Multiple Choice Questions with Accurate
Solutions for Discounted Cash Flow (DCF)
Analysis Complete A+ Graded.
The lower a company's DSO, the faster it
A) accrues wage expenses
B) pays cash for prepaid expenses
C) receives cash from credit sales
D) pays vendors for services provided
Verified Answer -C) receives cash from credit sales
Depreciation refers to which of the following?
A) Funds that a company uses to purchase, improve, expand, or replace
physical assets
B) An expense that approximates the reduction of the book value of a
company's long-term fixed assets
C) An expense that reduces the value of a company's definite life
intangible asset
D) A measure of how much cash a company needs to fund its operations
on an ongoing basis
Verified Answer -B) An expense that approximates the reduction of the
book value of a company's long-term fixed assets
A small company has a cost of equity of 12.5%. The risk-free rate is 4.2%,
the market risk premium is 5.0%, and the company's stock has a beta of
1.2. Has any small company "size premium" been assigned?
A) No
,B) Yes, the premium is .85%
C) Yes, the premium is 1.25%
D) Yes, the premium is 2.30%
Verified Answer -D) Yes, the premium is 2.30%
Without a size premium, the cost of equity would be 4.2% + (1.2 x 5.0%)
= 10.2%. But we know the cost of equity is 12.5%, so the difference
(12.5% - 10.2% = 2.30%) must be caused by the size premium.
Which of the following are inputs in calculating a company's quick ratio?
I. Accounts receivable
II. Cash flow
III. Gross sales
IV. Current liabilities
A) I and III
B) I and IV
C) II and III
D) II and IV
Verified Answer -B) I and IV
A stock has an expected return of 5.5% and a Beta of .80. By how much
will the excess return of the stock change if the excess return of the S&P
500 falls by 1%?
A) It will fall by 1.2%
, B) It will rise by 1.2%
C) It will fall by .8%
D) It will rise by .8%
Verified Answer -C) It will fall by .8%
Excess return = expected return above risk-free rate. The expected return of
any stock will change by an amount equal to the expected return change
of the market portfolio (S&P 500) multiplied by the stock's Beta. A 1%
decline in expected return in the S&P 500 will cause the stock to decline by
1% x .8 = .8%.
Company A has a very young workforce. Company B has a relatively old
workforce. Both companies have pension plan funding ratios of .85. If
interest rates decline, which company's funding ratio is more vulnerable?
A) Company A
B) Company B
C) They are equally vulnerable
D) Neither is vulnerable
Verified Answer -A) Company A
A decrease in a company's current assets equates to
A) a decrease in cash
B) an increase in cash
C) no change in cash
D) an increase in assets
Verified Answer -B) an increase in cash
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