Concordia University
John Molson School of Business
FINA 410
Winter 2021
Final Exam
Conceptual Questions
Q1. Walter White recently quitted his high school chemistry teacher job and joined the Bank of BKB as a
financial analyst. His first task is to capitalize R&D expenses and reflect the adjustments on the three
major financial statements. After reviewing his work, one of the Bank of BKB’s clients asks White to
explain the reason that R&D expense is not capitalized following the US GAAP guideline. White
suggests that the reason is that the value of R&D activities cannot be divided asset-by-asset, and therefore
R&D activities do not meet the requirements of an asset on the Balance Sheet per US GAAP guideline.
Q: Is White’s suggestion on the reason that R&D expense is not capitalized following the US GAAP
guideline justifiable? Why?
Not justifiable. R&D is not capitalized per US GAAP because it is uncertain if R&D activities would
generate future economic benefits and the economic value of R&D activities could not be reliably
measured until a patent is filed or a product is released.
Q2. Hank Schrader has been a senior financial analyst at the Bank of BKB for more than five years. His
current major duty consists of supervising the new hires and college interns. Today, Schrader is reviewing
the discounted cash flow valuation results finished by the new hire, Steven Gomez. Gomez told Schrader
that the implied stock price of New Mexico Foods is $15.38 per share according to his estimation.
However, Schrader notices that Gomez accidently used the unlevered beta to calculate the cost of equity
of New Mexico Foods. Therefore, Schrader suggests the correct implied stock price per share of New
Mexico Foods should be lower than $15.38.
Q: Is Schrader’s suggestion on the correct implied stock price per share of New Mexico Foods justifiable?
Why?
Yes. Unlevered beta is smaller than levered beta. Therefore, the cost of equity that Gomez accidently used
is smaller than the correct cost of equity. This implies that the correct implied stock price is lower than
$15.38.
, Concordia University
John Molson School of Business
FINA 410
Winter 2021
Final Exam
Q3. Saul Goodman is interviewing with the Bank of BKB for a financial analyst position. The interviewer
is interested in knowing whether he understands the concept of enterprise value. Goodman explains that
the enterprise value is calculated as market value of equity, plus book value of debt, and minus cash and
short-term investments. Goodman suggests that the reason that cash and short-term investments are
deducted when calculating the enterprise value is because cash and short-term investment captures the
necessary reinvestment to the firm that support a firm’s operation.
Q: Is Goodman’s suggestion on the reason that cash and short-term investment are deducted justifiable?
Why?
No. We subtract cash and short-term investment because they could be used to partially/entirely paid off
debt.
Q4. Jesse Pinkman is a credit risk analyst at the Bank of BKB. He is currently analyzing the cash
availability of Albuquerque Foods, a retail company. He collects the following statement and data from
the company’s most recent annual report. According to the information, Pinkman suggests Albuquerque
Foods has enough cash to pay back debts on time in the coming future.
Statement:
Item 7: MD&A – Our credit facility requires the maintenance of a times interest earned ratio at the 2.60 to
3.00 range.
Data:
Albuquerque Foods
Partial Income Statements
2020 2019
EBIT – Unadjusted 3039.0 2674.0
EBIT – Adjusted for R&D and lease expense 3061.0 2703.0
EBITDA – Unadjusted 5412.0 4963.0
EBITDA – Adjusted for R&D and lease expense 5434.0 4992.0
Interest Expense 1048.0 978.0
Q: Is Pinkman’s suggestion on Albuquerque Foods’ cash availability to pay back its debt on time
justifiable? Why?
No. EBIT and EBITDA are not cash.
John Molson School of Business
FINA 410
Winter 2021
Final Exam
Conceptual Questions
Q1. Walter White recently quitted his high school chemistry teacher job and joined the Bank of BKB as a
financial analyst. His first task is to capitalize R&D expenses and reflect the adjustments on the three
major financial statements. After reviewing his work, one of the Bank of BKB’s clients asks White to
explain the reason that R&D expense is not capitalized following the US GAAP guideline. White
suggests that the reason is that the value of R&D activities cannot be divided asset-by-asset, and therefore
R&D activities do not meet the requirements of an asset on the Balance Sheet per US GAAP guideline.
Q: Is White’s suggestion on the reason that R&D expense is not capitalized following the US GAAP
guideline justifiable? Why?
Not justifiable. R&D is not capitalized per US GAAP because it is uncertain if R&D activities would
generate future economic benefits and the economic value of R&D activities could not be reliably
measured until a patent is filed or a product is released.
Q2. Hank Schrader has been a senior financial analyst at the Bank of BKB for more than five years. His
current major duty consists of supervising the new hires and college interns. Today, Schrader is reviewing
the discounted cash flow valuation results finished by the new hire, Steven Gomez. Gomez told Schrader
that the implied stock price of New Mexico Foods is $15.38 per share according to his estimation.
However, Schrader notices that Gomez accidently used the unlevered beta to calculate the cost of equity
of New Mexico Foods. Therefore, Schrader suggests the correct implied stock price per share of New
Mexico Foods should be lower than $15.38.
Q: Is Schrader’s suggestion on the correct implied stock price per share of New Mexico Foods justifiable?
Why?
Yes. Unlevered beta is smaller than levered beta. Therefore, the cost of equity that Gomez accidently used
is smaller than the correct cost of equity. This implies that the correct implied stock price is lower than
$15.38.
, Concordia University
John Molson School of Business
FINA 410
Winter 2021
Final Exam
Q3. Saul Goodman is interviewing with the Bank of BKB for a financial analyst position. The interviewer
is interested in knowing whether he understands the concept of enterprise value. Goodman explains that
the enterprise value is calculated as market value of equity, plus book value of debt, and minus cash and
short-term investments. Goodman suggests that the reason that cash and short-term investments are
deducted when calculating the enterprise value is because cash and short-term investment captures the
necessary reinvestment to the firm that support a firm’s operation.
Q: Is Goodman’s suggestion on the reason that cash and short-term investment are deducted justifiable?
Why?
No. We subtract cash and short-term investment because they could be used to partially/entirely paid off
debt.
Q4. Jesse Pinkman is a credit risk analyst at the Bank of BKB. He is currently analyzing the cash
availability of Albuquerque Foods, a retail company. He collects the following statement and data from
the company’s most recent annual report. According to the information, Pinkman suggests Albuquerque
Foods has enough cash to pay back debts on time in the coming future.
Statement:
Item 7: MD&A – Our credit facility requires the maintenance of a times interest earned ratio at the 2.60 to
3.00 range.
Data:
Albuquerque Foods
Partial Income Statements
2020 2019
EBIT – Unadjusted 3039.0 2674.0
EBIT – Adjusted for R&D and lease expense 3061.0 2703.0
EBITDA – Unadjusted 5412.0 4963.0
EBITDA – Adjusted for R&D and lease expense 5434.0 4992.0
Interest Expense 1048.0 978.0
Q: Is Pinkman’s suggestion on Albuquerque Foods’ cash availability to pay back its debt on time
justifiable? Why?
No. EBIT and EBITDA are not cash.
