Q: If a company’s return on equity (ROE) is 15%, its dividend payout ratio is 40%, and the expected growth rate is calculated as $$ g = ROE \times (1 - Dividend\ Payout\ Ratio) $$, what is the expected growth rate?

$$ g = 15\% \times (1 - 0.40) = 9\% $$

Q: If a company’s beta ($$ \beta ) is 1.2$$, the risk-free rate ($$ R_f ) is 3$$%, and the expected market return ($$ R_m ) is 8$$%, what is the required return using the CAPM formula $$ r = R_f + \beta (R_m - R_f) $$?

$$ r = 3\% + 1.2 \times (8\% - 3\%) = 9\% $$

Question 1

Which of the following best describes why liquidity ratios are important for creditors when analyzing a company's financial statements?

Accepted Answer

They assess the company's ability to meet short-term obligations using current assets.

Question 2

A company has current assets of $$500,000 and current liabilities of 250$$,000. What is its current ratio?

Accepted Answer

$$ \frac{500,000}{250,000} = 2.0 $$

Question 3

Which ratio would you use to evaluate a company's ability to generate profit from its sales, and what is its formula?

Accepted Answer

Operating profit margin; $$ \frac{Operating\ Income}{Net\ Sales} $$

Question 4

If a company’s return on equity (ROE) is 15%, its dividend payout ratio is 40%, and the expected growth rate is calculated as $$ g = ROE 	imes (1 - Dividend\ Payout\ Ratio) $$, what is the expected growth rate?

Accepted Answer

$$ g = 15\% 	imes (1 - 0.40) = 9\% $$

Question 5

Which of the following is NOT a component of the DuPont Analysis for Return on Equity (ROE)?

Accepted Answer

Dividend yield

Question 6

A company has net income of $$120,000, sales of 1$$,000,000, and average total assets of $600,000. What is its asset turnover ratio?

Accepted Answer

$$ \frac{1,000,000}{600,000} = 1.67 $$

Question 7

If interest rates increase, what is the expected effect on the present value of future cash flows in a Discounted Cash Flow (DCF) model?

Accepted Answer

The present value will decrease.

Question 8

Which formula is used to estimate the value of a stock using the Dividend Discount Model (DDM) with constant growth?

Accepted Answer

$$ V_0$ = \frac{D_1$}{r - g} $$

Question 9

A company has EBIT of $$200,000, interest expense of 50$$,000, and income tax expense of $30,000. What is its Times Interest Earned (TIE) ratio?

Accepted Answer

$$ \frac{200,000}{50,000} = 4.0 $$

Question 10

Which of the following best describes the purpose of the cash flow adequacy ratio?

Accepted Answer

To assess whether operating cash flows are sufficient to cover capital expenditures, dividends, and investments.

Question 11

If a company’s beta ($$ \beta ) is 1.2$$, the risk-free rate ($$ R_f ) is 3$$%, and the expected market return ($$ R_m ) is 8$$%, what is the required return using the CAPM formula $$ r = R_f + \beta (R_m - R_f) $$?

Accepted Answer

$$ r = 3\% + 1.2 	imes (8\% - 3\%) = 9\% $$

Question 12

Which of the following ratios is most useful for evaluating a company’s long-term solvency?

Accepted Answer

Debt ratio

Question 13

A company’s price/earnings (P/E) ratio is 20, and its earnings per share (EPS) is $2. What is its market price per share?

Accepted Answer

$$ 20 	imes 2 = 40 $$

Question 14

Which of the following is a key insight from Porter’s Five Forces analysis when evaluating industry and firm value?

Accepted Answer

It analyzes competitive forces that affect revenues, margins, and growth.

Question 15

If a company’s cost of goods sold is $$600,000 and its average inventory is 150$$,000, what is its inventory turnover ratio?

Accepted Answer

$$ \frac{600,000}{150,000} = 4.0 $$

Question 16

Relative valuation methods often use multiples. Which of the following is NOT a commonly used multiple in relative valuation?

Accepted Answer

ROE (Return on Equity)

Question 17

Which of the following statements about the effect of inflation on valuation models is correct?

Accepted Answer

Higher inflation reduces the present value of future cash flows.

Question 18

A company’s net sales are $$800,000 and its gross profit is 320$$,000. What is its gross profit margin?

Accepted Answer

$$ \frac{320,000}{800,000} = 0.40 $$

Question 19

Which of the following best describes the purpose of the Discounted Cash Flow (DCF) model in valuation?

Accepted Answer

To estimate enterprise value by discounting future free cash flows and terminal value.

Financial Statement Analysis & Valuation: Study Guide (Chapter 5 + Valuation Models)

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