Fin 3321– Fall - 2014Exam 1Moore

Exam 1 – Fin 3321 - Fall - 2014

Printed Name:______Company you are valuing:______

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:______

Clearly Circle the BEST response for each of the following questions:

Multiple Choice (2.5 Points Each) (Answer ANY 4) – 10 Point Problem

1.According to classical financial theory, the objective of the firm’s management should be:

a.Maximize the book value of assets

b.Minimize the market value of liabilities

c.Maximize revenues

d.Minimize expenses

e.Maximize shareholder wealth

2.Which of the following is NOT Correct regarding accrual accounting?

a.Accrual accounting is the information basis of inputs for most classical finance models

b.Accrual accounting attempts to measure the period in which cash flows occur

c.Accrual accounting attempts to measure the cash flow consequences of transactions in the period cash flows occur.

d.Accrual accounting is a natural consequence of implementing the Matching Principle.

3.The impact of Labor Unions is part of which main element in Figure 1-2?

a.Business Environment

b.Business Strategy

c.Capital Markets

d.Accounting Environment

e.Accounting Strategy

4.Which is the second step in a structured equity security analysis and valuation project?

a.Prospective Analysis

b.Accounting Analysis

c.Financial Analysis

d.Business Strategy Analysis

e.Implementing Valuation Models

5.Identify the proper sequence in which following items would be presented on the income statement is:

  1. Interest Expense
  2. Gross Profit
  3. Advertising Expense
  4. OperatingIncome
  5. Comprehensive Income

a.2, 1, 3, 4, 5

  1. 1, 5, 2, 4, 3
  2. 3, 2, 4, 1, 5
  3. 2, 3, 4, 1, 5
  4. 1, 2, 3, 5, 4

6.An industry having a high degree of price competition would be characterized by:

  1. Low Industry Concentration, Low Legal Barriers to Entry, High Product Differentiation
  2. Few Exit Barriers, Low First mover advantage, Low Product Differentiation
  3. High Industry Concentration, High Distribution Access, LowFirmExcess Capacity
  4. Low Concentration, High Fixed-Variable Cost Ratio, Low First Mover Advantage
  5. Supply Demand, HighFirst Mover Advantage, High Fixed to Variable Cost Ratio

7.Which of the following would lead to the lowest degree of industry price competition?

  1. Low Industry Concentration, Low Legal Barriers to Entry, Low Product Differentiation
  2. Few Exit Barriers, High First Mover Advantage, Low Product Differentiation
  3. Low Industry Concentration, Low Distribution Access, Low Customer Switching Costs
  4. High Industry Concentration, Low Fixed-Variable Cost Ratio, Hiproduct differentiation
  5. Supply Demand, High Legal Barriers to Entry, Steep Industry Learning Curves

8.Which of the following models, theorems or hypotheses, if absolutely true in the real world, would make the activities of information production or financial analysis a socially and economically non-productive activities?

a.Capital Asset Pricing Model

b.Weak Form Efficient Market Hypothesis

c.Strong Form Efficient Market Hypothesis

d.Modigliani and Miller Theorem, without taxes

e.Residual Income Valuation Model

Short Problem 1 (show all work and briefly comment) (10 Points)

Assume PG is the fair insurance price for Good drivers and PB is the fair insurance price for Bad drivers, where PG= 100, PB= 350and 40% of the drivers are Good drivers. If insurers can perfectly distinguish good and bad drivers, what price(s) will result in the mandatory insurance market (assume linear risk preferences and insurers cannot, on average, overcharge customers)?

How does the mandatory (regulation) element in the above assumptions impact the pricing outcome?

How would the result change if insurers were banned from gathering information regarding the quality of the drivers? In other words, no information was available.

Short Problem 2 – Overs and Unders (5 Points)

Analyze the following transactions (omissions or incorrect accounting treatments) and assess whether the accounts are Overstated, Understated, or No Effect. Fill in the appropriate boxes as (O), (U), (N). Base your analysis on Proper GAAP. Number 5 relates to impact resulting from the decision.

Short Problem 3 – Goodwill and M&A Activity (5 Points)

Acquirer Company buys Target Company. Target’s pre-acquisition balance sheet at historical cost showed Total Assets at $730,000 and Total Liabilities at $420,000. Upon acquisition, Acquirer revalued Target’s assets at $1,285,000 and liabilities at $675,000.

Acquirer recognized paid $960,000 for Target. How much new Goodwill associated with the acquisition of Target must Acquirer recognize?

Short Essay Problem 1 (write concisely, with bullet points and sentences, but make your answer clear) (15 Points)

Company: ______

This Essay is directly related to the company your group is analyzing. For each of the 5 forces (Porter’s Model), conclude whether that item (force) leads to price-taking, price-setting or mixed behavior in the industry (e.g. Existing Competition = hi, low or mixed) and then provide 2 specific business activity examples for the industry that support this conclusion for each “force”. (e.g. low industry concentration).

Also, identify the three relevant competitors your group is using for industry benchmarks:

  1. ______
  1. ______
  1. ______

Short Essay Problem 2 (Use bullet points with complete sentences for clarity) (10 Points)

Company: ______

This Essay is directly related to the company your group is analyzing. Identify 5 (five) specific value drivers for the industry you analyzed and explain, briefly, how these business activities create value and lead to creating or maintaining competitive advantages.

Take-Home Portion of Exam

You must email the completed excel file (in .xls format) to my ttu email address no later than 11pm on Friday, September 26, 2014 to receive any credit for these problems.

The submitted file must have the following name:

Exam1-Fin3321-Fall2014-YourLastName-YourFirstName.xls

Problem 1 (10 Points) – Capitalize Operating Leases

Problem 2 (10 Points) - Goodwill

Problem 3 (10 Points) – Capitalize R&D Expenses

Problem 4 (15 Points) – Restate the 2009 Financials in good

form.

Take this page home with you

Your Personal 4-Digit Exam Code:

______

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