FIN 340 EXAM WITH 100% CORRECT
ANSWERS
Basic approach to forecasting financial statements - Answer- Forecast operating items
Choose preliminary financial policy and forecast items
Identify financing surplus or deficit
Repeat until satisfied
Forecasting operating items - Answer- Forecast sales to grow at chosen growth rate
Forecast in percentage of sales
Forecast depreciation
Alternatives to paying a special dividend - Answer- Repurchase stock , repay debt ,
purchase marketable securities
Alternatives to paying special dividend - Answer- Repurchase stock , repay debt ,
purchase marketable securities
Adjustments need to be made if - Answer- Economies of scale exists
Excess capacity
Lump assets
Factors that the firm cannot control- WACC - Answer- Interest rates in economy
General level of stock prices
Tax rates
Factors that the firm can control - WACC - Answer- Capital structure
Dividend payout ratio
Capital budgeting decisions
The four basic financial statements contained in the annual report - Answer- balance
sheet, income statement , stockholders equity , statement of cash flows
3 aspects of cash flows that affect investment value - Answer- Financial asset derived
from the amount of cash flows (bigger is better)
Timing of cash flows stream (sooner better)
Investors are risk adverse ( pay more for less risk)
Net cash flow differs from accounting profit because - Answer- some of the revenues
and expenses shown in accounting profit is not yet received or paid out
Net cash flow is - Answer- net income + depreciation
, Operating current assets does NOT include - Answer- short term investments
Operating current assets does include - Answer- cash, inventory and receivables
Operating current liabilities - Answer- accounts payable and accruals
WACC - Answer- average rate of return required by all company investors
WACC - Answer- Affected by capital structure
Interest rates
Risk of the firm
Investors attitude toward risk
Net operating working capital - Answer- difference from operating current assets and
liabilities
Operating long term assets - Answer- support operations such as net plant and
equipment
Total net operating capital - Answer- total amount of capital needed to run the business
NOPAT - Answer- after tax profit a company would have if it had no debt and no
investments on non operating assets, better measure of performance than net income
Return on Invested capital - Answer- It measures the rate of return that the operations
are generating . best measure of operating performance
Free Cash flow - Answer- amount of cash flow available for distribution to investors ,
NOPAT minus total net operating capital
5 uses of fcf - Answer- Pay interest to debt holders, repay debt holders, pay dividends,
repurchase stock, buy short term investments
MVA - Answer- represents the difference between the total market value of a firm and
the total amount of investor supplied capital, if market value of debt and preferred stock
equa l values reported in financial statements then MVA is the difference between the
market value of a forms stock and the amount of equity its shareholders have
EVA - Answer- is the difference between after tax operating profit and the total dollar
cost of capital including cost of equity capital , estimate of value created by
management
MVA/EVA observations - Answer- If has negative EVA , MVA negative ; if have positive
EVa , MVA positive
ANSWERS
Basic approach to forecasting financial statements - Answer- Forecast operating items
Choose preliminary financial policy and forecast items
Identify financing surplus or deficit
Repeat until satisfied
Forecasting operating items - Answer- Forecast sales to grow at chosen growth rate
Forecast in percentage of sales
Forecast depreciation
Alternatives to paying a special dividend - Answer- Repurchase stock , repay debt ,
purchase marketable securities
Alternatives to paying special dividend - Answer- Repurchase stock , repay debt ,
purchase marketable securities
Adjustments need to be made if - Answer- Economies of scale exists
Excess capacity
Lump assets
Factors that the firm cannot control- WACC - Answer- Interest rates in economy
General level of stock prices
Tax rates
Factors that the firm can control - WACC - Answer- Capital structure
Dividend payout ratio
Capital budgeting decisions
The four basic financial statements contained in the annual report - Answer- balance
sheet, income statement , stockholders equity , statement of cash flows
3 aspects of cash flows that affect investment value - Answer- Financial asset derived
from the amount of cash flows (bigger is better)
Timing of cash flows stream (sooner better)
Investors are risk adverse ( pay more for less risk)
Net cash flow differs from accounting profit because - Answer- some of the revenues
and expenses shown in accounting profit is not yet received or paid out
Net cash flow is - Answer- net income + depreciation
, Operating current assets does NOT include - Answer- short term investments
Operating current assets does include - Answer- cash, inventory and receivables
Operating current liabilities - Answer- accounts payable and accruals
WACC - Answer- average rate of return required by all company investors
WACC - Answer- Affected by capital structure
Interest rates
Risk of the firm
Investors attitude toward risk
Net operating working capital - Answer- difference from operating current assets and
liabilities
Operating long term assets - Answer- support operations such as net plant and
equipment
Total net operating capital - Answer- total amount of capital needed to run the business
NOPAT - Answer- after tax profit a company would have if it had no debt and no
investments on non operating assets, better measure of performance than net income
Return on Invested capital - Answer- It measures the rate of return that the operations
are generating . best measure of operating performance
Free Cash flow - Answer- amount of cash flow available for distribution to investors ,
NOPAT minus total net operating capital
5 uses of fcf - Answer- Pay interest to debt holders, repay debt holders, pay dividends,
repurchase stock, buy short term investments
MVA - Answer- represents the difference between the total market value of a firm and
the total amount of investor supplied capital, if market value of debt and preferred stock
equa l values reported in financial statements then MVA is the difference between the
market value of a forms stock and the amount of equity its shareholders have
EVA - Answer- is the difference between after tax operating profit and the total dollar
cost of capital including cost of equity capital , estimate of value created by
management
MVA/EVA observations - Answer- If has negative EVA , MVA negative ; if have positive
EVa , MVA positive
