Corporate Finance (Berk/DeMarzo)- Chapter 2 – Introduction to Financial Statement Analysis

 Corporate Finance (Berk/DeMarzo)- Chapter 2
– Introduction to Financial Statement Analysis  2.1 The Disclosure of Financial Information 1)

U.S. public companies are required to file their annual financial statements with the U.S. Securities and Exchange Commission on which form?
A)

10-A
B)

10-K
C)

10-Q
D)

10-SEC
    2)

Which of the following is not a financial statement that every public company is required to produce?
A) Income Statement
B) Statement of Sources and Uses of Cash
C) Balance Sheet
D) Statement of Stockholders’ Equity
    3)

The third party who checks  annual financial statements to ensure that they are prepared according to GAAP and verifies that the information reported is reliable is the
A) NYSE Enforcement Board.
B) Accounting Standards Board.
C) Securities and Exchange Commission (SEC).
D) auditor.
    2.2 The Balance Sheet 1) Which of the following balance sheet equations is incorrect?
A) Assets – Liabilities = Shareholders’  Equity
B) Assets = Liabilities + Shareholders’ Equity
C) Assets – Current Liabilities = Long Term Liabilities
D) Assets – Current Liabilities = Long Term Liabilities + Shareholders’ Equity
  3) Accounts payable is a
A) Long-term liability.

B) Current Asset.

C) Long-term asset.

D) Current Liability.

  4)

A 30 year mortgage loan is a
A) Long-term liability. B) Current Liability. C) Current Asset. D) Long-term asset.     5)
Which of the following statements regarding the balance sheet is incorrect?
A) The balance sheet provides a snapshots of the firm’s financial position at a given point in time.
B) The balance sheet lists the firm’s assets and liabilities.
C) The balance sheet reports stockholders’ equity on the right hand side.
D) The balance sheet reports liabilities on the left hand side.
    Use the table for the question(s) below.

 Consider the following balance sheet:
 Luther CorporationConsolidated Balance SheetDecember 31, 2006 and 2005 (in $ millions) Assets20062005 Liabilities and Stockholders’ Equity20062005Current Assets   Current Liabilities  Cash63.658.5 Accounts payable87.673.5Accounts receivable55.539.6 Notes payable / short-term debt10.59.6Inventories45.942.9 Current maturities of long-term debt39.936.9Other current assets6.03.0 Other current liabilities6.012.0     Total current assets171.0144.0      Total current liabilities144.0132.0       Long-Term Assets   Long-Term Liabilities    Land66.662.1   Long-term debt239.7168.9  Buildings109.591.5   Capital lease obligationss——  Equipment119.199.6 Total Debt239.7168.9  Less accumulated  depreciation(56.1)(52.5) Deferred taxes22.822.2Net property, plant, and equipment239.1200.7 Other long-term liabilities——Goodwill60.0– Total long-term liabilities262.5191.1Other long-term assets63.042.0 Total liabilities406.5323.1     Total long-term assets362.1242.7 Stockholders’ Equity126.663.6       Total Assets533.1386.7 Total liabilities and Stockholders’ Equity533.1386.7  6)

What is Luther’s net working capital in 2005?
A) $12 million
B) $27 million
C) $39 million
D) $63.6 million
  7)

If in 2006 Luther has 10.2 million shares outstanding and these shares are trading at $16 per share, then Luther’s Market-to-book ratio would be closest to:
A) 0.39
B) 0.76
C) 1.29
D) 2.57
    8)

When using the book value of equity, the debt to equity ratio for Luther in 2006 is closest to:
A) 2.21
B) 2.29
C) 2.98
D) 3.03
    9)

If in 2006 Luther has 10.2 million shares outstanding and these shares are trading at $16 per share, then using the market value of equity, the debt to equity ratio for Luther in 2006 is closest to:
A) 1.71
B) 1.78
C) 2.31
D) 2.35
10)

If in 2006 Luther has 10.2 million shares outstanding and these shares are trading at $16 per share, then what is Luther’s Enterprise Value?
A) -$63.3 million
B) $353.1 million
C) $389.7 million
D) $516.9 million
    11)

