ACCT7106 Final Exam - Semester 1, 2023
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Part I – Multiple choice questions
INSTRUCTIONS
1. You need to answer all questions.
2. You are required to type your responses.
3. For numeric questions, do not include dollar/cents symbols (e.g. $/c), comma (,) or
percentage (%) in your answers. For example, 1.56 should be rounded off as 1.6;1.55 should
be rounded off as 1.6; 1.54 should be rounded off as 1.5; 10% should be written as 10.
4. Unless otherwise stated, answer questions based on the methods/theories taught in lectures.
ACCT7106 Final Exam - Semester 1, 2023
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Question 1. Which of the following statements is INCORRECT? (1 mark)
[ ] A. Suppliers are more likely to be powerful if they offer products which are differentiated
[ ] B. Rivalry between existing competitors is likely to be higher when industry is growing
very fast
[ ] C. Suppliers are more likely to be powerful if the supplier’s industry is more concentrated
that the industry it sells to
[ ] D. None of the options
Question 2. What is the usual classification of investment in associates in the reformulated
statement of financial position? (1 mark)
[ ] A. Financial assets
[ ] B. Operating assets
[ ] C. Financial obligation
[ ] D. Operating liabilities
Question 3. A firm has P/E ratio of 15 and a price-to-sales ratio of 3. What should be the net
profit margin? (1 mark)
[ ] A. 10 %
[ ] B. 30 %
[ ] C. 5 %
[ ] D. 20 %
Question 4. Use the following information:
Net property plant and equipment (FY2021) = $ 200m
Net property plant and equipment (FY2022) = $ 190m
Depreciation expense (FY2022) = $ 40m
How much new investment in property plant and equipment was made during FY2022 if there
was no disposal, no impairment, and no revaluation of PPE during the year? (1 mark)
[ ] A. $ 50m
[ ] B. $ 40m
[ ] C. $ 10m
[ ] D. $ 30m
ACCT7106 Final Exam - Semester 1, 2023
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Question 5. What should be the appropriate classification of accrued compensation on the
reformulated balance sheet? (1 mark)
[ ] A. Operating asset
[ ] B. Financial asset
[ ] C. Operating liability
[ ] D. Financial obligation
Question 6. Which of the following is a possible reason for the fact that for most companies,
the book value of equity is not equal to the market value of equity? (1 mark)
[ ] A. Financial statements capture future growth opportunities.
[ ] B. Some intangible assets are not recognised on the statement of financial position.
[ ] C. R&D expenditures and advertising expenditures are always capitalised.
[ ] D. None of the options
Question 7. What is the appropriate classification of preference dividends on the reformulated
income statement? (1 mark)
[ ] A. Core operating income from sales
[ ] B. Unusual operating income
[ ] C. Total net financial expenses
[ ] D. Operating OCI
Question 8. Which of the following is an unlevered figure? (1 mark)
[ ] A. Free cash flows
[ ] B. Common stockholder’s equity
[ ] C. Net transactions with shareholders
[ ] D. Comprehensive income
Question 9. Use the following information:
Common stockholders’ equity (FY2022) = $ 90m
Common stockholders’ equity (FY2021) = $ 80m
Weighted average cost of capital (WACC) = 10 %
Cost of equity = 12 %
Operating income after tax (FY2022) = $ 15m
Comprehensive income after tax (FY2022) = $ 12m
ACCT7106 Final Exam - Semester 1, 2023
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What was the Residual Income (RI) during FY2022? (1 mark)
[ ] A. $ 1.2m
[ ] B. - $ 1.2m
[ ] C. - $ 2.4m
[ ] D. $ 2.4m
Question 10. Which of the following statements is TRUE? (1 mark)
[ ] A. Fundamental investing relies on intuition.
[ ] B. Passive investing accepts the market price as value.
[ ] C. Passive investors forecast future payoffs to discover the value of an investment.
[ ] D. None of the options
Question 11. Which of the following statements is TRUE? (1 mark)
[ ] A. The terminal growth rate for a fast-growing company is higher than the nominal GDP
growth rate of the country.
[ ] B. When using comparable company multiple approach for valuation, choice of multiple
does not make a difference in valuation if we calculate multiples from the reformulated
financial statements.
[ ] C. Value of the enterprise will be more that the current book value of net operating assets
(NOA) if the enterprise is expected to generate positive residual operating income (ReOI) in
future
[ ] D. None of the options
Question 12. A company has made a passive investment by purchasing stocks (< 20 %) of
another company. In the reformulated statement of cash flows, this item will be classified as?
(1 mark)
[ ] A. Cash flow from operations (C)
[ ] B. Cash flow from investing (I)
[ ] C. Debt financing cash flows (F)
[ ] D. Equity financing cash flows (d)
ACCT7106 Final Exam - Semester 1, 2023
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Question 13. After reformulating the statement of cash flow for a company, you notice that a
company has generated positive cash flows from operations (C), investment (I), and financing
(d + F). How will you interpret this situation? (1 mark)
[ ] A. Positive cash flows from operating, investing, and financing activities is a sign of
healthy and mature business.
