FSA EXAM WITH 100% CORRECT ANSWERS 2024.

MODULE 3 - answer-MODULE 3 Describe the concept of asset turnover. What does the concept mean and why is it so important to understanding and interpreting financial performance? - answer-Asset turnover measures the amount of revenue compared with the investment in an asset. AT measures productivity. When AT increase, ROA increases, which causes ROE to increase, which increases shareholder value. (a) Explain how an increase in financial leverage can increase a company's ROE. (b) Given the potentially positive relation between financial leverage and ROE, why don't we see companies with 100% financial leverage (entirely nonowner financed)? - answer-(a) Increasing leverage increases ROE as long as the assets earn a greater operating return than the cost of the additional debt (b) As FL increases so does the risk of bankruptcy and default. We don't see 100% FL because that would pose too much risk a company Explain what it means when a company's ROE exceeds its RNOA. What about when the reverse occurs? - answer-An ROE that exceeds RNOA implies a positive return on nonoperating activities. This results from borrowed funds being invested in operating assets whose return (RNOA) exceeds the cost of borrowing. In this case, borrowing money increases ROE. When the reverse occurs, the company has net nonoperating assets (nonoperating assets nonoperating liabilities). This is "negative" net nonoperating obligations in the ROE disaggregation. Discontinued operations are typically viewed as a nonoperating activity in the analysis of the balance sheet and the income statement. What is the rationale for this treatment? - answer-Because income derived from discontinued operations is no longer coming from a source that is a basic part of how the company operate What analysis challenge arises when a company's equity is negative? What can be done to meet the challenge? - answer-When equity is negative, ratios that include equity, are uninterpretable. This includes the all-important ratio, return on equity, ROE. We can add back the book value of Treasury stock to both total equity and total assets and recalculate any ratios involving those measures. MODULE 4 - answer-MODULE 4 Companies often borrow money to fund operating activities. Why do lenders distinguish between cyclical cash needs and cash needed to fund operating losses? - answer-Because cash needed to fund operating losses is riskier. Operating losses are not routine and can signal ongoing liquidity problems or bankruptcy. What is credit risk? What is the main purpose of performing a credit analysis? - answer-Credit risk encapsulates the chance of loss resulting from a creditor's default. Assessing credit risk via a credit analysis allows suppliers of credit to determine 1) whether they wish to extend credit to a particular entity, and if so, 2) what the credit terms should be. Why are missing or understated liabilities especially critical for credit analysis? - answer-Because various methods exist for companies to obtain "off-balance-sheet" financing, it is imperative to adjust the financials for any obligations not listed on the balance sheet because these are real economic obligations that must be honored and may have senior claim in certain situations. Explain the concepts of liquidity and solvency. Why is performance on these two dimensions crucial to company survival? - answer-Liquidity refers to cash availability: how much cash the company has and how quickly it can generate more on short notice. Solvency refers to a company's ability to meet its financial obligations over the short and long run. Both measures provide perspective on companies' credit risks and thus measure the likelihood of default or potential bankruptcy. How does coverage analysis differ from measures of liquidity and solvency? - answer-Coverage analysis differs from typical measures of liquidity and solvency because it uses flow variables to calculate how likely it is that the company will be able to make principal and interest payments. Why do lenders impose debt covenants on borrowers? Explain the three types ofdebt covenants. - answer-To limit credit risk by protecting cash flows the company will have to repay the loan. Aid creditors by providing evidence of deteriorating conditions within the firm. 1. Require borrowers to take certain actions 2. Restrict the borrower from taking certain actions 3. Require the borrower to maintain certain financial conditions MODULE 11 - answer-MODULE 11 What does the concept of financial statement articulation mean in the forecasting process? - answer-The forecasted income statement, balance sheet, and statement of cash flows should articulate in the same way that historical financial statements do; that is, they should tie together In addition to recent revenues trends, what other types and sources of information can we use to help us forecast revenues? - answer-We can incorporate external (nonfinancial) information into the forecasting process. Like, incorporating the expected level of macroeconomic activity, the degree to which the competitive landscape is changing, recent changes in laws or regulations, and any strategic initiatives that have been announced by management, and so forth. Capital expenditures are usually an important cash outflow for a company, and they figure prominently into forecasts of net operating assets. What sources of information about capital expenditures can we draw upon? - answer-Historical capital expenditures are reported in the statement of cash flows. Forecasted capital expenditures (CAPEX) are sometimes discussed in the Management Discussion and Analysis (MD&A) section of the 10-K and also in meetings with analysts or in other public disclosures. MODULE 12 - answer-MODULE 12