Luther’s current ratio for 2006 is closest to:
A) 0.84
B) 0.87
C) 1.15
D) 1.19
      15)
If on December 31, 2005  Luther has 8 million shares outstanding trading at $15 per share., then what is Luther’s enterprise value?
 2.3 The Income Statement 1) Which of the following statements regarding the income statement is incorrect?
A) The income statement shows the earnings and expenses at a given point in time.
B) The income statement shows the flow of earnings and expenses generated by the firm between two dates.
C) The last or “bottom” line of the income statement shows the firm’s net income.
D) The first line of an income statement lists the revenues from the sales of products or services.
  2) Gross profit is calculated as
A) Total sales – cost of sales
– selling, general and administrative expenses
– depreciation and amortization
B) Total sales – cost of sales – selling, general and administrative expenses C) Total sales – cost of sales D) None of the above
  3) Which of the following is not an operating expense?
A) Interest expense
B) Depreciation and amortization
C) Selling, general and administrative expenses
D) Research and development
    Use the table for the question(s) below. Consider the following income statement and other information:
 Luther CorporationConsolidated Income StatementYear ended December 31 (in $ millions) 20062005Total sales610.1578.3Cost of sales(500.2)(481.9)Gross profit109.996.4Selling, general, and administrative expenses(40.5)(39.0)Research and development(24.6)(22.8)Depreciation and amortization(3.6)(3.3)Operating income41.231.3Other income——Earnings before interest and taxes (EBIT)41.231.3Interest income (expense)(25.1)(15.8)Pretax income16.115.5Taxes(5.5)(5.3)Net income10.610.2   Price per share$16$15Shares outstanding (millions)10.28.0Stock options outstanding (millions)0.30.2   Stockholders’ Equity126.663.6Total Liabilities and Stockholders’ Equity533.1386.7  4) For the year ending December 31, 2006 Luther’s earnings per share are closest to:
A) $1.01
B) $1.04
C) $1.58
D) $4.04  
    6) Luther’s Operating Margin for the year ending December 31, 2005 is closest to:
A) 1.8%

B) 2.7%

C) 5.4%

D) 16.7%

  7) Luther’s Net Profit Margin for the year ending December 31, 2005 is closest to:
A) 1.8% B) 2.7% C) 5.4% D) 16.7%   8) Luther’s earnings before interest, taxes, depreciation, and amortization (EBITDA) for the year ending December 31, 2006 is closest to:
A) 19.7 million
B) 37.6 million
C) 41.2 million
D) 44.8 million
    9) Luther’s return on equity (ROE) for the year ending December 31, 2006 is closest to:
A) 2.0%

B) 6.5%

C) 8.4%

D) 12.7%

    10) Luther’s return on assets (ROA) for the year ending December 31, 2006 is closest to:
A) 2.0% B) 6.5% C) 8.4% D) 12.7% 11) Luther’s price – earnings ration (P/E) for the year ending December 31, 2006 is closest to:
A) 7.9
B) 10.1
C) 15.4
D) 16.0
    2.4 The Statement of Cash Flows 1) Which of the following is not a section on the cash flow statement?
A) Income generating activities
B) Investing activities
C) Operating activities
D) Financing activities
3) Which of the following is not a reason why cash flow may not equal net income?
A) Amortization is added in when calculating net income.
B) Changes in inventory will change cash flows but not income.
C) Capital expenditures are not recorded on the income statement.
D) Depreciation is deducted when calculating net income.  
       Use the tables for the question(s) below.
 Consider the following financial information:
 Luther CorporationConsolidated Balance SheetDecember 31, 2006 and 2005 (in $ millions)Assets20062005 Liabilities and Stockholders’ Equity20062005Current Assets   Current Liabilities  Cash63.658.5 Accounts payable87.673.5Accounts receivable55.539.6 Notes payable / short-term debt10.59.6Inventories45.942.9 Current maturities of long-term debt39.936.9Other current assets6.03.0 Other current liabilities6.012.0     Total current assets171.0144.0      Total current liabilities144.0132.0       Long-Term Assets   Long-Term Liabilities    Land66.662.1   Long-term debt239.7168.9  Buildings109.591.5   Capital lease obligationss——  Equipment119.199.6 Total Debt239.7168.9  Less accumulated  depreciation(56.1)(52.5) Deferred taxes22.822.2Net property, plant, and equipment239.1200.7 Other long-term liabilities——Goodwill60.0– Total long-term liabilities262.5 Other long-term assets63.042.0 Total liabilities406.5323.1     Total long-term assets362.1242.7 Stockholders’ Equity126.663.6       Total Assets533.1386.7 Total liabilities and Stockholders’ Equity533.1386.7   Luther CorporationConsolidated Income StatementYear ended December 31 (in $ millions) 20062005Total sales610.1578.3Cost of sales(500.2)(481.9)Gross profit109.996.4Selling, general, and administrative expenses(40.5)(39.0)Research and development(24.6)(22.8)Depreciation and amortization(3.6)(3.3)Operating income41.231.3Other income——Earnings before interest and taxes (EBIT)41.231.3Interest income (expense)(25.1)(15.8)Pretax income16.115.5Taxes(5.5)(5.3)Net income10.610.2Dividends Paid                 5.15.0Price per Share$16$15Shares outstanding (millions)10.28.0Stock options outstanding (millions)0.30.2   Stockholders’ Equity126.663.6Total Liabilities and Stockholders’ Equity533.1386.7  6) For the year ending December 31, 2006 Luther’s cash flow from operating activities is ? 
 2.6 Accounting Manipulation 1) In response to corporate scandals such as Enron and WorldCom, in 2002 congress passed a law that requires, among other things, that CEOs and CFOs certify the accuracy and appropriateness of their firm’s financial statements and increases he penalties against them if the financial statements later prove to be fraudulent.  The name of this act is?
A) The Glass-Steagall Act
B) The Sarbanes-Oxley Act
C) The Accuracy in Accounting Act
D) The McCain-Feingold Act