurance Companies
b. Investment Banks
c. Mutual Funds
d. Investment Banks
e. Financial Analysts Capitalists
3. Which of the following is an accounting strategy that can be chosen by managers?
a. Choice of accounting estimates
b. Estimation error
c. Contracting and governance
d. Managers’ superior information on business activities
e. Third party auditing
4. Which of the following is not defined as being part of the firm’s business environment?
a. Labor markets
b. Third party auditing
c. Product markets
d. Customers
e. Business regulations
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FSA 3321 – Summer 1 (2008)
Exam 1
Moore
5. In the US, the accounting treatment (GAAP) for recognizing sales commissions in the
period the selling activity takes place and not necessarily in the period when commissions
are paid is determined and justified by:
a. Accrual Accounting
b. Matching Principle
c. Periodicity Principle
d. Revenue Recognition Principle
e. The IASB
6. Which is the fourth step in a structured equity security analysis and valuation?
a. Prospective Analysis
b. Accounting Analysis
c. Financial Analysis
d. Business Strategy Analysis
e. Implementing Valuation Models
7. Which step in a structured business valuation analysis involves forecasting future financial
performance?
a. Prospective Analysis
b. Accounting Analysis
c. Financial Analysis
d. Business Strategy Analysis
e. Implementing Valuation Models
8. One of the main reasons that firms are allowed flexible financial accounting standards
under GAAP is:
a. It provides firms a better opportunity to report the underlying economic substance of
transactions and events.
b. It gives the firms the opportunity to reduce the volatility of earnings so that investors
can provide better forecasts of future performance.
c. It allows managers to better tie earnings to performance for compensation purposes.
d. It gives firms the opportunity to mark-to-market the physical assets so that balance
sheet values are more relevant to decision makers.
e. None of the above.
9. The last possible line item reported on the income statement is:
a. Net Revenue
b. Operating Income
c. Comprehensive Income
d. Income from Continuing Operations
e. Gross Profit
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FSA 3321 – Summer 1 (2008)
Exam 1
Moore
10. Which of the following line items is reported earliest in the income statement?
a. Extraordinary Expenses
b. Operating Income
c. Comprehensive Income
d. Income from Continuing Operations
e. Gross Profit
11. Identify the proper sequence in which following items would be presented on the income
statement is:
1. Net Revenue
2. Operating Income
3. Comprehensive Income
4. Income from Continuing Operations
5. Gross Profit
a.
b.
c.
d.
e.
1,
1,
1,
1,
1,
2,
5,
3,
5,
4,
3,
2,
5,
3,
3,
4,
4,
4,
2,
5,
5
3
2
4
2
12. Which of the following statements is incorrect?
a. The SEC has the legal authority to proscribe GAAP.
b. Transparent financial reporting practices allow users to get a true and fair picture of the
firm.
c. Conservatism of financial reporting standards may reduce valuation relevance.
d. Prospective analysis involves forecasting future events and outcomes.
e. The external auditor certifies the financial statements are correct.
13. Which of the following is an element of the “Five-Forces” model?
a. Cost Leadership
b. Maintaining Competitive Advantage(s)
c. Ability to supply the same product or service at a lower cost
d. Product Differentiation
e. Threat of substitute products
14. An
a.
b.
c.
d.
e.
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, High First mover advantage, Low Product Differentiation
Low Industry Concentration, Low Distribution Access, High Customer Switching Costs
High Concentration, Low Fixed-Variable Cost Ratio, Low Firm Switching Costs
Supply > Demand, Low First Mover Advantage, High Fixed to Variable Cost Ratio
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FSA 3321 – Summer 1 (2008)
Exam 1
Moore
15. 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, Low First mover advantage, High Product Differentiation
c. Low Industry Concentration, Low Distribution Access, Low Customer Switching Costs
d. High Industry Concentration, High Fixed-Variable Cost Ratio, Low product differentiation
e. Supply < Demand, High Legal Barriers to Entry, Steep Industry Learning Curves
16. Which of the following strategies would be consistent with either a pure cost leadership or
pure product differentiation strategy (but not both)?
