FINANCIAL REPORTING AND ANALYSIS FINAL EXAM QUESTIONS WITH CORRECT ANSWERS 2025

FINANCIAL REPORTING AND ANALYSIS: FINAL EXAM
QUESTIONS WITH CORRECT ANSWERS 2025
AllGofGtheGfollowingGareGstepsGinGtheGanalysisGandGvaluationGframeworkGusedGtoGunderstandGtheGfundame
ntalsGofGaGbusinessGandGdetermineGestimatesGofGitsGvalueGexcept:

a.GAnalyzeGtheGfirm'sGstrategyGinGtermsGofGtheGcompetition.

b.GDeriveGforecastsGofGfutureGearningsGfromGtheGfirm'sGprojectedGfinancialGstatements.

c.GAssessGtheGqualityGofGtheGfirm'sGaccountingGandGfinancialGreporting.

d.GObtainGtheGnationalGrankingGofGtheGfirm'sGexternalGauditors.G-GCORRECTGANSWERG-
d.GObtainGtheGnationalGrankingGofGtheGfirm'sGexternalGauditors.



WhenGderivingGtheGequityGvalueGofGaGfirm,GanGanalystGforecastsGtheGrealGdividendsGexpectedGtoGbeGpaidGi
nGtheGfuture.GInGthisGcase,GwhichGdiscountGrateGshouldGbeGused?

a.GTheGrisk-freeGrateGofGreturn

b.GTheGnominalGrateGofGreturn

c.GTheGriskGadjustedGrateGofGreturn

d.GTheGrealGrateGofGreturnG-GCORRECTGANSWERG-d.GTheGrealGrateGofGreturn



TheGfollowingGdataGpertainsGtoGZonkGCorp.,GaGmanufacturerGofGballGbearingsG(dollarGamountsGinGmillions):

TotalGassets$7,460

Interest-bearingGdebt$3,652

AverageGpre-taxGborrowingGcost10.5%

CommonGequity:GBookGvalue$2,950

MarketGvalue$13,685

IncomeGtaxGrate35%

MarketGequityGbeta1.13

AssumeGthatGZonkGisGaGpotentialGleveragedGbuyoutGcandidate.GAssumeGthatGtheGbuyerGintendsGtoGputGinG
placeGaGcapitalGstructureGthatGhasG70GpercentGdebtGwithGaGpretaxGborrowingGcostGofG14GpercentGandG30Gp
ercentGcommonGequity.GComputeGtheGrevisedGequityGbetaGforGZonkGbasedGonGtheGnewGcapitalGstructure.

a.G3.91

b.G4.34

,c.G4.77

d.G4.35G-GCORRECTGANSWERG-d.G4.35



LeveredGmarketGequityGbetaG=GunleveredGmarketGequityGbetaG(1G+G(1-
t)G[MVGdebt\MVGequity])G=G1.13*(1+(1-.35)[.70/.30]=4.35



TheGfollowingGdataGpertainsGtoGZonkGCorp.,GaGmanufacturerGofGballGbearingsG(dollarGamountsGinGmillions):

TotalGassets$7,460

Interest-bearingGdebt$3,652

AverageGpre-taxGborrowingGcost10.5%

CommonGequity:GBookGvalue$2,950

MarketGvalue$13,685

IncomeGtaxGrate35%

MarketGequityGbeta1.13

AssumingGthatGrisklessGrateGisG4.6%GandGtheGmarketGpremiumGisG7.3%,GcalculateGZonk'sGcostGofGequityGca
pital:

a.G12.85%

b.G8.28%

c.G10.4%

d.G11.89%G-GCORRECTGANSWERG-a.G12.85%



costGofGequityGcapitalG=G.046+1.13(.073)G=G12.85%



WhichGofGtheGfollowingGisGnotGaGproblemGwithGusingGaGdividend-basedGvaluationGformula?

a.GDividendsGrepresentGaGtransferGofGwealthGtoGshareholders.

b.GDividendsGareGarbitrarilyGestablished.

c.GSomeGfirmsGdoGnotGpayGaGregularGperiodicGdividend.

d.GItGisGaGchallengeGtoGforecastGtheGfinalGliquidatingGdividend.G-GCORRECTGANSWERG-
a.GDividendsGrepresentGaGtransferGofGwealthGtoGshareholders.