[ ] B. Positive cash flows from operating, investing, and financing activities suggest that the
company is growing very fast and it is a young company.
[ ] C. Positive cash flows from operating, investing, and financing activities suggest that the
company is not generating sufficient cash to fund cash investment.
[ ] D. None of the options
Question 14. The return an investor demands to compensate for the risk that she is taking by
investing in a security is called: (1 mark)
[ ] A. Expected return
[ ] B. Required return
[ ] C. Market risk premium
[ ] D. None of the options
Question 15. Which of the following relations is INCORRECT? (1 mark)
[ ] A. FCF = OI - ∆ NOA
[ ] B. CI = NPAT - OCI
[ ] C. CI = OI - NFE
[ ] D. FCF = NFE - ∆ NFO + d
Question 16. Which of the following are ADVANTAGES of the residual operating income
model (ReOI)? (2 marks)
There can be more than one correct answer. Please select all the correct answers.
[ ] A. It can be applied to companies which do not pay dividends.
[ ] B. It can be applied using consensus analyst forecasts.
[ ] C. It does not require forecasting net dividends.
[ ] D. It does not require forecasting capital structure of the company.
ACCT7106 Final Exam - Semester 1, 2023
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Question 17. Which of the following items are usually classified as operating assets on the
reformulated statement of financial position? (2 marks)
There can be more than one correct answer. Please select all the correct answers.
[ ] A. Inventories
[ ] B. Right-of-use assets
[ ] C. Financial cash
[ ] D. Passive investment
Question 18. Which of the following items are usually classified as financial obligations on
the reformulated statement of financial position? (2 marks)
There can be more than one correct answer. Please select all the correct answers.
[ ] A. Banks overdraft
[ ] B. Employee benefit obligations
[ ] C. Lease obligations
[ ] D. Trade payable
Question 19. Which of the following items are considered in calculating net transactions with
shareholders? (2 marks)
There can be more than one correct answer. Please select all the correct answers.
[ ] A. Dividends paid
[ ] B. Shares issued
[ ] C. Operating OCI
[ ] D. Financing OCI
Question 20. In the reformulation of the statement of cash flows for JB Hi-Fi discussed in the
class, which of the following is/are TRUE regarding stock-based compensation? (2 marks)
There can be more than one correct answer. Please select all the correct answers.
[ ] A. They were ignored as they are non-cash items and will not affect the cash flows.
[ ] B. They were treated as cash outflow due to operating activities.
[ ] C. They were treated as cash inflow due to financing activities.
[ ] D. They were treated as cash outflow due to investing activities.
ACCT7106 Final Exam - Semester 1, 2023
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Part II – Written questions
Question 21. Below is the summary of reformulated statement of financial position and
statement of profit and loss for Sunshine Retailers Ltd. Adjusted cash flow from operations (C)
for Sunshine Retailers Ltd during FY2022 is $ 1,000. Answer the following questions. (8
marks)
Sunshine Retailers Ltd
Reformulated Statement of Financial Position
Assets ('$) Liabilities and Equity ('$)
June 2021 June 2022 June 2021 June 2022
Operating assets 16,000 16,500 Operating liabilities 10,000 9,700
Financial assets 2,000 2,000 Financial obligations 1,500 1,300
18,000 18,500 Common equity 6,500 7,500
18,000 18,500
Sunshine Retailers Ltd
Reformulated Statement of Profit and Loss
For the year ending on June 30, 2022 ('$)
Sales 48,000
Operating income (after tax) 2,400
Net financial income (after tax) 50
Round-off your answers up to one place of decimal (For example, 1.56 should be rounded
off as 1.6;1.55 should be rounded off as 1.6; 1.54 should be rounded off as 1.5; 10% should
be written as 10). Do not use dollar sign ($), comma (,), or percentage (%) in your answers.
A. What are net operating assets (NOA) as of June 2022?
B. What are net financial assets (NFA) as of June 2022?
C. What is comprehensive income (after tax) during FY2022?
D. What is net transaction with the shareholders (d) during FY2022?
E. What is free cash flow (FCF) for FY2022?
F. What is cash investment in operating assets (I) during FY2022?
G. What is debt financing cash flows (F) for FY2022?
H. What is operating profit margin (in percentage) during FY2022?
ACCT7106 Final Exam - Semester 1, 2023
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Question 22. Refer to the statement of cash flows for Hawken Ltd for the year ending on June
30, 2022. Answer the following questions. (2 marks)
Hawken Ltd
Statement of Cash Flows (FY2022)
Cash flow from operating activities
Receipts from customers 500.0
Payments to suppliers and employees (300.0)
Net interest paid (10.0)
Income tax paid (50.0)
140.0
Cash flow from investing activities
Additions to property and plant (100.0)
Purchases of short-term investments (100.0)
Sale of short-term investments 150.0
(50.0)
A. What should be the adjusted cash flow from operations (C) during FY2022 assuming the
corporate tax rate of 30 percent?
