First Examination Finance 3321 s2
FSA 3321 – Summer 1 (2005) Exam 1 Moore
First Examination – Finance 3321
Spring 2005 (Moore)
Student ID: ______Printed Name: ______
Ethical conduct is an important component of any profession. The Texas Tech University Code of Student Conduct is in force during this exam. Students providing or accepting unauthorized assistance will be assigned a score of zero (0) for this piece of assessment. Using unauthorized materials during the exam will result in the same penalty. Ours’ should be a self-monitoring profession. It is the obligation of all students to report violations of the honor code in this course. By signing below, you are acknowledging that you have read the above statement and agree to abide by the stipulated terms.
Student’s Signature: ______
Where indicated, use the financial statement for Dell-U-Dead, Inc. (a large computer manufacturer and distributor that sells in both the wholesale and retail markets).
Clearly Circle the BEST response for each of the following questions:
1. Which of the following is considered a financial intermediary?
a. Accountants
b. Bond Raters
c. Financial Analysts
d. Venture Capitalists
e. Media
2. Which of the following is considered an information intermediary?
a. Insurance Companies
b. Investment Banks
c. Mutual Funds
d. The SEC
e. Venture Capitalists
3. Which of the following is an accounting strategy that can be chosen by managers?
a. Accounting conventions and regulations
b. Tax and financial accounting linkages
c. Contracting and governance
d. Supplementary disclosures
e. Third party auditing
4. In the US, the accounting treatment (GAAP) for recognizing sales commissions in the period the selling activity takes place and not necessarily in the period when commissions are paid is determined and justified by:
a. Accrual Accounting
b. Matching Principle
c. Periodicity Principle
d. Revenue Recognition Principle
e. The IASB
5. Which of the following is not defined as being part of the firm’s business environment?
a. Labor markets
b. Capital market structure
c. Product markets
d. Customers
e. Business regulations
6. Which is the first step in a structured equity security analysis and valuation?
a. Prospective Analysis
b. Accounting Analysis
c. Financial Analysis
d. Business Strategy Analysis
e. Implementing Valuation Models
7. Which step in a structured business valuation analysis involves evaluating performance using ratios and cash flow analysis?
a. Prospective Analysis
b. Accounting Analysis
c. Financial Analysis
d. Business Strategy Analysis
e. Implementing Valuation Models
8. One of the main reasons that firms are allowed flexible financial accounting standards under GAAP is:
a. It provides firms a better opportunity to report the underlying economic substance of transactions and events.
b. It gives the firms the opportunity to reduce the volatility of earnings so that investors can provide better forecasts of future performance.
c. It allows managers to better tie earnings to performance for compensation purposes.
d. It gives firms the opportunity to mark-to-market the physical assets so that balance sheet values are more relevant to decision makers.
e. None of the above.
9. The last line item reported on the income statement is:
a. Net Revenue
b. Operating Income
c. Comprehensive Income
d. Income from Continuing Operations
e. Gross Profit
10. Which of the following line items is reported earliest in the income statement?
a. Extraordinary Expenses
b. Operating Income
c. Comprehensive Income
d. Income from Continuing Operations
e. Gross Profit
11. Which of the following statements is incorrect?
a. The SEC has the legal authority to proscribe GAAP.
b. Transparent financial reporting practices allow users to get a true and fair picture of the firm.
c. Conservatism of financial reporting standards may reduce valuation relevance.
d. Prospective analysis involves forecasting future events and outcomes.
e. The external auditor certifies the financial statements are correct.