,EquityGvaluationGmodelsGbasedGonGdividends,GcashGflows,GandGearningsGhaveGbeenGtheGtopicGofGmanyGthe
oreticalGandGempiricalGresearchGstudiesGinGrecentGyears.GAllGofGtheGfollowingGareGtrueGregardingGevidenceG
fromGtheseGstudiesGexcept

a.GshareGpricesGinGtheGcapitalGmarketsGgenerallyGcorrelateGcloselyGwithGshareGvalue.

b.GtemporaryGdeviationsGofGpriceGfromGvalueGoccur.

c.GshareGpricesGdoGnotGalwaysGequalGshareGvalues.

d.GunexpectedGchangesGinGearningsGdoGnotGcorrelateGwithGchangesGinGstockGprices.G-GCORRECTGANSWERG-
d.GunexpectedGchangesGinGearningsGdoGnotGcorrelateGwithGchangesGinGstockGprices.



TheGtheoryGsupportingGdividends-basedGvaluationGis

a.GdividendsGareGequivalentGtoGtheGdifferenceGbetweenGtheGcomprehensiveGincomeGandGtheGrequiredGinc
omeG("normalGearnings")GofGtheGfirm.

b.GdividendsGrepresentGtheGfreeGcashGflowsGintoGtheGfirm.

c.GdividendsGareGvalue-
relevantGtoGcommonGequityGshareholdersGbecauseGtheGdividendsGareGcashGflowsGdirectlyGtoGtheGequityGsh
areholders.

d.GdividendsGareGestablishedGbyGtheGpoliciesGofGtheGmanagersGandGtheGboardGofGdirectorsGofGtheGfirm.G-
GCORRECTGANSWERG-c.GdividendsGareGvalue-

relevantGtoGcommonGequityGshareholdersGbecauseGtheGdividendsGareGcashGflowsGdirectlyGtoGtheGequityGsh
areholders.



UnderGtheGCAPM,GtheGexpectedGrateGofGreturnGisGbasedGonGtheGfollowingGcomponent(s):

a.GtheGrisk-freeGrateGofGreturn.

b.GtheGfirm'sGsystematicGrisk,GestimatedGwithGtheGfirm'sGmarketGbeta.

c.GtheGmarketGriskGpremium.

d.GallGofGtheseGresponsesGareGcorrect.G-GCORRECTGANSWERG-d.GallGofGtheseGresponsesGareGcorrect.



UnderGtheGCAPM,GtheGexpectedGrateGofGreturnGcompensatesGinvestorsGfor

a.GunsystematicGrisk.

b.GsystematicGrisk.

c.GtheGtimeGvalueGofGmoney.

, d.GbothGsystematicGriskGandGtheGtimeGvalueGofGmoney.G-GCORRECTGANSWERG-
d.GbothGsystematicGriskGandGtheGtimeGvalueGofGmoney.



TheGdividends-basedGvaluationGapproachGcannotGbeGusedGforGfirmsGthatGdoGnotGpayGdividends.

a.GTrueG

b.GFalseG-GCORRECTGANSWERG-b.GFalse



ExamplesGofGtypesGofGrisksGthatGareGnondiversifiableGwithinGtheGmarket-
wideGportfolioGofGstocksGmightGinclude

a.Geconomy-wideGinflation.

b.GrecessionaryGeconomicGconditions.

c.GtechnologicalGdiscoveriesGinGanGindustry.

d.GbothGeconomy-wideGinflationGandGrecessionaryGeconomicGconditions.G-GCORRECTGANSWERG-
d.GbothGeconomy-wideGinflationGandGrecessionaryGeconomicGconditions.



ExamplesGofGtypesGofGrisksGthatGareGdiversifiableGwithinGtheGmarket-
wideGportfolioGofGstocksGmightGinclude

a.GtheGeffectsGofGcompetitionGonGtheGdemandGforGaGfirm'sGproducts.

b.GchangesGinGeconomy-wideGpricesGforGspecificGinputs,GlikeGcoffee.

c.GlaborGstrikes.

d.GallGofGtheseGanswerGchoicesGareGcorrect.G-GCORRECTGANSWERG-
d.GallGofGtheseGanswerGchoicesGareGcorrect.



SupposeGaGfirmGhasGaGbetaGofG1.25,GtheGrisk-freeGyieldGonGlong-
termGgovernmentGsecuritiesGisG4.0%,GandGtheGmarket-
riskGpremiumGisG6.0%.GTheGexpectedGreturnGunderGtheGCAPMGis

a.G11.5%.

b.G6.0%.

c.G4.0%.

d.G7.5%.G-GCORRECTGANSWERG-a.G11.5%.