a. Economies of scale, low R&D investment, High investment in brand image
b. Superior product variety, lower input costs, High investment in R&D
c. Lower input costs, flexible distribution, efficient production
d. High investment in brand image, Superior product quality, Focus on creativity
e. Complex product designs, Tight cost control, focus on economies of scale or scope
17. Which of the following strategies would lead to a mixture of cost leadership and product
differentiation?
a. Economies of scale and scope, simpler product design, tight cost control
b. Superior product variety, more flexible delivery, High investment in R&D
c. Lower input costs, low-cost distribution, Low investment in R&D
d. High investment in brand image, High investment in R&D, Focus on Creativity
e. Simpler product designs, Tight cost control, Superior customer service
18. Determining whether the firm currently has the resources and capabilities to deal with the
identified key success factors is an example of:?
a. Competitive Strategy Analysis
b. Differentiation Analysis
c. Analysis of the Degree of Actual and Potential Competition
d. Analysis of the Threat of Substitute Products
e. Analysis of the Bargaining Power in Input and Output Markets
19. Dow Chemical’s ability to dictate price & delivery terms to bubble wrap manufacturers is an
example of:
a. Bargaining power of firm over suppliers
b. Bargaining power of supplier over firm
c. Bargaining power of customers over firm
d. Bargaining power of firm over customers
e. None of the above
20. Which of the following is not used to determine the Rivalry Among Existing Firms?
a. Exit Barriers
b. Entry Barriers
c. Fixed-Variable Costs
d. Excess Capacity
e. Economies of Scale
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FSA 3321 – Summer 1 (2008)
Exam 1
Moore
21. Which of the following does not necessarily create corporate value?
a. Managing the value chain
b. Maintaining a good fit between the company’s specialized resources and the portfolio of
businesses in which the company is operating.
c. Good allocation of decision rights between the headquarters office and the business
units to realize all the potential economies of scope.
d. Internal measurement, information, and incentive systems that reduce agency costs.
e. Investing significant resources to product advertising and marketing activities.
22. Which of the following models, theorems or hypotheses, if absolutely true in the real world,
would make the activities of information production or financial analysis a socially and
economically non-productive activities?
a. Capital Asset Pricing Model
b. Weak Form Efficient Market Hypothesis
c. Semi-Strong Form Efficient Market Hypothesis
d. Modigliani and Miller Theorem, without taxes
23. Which of the following statements is correct with respect to Efficient Markets?
a. Weak form market efficiency presumes asset prices fully reflect past information and
expectations of future information.
b. Strong form market efficiency is incompatible with the existence of futures markets and
the current spot markets (e.g. commodity and equity cash markets).
c. Semi-strong market efficiency requires that asset prices instantaneously react to new
information, that the new equilibrium price of the asset will be instantaneously reached,
and that prices will not vary from that point until a new information event is reached.
d. Semi-strong market efficiency would suggest that, on average, asset prices are correct
(this makes investing a “fair game”), but allows for socially and economically productive
information analysis and financial analysis.
e. Strong form market efficiency requires asset prices do not reflect private information.
24. Assume PG is the fair insurance price for Good drivers and PB is the fair insurance price for
Bad drivers, where PG < PB and 40% of the drivers are Good drivers. If insurers do not
have a mechanism to distinguish good and bad drivers, what price will result in the
voluntary insurance market?
a. PG
b. PB
c. (PG + PB )/2
d. (.4PG + .6PB )
25. Which of the following environmental structures (designs) is necessary for differential
insurance prices to obtain that approach theoretically fair prices of PG and PB ?
a. Insurance is mandated
b. Insurance is voluntary
c. Information is verifiable
d. Population statistics regarding the proportion of good and bad drivers are known
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