Equity Asset Valuation Final Exam Questions with Correct Answers Latest Update 2025
based on exhibit 1 [selected financial information], which of the following provides the strongest
evidence that Chrome Displays economies of scale:
a. increasing net sales
b. profit margins that are increasing with net sales
c. gross profit margins that are increasing with net sales - Answers gross profit margins that are
increasing with net sales
economies of scale are a situation in which average costs decrease with increasing sales volume.
Chrome's gross margins have been increasing with net sales. Gross margins that increase with sales
levels provide evidence of economies of scale, assuming that higher levels of sales reflect increased unit
sales. Gross margin more directly reflects the cost of sales than does profit margin
Based on exhibit 2, the job candidate most likely using a bottom-up approach to model net sales is:
Candidate A - Net sales will grow at the average annual growth rate in net sales over the 2010-2012 time
period
Candidate B - industry sales will grow at the same rate as nominal GDP, but Chrome will have a 2
percentage points decline in market share
Candidate C - net sales will row 50 basis points slower than nominal GDP - Answers Candidate A
a bottom up approach for developing inputs to equity valuation models begins at the level of the
individual company or a unit within the company. by modeling net sales using the average growth rate,
candidate A is using a bottom-up approach. both B and C are using a top-down approach, which begins
at the level of the overall economy
Based on exhibit 2, the modeling approach used by Candidate B to project future net sale is most
accurately classified as a:
,"industry sales will grow at the same rate as nominal GDP, but Chrome will have a 2 percentage points
decline in market share"
a. hybrid approach
b. top-down approach
c. bottom-up approach - Answers Top-Down Approach
a top-down approach usually begins at the level of the overall economy. Candidate B assumes industry
sales will grow at the same rate as nominal gdp but that chrome will have 2 percentage points decline in
market share. candidate b is not using any elements of a bottom-up approach; therefore, a hybrid
approach is not being employed
Based on exhibit 2, forecasted interest expense will reflect changes in Chrome's debt level under the
forecast assumptions used by:
Candidate A - 2013 effective tax rate will be the same as the 2012 rate
Candidate B - 2013 effective tax rate will equal the blended statutory rate of 30%
Candidate C - 2013 effective tax rate will be the same as the average effective tax rate over the 2010-
2012 time period - Answers Candidate A
in forecasting financing costs such as interest expense, the debt/equity structure of a company is a key
determinant. Accordingly, a method that recognizes the relationship between the income statement
account (interest expense) and the balance sheet account (debt) would be a preferable method for
forecasting interest expense when compared with methods that forecast based solely on the income
statement account. By using the effective interest rate (interest expense divided by average gross debt),
Candidate A is taking the debt-equity structure into account whereas B and C are not taking the balance
sheet into consideration.
Which return metric should French use to assess Archway's five-year historical performance relative to
its competitors:
,competitors are located in different countries with different tax structures
a. Return on Equity
b. Return on Invested Capital
c. Return on Capital Employed - Answers Return on Capital Employed
the return on capital employed (ROCE) is a pre-tax return measure than can be useful in the peer
comparison of companies in countries with different tax structures. Archway's two main competitors are
located in different countries with significantly different tax structures, and therefore, a pre-tax measure
of return on capital is better than an after-tex measure
Based on the current competitive landscape presented in exhibit 3, French should conclude that
Archway's ability to:
Low threat of substitutes, rivalry is low, large number of suppliers, specialized products, high fixed costs
to enter the industry > low threat of new entrants
a. pass along price increases is high
b. demand lower input prices from supplies is low
c. generate above-average returns on invested capital is low - Answers pass along price increases is high
Porter's five forces framework in exhibit 3 describes an industry with high barriers to entry, high
customer witching costs, and a specialized product. Furthermore, the primary production inputs from
the large group of suppliers are considered basic commodities. These favorable industry characteristics
will likely enable Archway to pass along price increases and generate above average returns on invested
capital
based on the current competitive landscape presented in exhibit 3, Archway's operating profit margins
over the forecast horizon are least likely to:
Low threat of substitutes, rivalry is low, large number of suppliers, specialized products, high fixed costs
to enter the industry > low threat of new entrants
, a. decrease
b. remain constant
c. increase - Answers a. decrease
the current favorable characteristics of the industry (high barriers to entry, low bargaining power of
suppliers and buyers, low threat of substitutes), coupled with Archway's dominant market share
position, is likely to lead to Archway's profit margins being at least equal to or greater than current levels
over the forecast horizon
French's approach to forecasting Archway's working capital accounts would be most likely classified as a:
"begins by forecasting financial statements and balance sheet items. he uses historical efficiency ratios
to forecast the company's working capital accounts"
a. hybrid approach
b. top-down approach
c. bottom-up approach - Answers bottom up approach
French is using a bottom-up approach to forecast Archway's working capital accounting by using the
company's historical efficiency ratios to project future performance
the most appropriate response to Wright's questions about the technological developments is to:
"what change in the calculation of the terminal value would you make if a technological development
that would adversely affect Archway was forecast to occur sometime beyond your financial forecast
horizon"
a. increase the required return
b. decrease the P/E multiple
based on exhibit 1 [selected financial information], which of the following provides the strongest
evidence that Chrome Displays economies of scale:
a. increasing net sales
b. profit margins that are increasing with net sales
c. gross profit margins that are increasing with net sales - Answers gross profit margins that are
increasing with net sales
economies of scale are a situation in which average costs decrease with increasing sales volume.
