Business Analysis and Valuation — Exercises & Exam Workbook
Contents
Part A — Worked exercises (step by step) ........................................................................................................... 2
Chapter 2 — Accounting Analysis ..................................................................................................................... 2
Chapter 3 — From Earnings to Cash Flows, Growth, Terminal Value .............................................................. 6
Chapter 4 — Estimating the Cost of Financing ................................................................................................. 8
Chapter 5 — discounted cash flow Models .................................................................................................... 10
Chapter 6 — Multiples .................................................................................................................................... 12
Chapter 7 — Residual Income ........................................................................................................................ 14
Part B — ~30 exam questions with answers....................................................................................................... 16
Open-book multiple-choice (1 pt each; −1/3 for a wrong answer) ................................................................ 16
Conceptual / theory questions ....................................................................................................................... 16
Exercise questions .......................................................................................................................................... 18
Page 1 of 19
, Business Analysis and Valuation — Exercises & Exam Workbook
Part A — Worked exercises (step by step)
Chapter 2 — Accounting Analysis
2.1 Long-term contract — revenue recognition (input method)
Given
Contract value USD 3.4bn; expected total cost USD 2.4bn (so expected profit USD 1.0bn); duration 2
years.
Year 1: 60% of total cost is incurred. Year 2: actual cumulative cost is USD 2.55bn.
1. Measure progress by cost incurred ÷ estimated total cost. Year 1 progress = 60%.
2. Year 1 revenue = 60% × 3.4 = $2.04bn; Year 1 cost = 60% × 2.4 = $1.44bn → Year 1 profit = $0.60bn.
3. Year 2 revenue = remainder = 3.4 − 2.04 = $1.36bn; Year 2 cost = cumulative 2.55 − 1.44 = $1.11bn →
Year 2 profit = $0.25bn.
4. Cumulative profit = 0.60 + 0.25 = $0.85bn (below the $1.0bn expected, because actual cost ran over).
✓ Answer: Year 1: revenue $2.04bn, profit $0.60bn. Year 2: revenue $1.36bn, profit $0.25bn.
Management’s cost estimate drives the recognised figure → audit-risk area.
2.2 Inventory under first-in, first-out (FIFO) — cost of goods sold (COGS) and ending inventory
Given
Purchases in order: 2,400 @ €16, 1,800 @ €18, 1,200 @ €20, 600 @ €22 (6,000 bottles, €108,000 total).
Sold 4,300 bottles at €28.95 each. First-in, first-out.
1. Revenue = 4,300 × €28.95 = €124,485.
2. cost of goods sold = oldest units first: 2,400@€16 (€38,400) + 1,800@€18 (€32,400) + 100@€20 (€2,000)
= €72,800.
3. Ending inventory = newest units left: 1,100@€20 (€22,000) + 600@€22 (€13,200) = €35,200.
4. Gross profit = 124,485 − 72,800 = €51,685. (LIFO would reverse the COGS/inventory split: higher cost of
goods sold, lower profit, lower inventory.)
✓ Answer: Revenue €124,485; cost of goods sold €72,800; ending inventory €35,200; gross profit €51,685.
2.3 Diluted earnings per share (EPS) — treasury-stock method
Given
Net income €23mn; 8,000,000 weighted-average shares; 300,000 options at a €35 exercise price; average
share price €55.
1. Basic EPS = 23,000,,000,000 = €2.875.
2. Cash raised on exercise = 300,000 × €35 = €10,500,000.
3. Shares repurchased with that cash = 10,500,000 / €55 = 190,909.
4. Net new shares = 300,000 − 190,909 = 109,091 → diluted shares = 8,109,091.
5. Diluted EPS = 23,000,,109,091 = €2.836 (≤ basic, always).
✓ Answer: Basic €2.875; diluted €2.836. If net income were negative, the options would be antidilutive →
diluted = basic.
Page 2 of 19
, Business Analysis and Valuation — Exercises & Exam Workbook
2.4 Impairment — International Financial Reporting Standards (IFRS) vs US Generally Accepted Accounting
Principles (GAAP) (two cases)
Given
Carrying amount €180,000 in both cases. Case 1: undiscounted cash flows €190,000; value-in-use
(present value (PV)) €160,000; fair value €170,000; costs to sell €20,000. Case 2: undiscounted €160,000;
present value €140,000; fair value €100,000; costs to sell €20,000.
1. International Financial Reporting Standards — recoverable amount = max(fair value − costs to sell, value
in use). US Generally Accepted Accounting Principles — first a recoverability test (carrying vs.
undiscounted cash flows); only if it fails, write down to fair value.