12. Which of the following is an element of the “Five-Forces” model?
a. Cost Leadership
b. Maintaining Competitive Advantage(s)
c. Bargaining Power of Customers
d. Product Differentiation
e. Ability to supply the same product or service at a lower cost
13. An industry having a high degree of price competition would be characterized by:
a. High Industry Concentration, Low Legal Barriers to Entry, Low Product Differentiation
b. Few Exit Barriers, Low First mover advantage, Low Product Differentiation
c. Low Industry Concentration, Easy Distribution Access, High Customer Switching Costs
d. High Concentration, Low Fixed-Variable Cost Ratio, Low Firm Switching Costs
e. Supply < Demand, Low Supplier Switching Costs, Steep Industry Learning Curves
14. Which of the following would lead to the lowest degree of industry price competition?
a. Low Industry Concentration, Low Legal Barriers to Entry, Low Product Differentiation
b. Few Exit Barriers, Low First mover advantage, High Product Differentiation
c. Low Industry Concentration, Low Distribution Access, Low Customer Switching Costs
d. High Industry Concentration, Low Fixed-Variable Cost Ratio, Low Customer Switching Costs
e. Supply < Demand, High Legal Barriers to Entry, Steep Industry Learning Curves
15. Which of the following strategies would lead to pure cost leadership or pure product differentiation strategies?
a. Economies of scale and scope, high R&D investment, tight cost control
b. Superior product variety, lower input costs, High investment in R&D
c. Lower input costs, flexible distribution, low investment in R&D
d. Low investment in brand image, Low investment in R&D, Focus on Cost Control
e. Simpler product designs, Tight cost control, superior product quality
16. Which of the following strategies would lead to a mixture of cost leadership and product differentiation?
a. Economies of scale and scope, simpler product design, tight cost control
b. Superior product variety, more flexible delivery, High investment in R&D
c. Lower input costs, low-cost distribution, high investment in R&D
d. High investment in brand image, High investment in R&D, Focus on Creativity
e. Simpler product designs, Tight cost control, Lower Input Cost
17. Determining whether the firm currently has the resources and capabilities to deal with the identified key success factors is an example of which?
a. Competitive Strategy Analysis
b. Differentiation Analysis
c. Analysis of the Degree of Actual and Potential Competition
d. Analysis of the Threat of Substitute Products
e. Analysis of the Bargaining Power in Input and Output Markets
18. WalMart’s ability to dictate price & delivery terms to manufacturers is an example of:
a. Buyer bargaining power
b. Supplier bargaining power
c. Product differentiation
d. Fixed-Variable Cost ratios
e. Exit Barriers
19. Which of the following does not necessarily create corporate value?
a. Managing the value chain
b. Maintaining a good fit between the company’s specialized resources and the portfolio of businesses in which the company is operating.
c. Good allocation of decision rights between the headquarters office and the business units to realize all the potential economies of scope.
d. Having internal measurement, information, and incentive systems to reduce agency costs.
e. Investing significant resources to product advertising and marketing activities.
20. Assume the beginning of the year value of equity was $1000 with a 7% required cost of equity set by the market. During the year, the firm generated an actual 12% return on equity. How much value was created during the year?
a. $50
b. $70
c. $120
d. $1,070
e. $1,120
21. McDonald’s operates in a price competitive industry. Which of the following strategies is incompatible with achieving a competitive advantage in this type of industry?
a. Economies of scope and scale
b. Investment in brand image
c. Lower input costs
d. Efficient production
e. Tight cost control systems
22. Which of the following is not used to determine the Rivalry Among Existing Firms?
a. Exit Barriers
b. Importance of Product for Costs and Quality
c. Fixed-Variable Costs
d. Excess Capacity
e. Economies of Scale
23. The main purpose of a firm’s financial reports is to:
a. Present Assets, Liabilities and Equity
b. Present Revenues and Expenses
c. Present Operating, Investing and Financing Cash Flows
d. Provide equity investors a means of determining the market value of the firm
e. Credibly communicate economic consequences of business activities.
24. Which of the following components of the annual financial report is not audited:
a. Balance Sheet
b. Income Statement
c. Management discussion and Analysis
d. Statement of Cash Flows
e. Statement of Owners Equity
25. How many years useful life did we assume for the classroom transparency projector?
a. 3
b. 5
c. 10
d. 15
e. 23
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