Chrome's gross margins have been increasing with net sales. Gross margins that increase with sales
levels provide evidence of economies of scale, assuming that higher levels of sales reflect increased unit
sales. Gross margin more directly reflects the cost of sales than does profit margin
Based on exhibit 2, the job candidate most likely using a bottom-up approach to model net sales is:
Candidate A - Net sales will grow at the average annual growth rate in net sales over the 2010-2012 time
period
Candidate B - industry sales will grow at the same rate as nominal GDP, but Chrome will have a 2
percentage points decline in market share
Candidate C - net sales will row 50 basis points slower than nominal GDP - Answers Candidate A
a bottom up approach for developing inputs to equity valuation models begins at the level of the
individual company or a unit within the company. by modeling net sales using the average growth rate,
candidate A is using a bottom-up approach. both B and C are using a top-down approach, which begins
at the level of the overall economy
Based on exhibit 2, the modeling approach used by Candidate B to project future net sale is most
accurately classified as a:
,"industry sales will grow at the same rate as nominal GDP, but Chrome will have a 2 percentage points
decline in market share"
a. hybrid approach
b. top-down approach
c. bottom-up approach - Answers Top-Down Approach
a top-down approach usually begins at the level of the overall economy. Candidate B assumes industry
sales will grow at the same rate as nominal gdp but that chrome will have 2 percentage points decline in
market share. candidate b is not using any elements of a bottom-up approach; therefore, a hybrid
approach is not being employed
Based on exhibit 2, forecasted interest expense will reflect changes in Chrome's debt level under the
forecast assumptions used by:
Candidate A - 2013 effective tax rate will be the same as the 2012 rate
Candidate B - 2013 effective tax rate will equal the blended statutory rate of 30%
Candidate C - 2013 effective tax rate will be the same as the average effective tax rate over the 2010-
2012 time period - Answers Candidate A
in forecasting financing costs such as interest expense, the debt/equity structure of a company is a key
determinant. Accordingly, a method that recognizes the relationship between the income statement
account (interest expense) and the balance sheet account (debt) would be a preferable method for
forecasting interest expense when compared with methods that forecast based solely on the income
statement account. By using the effective interest rate (interest expense divided by average gross debt),
Candidate A is taking the debt-equity structure into account whereas B and C are not taking the balance
sheet into consideration.
Which return metric should French use to assess Archway's five-year historical performance relative to
its competitors:
,competitors are located in different countries with different tax structures
a. Return on Equity
b. Return on Invested Capital
c. Return on Capital Employed - Answers Return on Capital Employed
the return on capital employed (ROCE) is a pre-tax return measure than can be useful in the peer
comparison of companies in countries with different tax structures. Archway's two main competitors are
located in different countries with significantly different tax structures, and therefore, a pre-tax measure
of return on capital is better than an after-tex measure
Based on the current competitive landscape presented in exhibit 3, French should conclude that
Archway's ability to:
Low threat of substitutes, rivalry is low, large number of suppliers, specialized products, high fixed costs
to enter the industry > low threat of new entrants
a. pass along price increases is high
b. demand lower input prices from supplies is low
c. generate above-average returns on invested capital is low - Answers pass along price increases is high
Porter's five forces framework in exhibit 3 describes an industry with high barriers to entry, high
customer witching costs, and a specialized product. Furthermore, the primary production inputs from
the large group of suppliers are considered basic commodities. These favorable industry characteristics
will likely enable Archway to pass along price increases and generate above average returns on invested
capital
based on the current competitive landscape presented in exhibit 3, Archway's operating profit margins
over the forecast horizon are least likely to:
Low threat of substitutes, rivalry is low, large number of suppliers, specialized products, high fixed costs
to enter the industry > low threat of new entrants
, a. decrease
b. remain constant
c. increase - Answers a. decrease
the current favorable characteristics of the industry (high barriers to entry, low bargaining power of
suppliers and buyers, low threat of substitutes), coupled with Archway's dominant market share
position, is likely to lead to Archway's profit margins being at least equal to or greater than current levels
over the forecast horizon
French's approach to forecasting Archway's working capital accounts would be most likely classified as a:
"begins by forecasting financial statements and balance sheet items. he uses historical efficiency ratios
to forecast the company's working capital accounts"
a. hybrid approach
b. top-down approach
c. bottom-up approach - Answers bottom up approach
French is using a bottom-up approach to forecast Archway's working capital accounting by using the
company's historical efficiency ratios to project future performance
the most appropriate response to Wright's questions about the technological developments is to:
"what change in the calculation of the terminal value would you make if a technological development
that would adversely affect Archway was forecast to occur sometime beyond your financial forecast
horizon"
a. increase the required return
b. decrease the P/E multiple