2. Case 1 International Financial Reporting Standards: max(170,000−20,000; 160,000) = 160,000 < 180,000
→ impair €20,000.
3. Case 1 US Generally Accepted Accounting Principles: 180,000 < 190,000 (undiscounted) → recoverable
→ no impairment.
4. Case 2 International Financial Reporting Standards: max(100,000−20,000; 140,000) = 140,000 → impair
€40,000.
5. Case 2 US Generally Accepted Accounting Principles: 180,000 > 160,000 → fails → write down to fair
value 100,000 → impair €80,000.
✓ Answer: Case 1: International Financial Reporting Standards −€20,000, US Generally Accepted
Accounting Principles €0. Case 2: International Financial Reporting Standards −€40,000, US Generally
Accepted Accounting Principles −€80,000. International Financial Reporting Standards allows a later
reversal; US Generally Accepted Accounting Principles never does.
2.5 Deferred tax liability — accelerated tax depreciation
Given
Machine cost €100,000. Books: straight-line over 10 years. Tax: straight-line over 7 years. Tax rate 25%.
1. deferred tax liability (DTL) = (book carrying value − tax carrying value) × tax rate.
2. Year 1: book 90,000 vs. tax 85,714 → diff 4,286 → DTL = 25% × 4,286 = €1,071.
3. Year 2: 80,000 vs. 71,429 → diff 8,571 → deferred tax liability = €2,143.
4. Year 3: 70,000 vs. 57,143 → diff 12,857 → deferred tax liability = €3,214. The liability grows while tax
depreciation outruns book, then reverses later.
✓ Answer: deferred tax liability rises €1,071 → €2,143 → €3,214. Paying less tax early is value-accretive
(time value).
2.6 Financial instruments — three measurement categories
Given
€100mn bond, 4% coupon (paid semi-annually). After 6 months: €2mn coupon received and a €1mn
unrealised fair-value gain.
1. Held-to-maturity (amortised cost): recognise the €2mn coupon in profit; ignore the unrealised gain.
Profit +€2mn; balance sheet €100mn.
2. Fair value through other comprehensive income (OCI): €2mn coupon in profit; €1mn gain in other
comprehensive income (equity). Profit +€2mn; balance sheet €101mn; accumulated other
comprehensive income €1mn.
Page 3 of 19
Contents
Part A — Worked exercises (step by step) ........................................................................................................... 2
Chapter 2 — Accounting Analysis ..................................................................................................................... 2
Chapter 3 — From Earnings to Cash Flows, Growth, Terminal Value .............................................................. 6
Chapter 4 — Estimating the Cost of Financing ................................................................................................. 8
Chapter 5 — discounted cash flow Models .................................................................................................... 10
Chapter 6 — Multiples .................................................................................................................................... 12
Chapter 7 — Residual Income ........................................................................................................................ 14
Part B — ~30 exam questions with answers....................................................................................................... 16
Open-book multiple-choice (1 pt each; −1/3 for a wrong answer) ................................................................ 16
Conceptual / theory questions ....................................................................................................................... 16
Exercise questions .......................................................................................................................................... 18
Page 1 of 19
, Business Analysis and Valuation — Exercises & Exam Workbook
Part A — Worked exercises (step by step)
Chapter 2 — Accounting Analysis
2.1 Long-term contract — revenue recognition (input method)
Given
Contract value USD 3.4bn; expected total cost USD 2.4bn (so expected profit USD 1.0bn); duration 2
years.
Year 1: 60% of total cost is incurred. Year 2: actual cumulative cost is USD 2.55bn.
1. Measure progress by cost incurred ÷ estimated total cost. Year 1 progress = 60%.
2. Year 1 revenue = 60% × 3.4 = $2.04bn; Year 1 cost = 60% × 2.4 = $1.44bn → Year 1 profit = $0.60bn.
3. Year 2 revenue = remainder = 3.4 − 2.04 = $1.36bn; Year 2 cost = cumulative 2.55 − 1.44 = $1.11bn →
Year 2 profit = $0.25bn.
4. Cumulative profit = 0.60 + 0.25 = $0.85bn (below the $1.0bn expected, because actual cost ran over).
✓ Answer: Year 1: revenue $2.04bn, profit $0.60bn. Year 2: revenue $1.36bn, profit $0.25bn.
Management’s cost estimate drives the recognised figure → audit-risk area.
2.2 Inventory under first-in, first-out (FIFO) — cost of goods sold (COGS) and ending inventory
Given
Purchases in order: 2,400 @ €16, 1,800 @ €18, 1,200 @ €20, 600 @ €22 (6,000 bottles, €108,000 total).
Sold 4,300 bottles at €28.95 each. First-in, first-out.
1. Revenue = 4,300 × €28.95 = €124,485.
2. cost of goods sold = oldest units first: 2,400@€16 (€38,400) + 1,800@€18 (€32,400) + 100@€20 (€2,000)
= €72,800.
3. Ending inventory = newest units left: 1,100@€20 (€22,000) + 600@€22 (€13,200) = €35,200.
4. Gross profit = 124,485 − 72,800 = €51,685. (LIFO would reverse the COGS/inventory split: higher cost of
goods sold, lower profit, lower inventory.)
✓ Answer: Revenue €124,485; cost of goods sold €72,800; ending inventory €35,200; gross profit €51,685.
2.3 Diluted earnings per share (EPS) — treasury-stock method
Given
Net income €23mn; 8,000,000 weighted-average shares; 300,000 options at a €35 exercise price; average
share price €55.
1. Basic EPS = 23,000,,000,000 = €2.875.
2. Cash raised on exercise = 300,000 × €35 = €10,500,000.
3. Shares repurchased with that cash = 10,500,000 / €55 = 190,909.
4. Net new shares = 300,000 − 190,909 = 109,091 → diluted shares = 8,109,091.
5. Diluted EPS = 23,000,,109,091 = €2.836 (≤ basic, always).
✓ Answer: Basic €2.875; diluted €2.836. If net income were negative, the options would be antidilutive →
diluted = basic.
Page 2 of 19
, Business Analysis and Valuation — Exercises & Exam Workbook
2.4 Impairment — International Financial Reporting Standards (IFRS) vs US Generally Accepted Accounting
Principles (GAAP) (two cases)
Given
Carrying amount €180,000 in both cases. Case 1: undiscounted cash flows €190,000; value-in-use
(present value (PV)) €160,000; fair value €170,000; costs to sell €20,000. Case 2: undiscounted €160,000;
present value €140,000; fair value €100,000; costs to sell €20,000.
1. International Financial Reporting Standards — recoverable amount = max(fair value − costs to sell, value
in use). US Generally Accepted Accounting Principles — first a recoverability test (carrying vs.
undiscounted cash flows); only if it fails, write down to fair value.
2. Case 1 International Financial Reporting Standards: max(170,000−20,000; 160,000) = 160,000 < 180,000
→ impair €20,000.
3. Case 1 US Generally Accepted Accounting Principles: 180,000 < 190,000 (undiscounted) → recoverable
→ no impairment.
4. Case 2 International Financial Reporting Standards: max(100,000−20,000; 140,000) = 140,000 → impair
€40,000.
5. Case 2 US Generally Accepted Accounting Principles: 180,000 > 160,000 → fails → write down to fair
value 100,000 → impair €80,000.
✓ Answer: Case 1: International Financial Reporting Standards −€20,000, US Generally Accepted
Accounting Principles €0. Case 2: International Financial Reporting Standards −€40,000, US Generally
Accepted Accounting Principles −€80,000. International Financial Reporting Standards allows a later
reversal; US Generally Accepted Accounting Principles never does.
2.5 Deferred tax liability — accelerated tax depreciation
Given
Machine cost €100,000. Books: straight-line over 10 years. Tax: straight-line over 7 years. Tax rate 25%.
1. deferred tax liability (DTL) = (book carrying value − tax carrying value) × tax rate.
2. Year 1: book 90,000 vs. tax 85,714 → diff 4,286 → DTL = 25% × 4,286 = €1,071.
3. Year 2: 80,000 vs. 71,429 → diff 8,571 → deferred tax liability = €2,143.
4. Year 3: 70,000 vs. 57,143 → diff 12,857 → deferred tax liability = €3,214. The liability grows while tax
depreciation outruns book, then reverses later.
✓ Answer: deferred tax liability rises €1,071 → €2,143 → €3,214. Paying less tax early is value-accretive
(time value).
2.6 Financial instruments — three measurement categories
Given
€100mn bond, 4% coupon (paid semi-annually). After 6 months: €2mn coupon received and a €1mn
unrealised fair-value gain.
1. Held-to-maturity (amortised cost): recognise the €2mn coupon in profit; ignore the unrealised gain.
Profit +€2mn; balance sheet €100mn.
2. Fair value through other comprehensive income (OCI): €2mn coupon in profit; €1mn gain in other
comprehensive income (equity). Profit +€2mn; balance sheet €101mn; accumulated other
comprehensive income €1mn.
Page 3 of 19