B. What should be the adjusted cash flow from investments (I) during FY2022 assuming there
is no change in operating cash and financial cash?
Round-off your answers up to one place of decimal (For example, 1.56 should be rounded
off as 1.6;1.55 should be rounded off as 1.6; 1.54 should be rounded off as 1.5; 10% should
be written as 10). Do not use dollar sign ($), comma (,), or percentage (%) in your answers.
Question 23. Your friend, Maya, says that earnings can be manipulated by managers. She
argues that one should always look at the cash flows by ignoring the non-cash transactions
completely as cash flows cannot be manipulated and thus they will give an unbiased
understanding of a company’s performance. Do you agree or disagree with her? Clearly explain
your argument. (3 mark)
Question 24. The following information is available for a company, Carmody Ltd. (6 marks)
Beta = 0.8
Market Risk Premium (MRP) = 6%
Risk free rate = 3.2%
Terminal growth rate (g) = 4%
Common stockholders’ equity (CSE) at the beginning of FY2023 = $ 324m
Stock price at the beginning of FY2023 = $ 28
Number of shares outstanding = 10m
ACCT7106 Final Exam - Semester 1, 2023
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You have also obtained the following analyst consensus forecasts (in cents) for dividends and
earnings for Carmody Ltd.
FY2023 FY2024
DPS 108.00 116.64
EPS 324.00 349.92
Assuming the company will achieve the steady state after FY2024, answer the following
questions.
Round-off your answers up to one place of decimal (For example, 1.56 should be rounded
off as 1.6;1.55 should be rounded off as 1.6; 1.54 should be rounded off as 1.5; 10% should
be written as 10). Do not use dollar sign ($), comma (,), or percentage (%) in your answers.
A. What is the continuing value (in dollars) of Carmody Ltd from the Dividend Discount Model
(DDM)?
B. What is the present value (in dollars) of continuing value of Carmody Ltd from the Dividend
Discount Model (DDM)?
C. What is the value per share (in dollars) of Carmody Ltd at the beginning of FY2023 from
the Dividend Discount Model (DDM)?
D. What is the continuing value (in dollars) of Carmody Ltd from the Residual Income Model
(RIM)?
E. What is the present value (in dollars) of continuing value of Carmody Ltd from the Residual
Income Model (RIM)?
F. What is the value per share (in dollars) of Carmody Ltd at the beginning of FY2023 from
the Residual Income Model (RIM)?
Question 25. Using your valuation in the previous question (Question 24), answer the
following questions. Clearly label your answers. (3 marks)
A. Do you obtain the same valuation or different valuations for Carmody Ltd from DDM and
RIM (Question 24)? Clearly explain your answer.
B. Provide a buy or sell recommendation for Carmody Ltd.
Question 26. Your friend is analysing the financial statements of SuperBiz Ltd. She has made
the following set of forecasts for FY2023-25 for this company. She shared her forecasts with
you. Spot if there are any errors in these forecasts. Assume that there was no dirty surplus item
that was forecast in the equity statement. (4 marks)
ACCT7106 Final Exam - Semester 1, 2023
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2022A 2023E 2024E 2025E
$m $m $m $m
Net operating assets 82.0 100.0 120.0 140.0
Net financial obligations 20.0 20.0 25.0 30.0
Common stockholders’ equity 62.0 80.0 85.0 110.0
Sales 150.0 200.0 240.0 260.0
Operating income (after-tax) 15.0 20.0 24.0 26.0
Net financial expense (after-tax) (0.8) (0.8) (1.0) (1.2)
Comprehensive income (after-tax) 14.2 19.2 23.0 23.8
Net transactions with shareholders 2.0 8.0 9.8
Free cash flows 1.2 4.0 6.0
Question 27. The following information is available for a company, Gold Coast Ltd.
Number of shares outstanding = 19 m
Stock price at the beginning of FY2023 = $1
Net financial obligation (NFO) at the beginning of FY2023 = $ 4m
It is estimated that Gold Coast Ltd. will generate free cash flows (FCF) of $ 1.1m in FY 2023
and $ 1.21m in FY2024 respectively. After FY2024, free cash flows are expected to grow at 5
percent forever.
What is the implied cost of equity for Gold Coast Ltd. assuming that net borrowing cost (after
tax) is 2%? (3 marks)
Round-off your answers up to one place of decimal (For example, 1.56 should be rounded
off as 1.6;1.55 should be rounded off as 1.6; 1.54 should be rounded off as 1.5; 10% should
be written as 10). Do not use dollar sign ($), comma (,), or percentage (%) in your answers.
Question 28. Using the information from the previous question (Question 27), answer the
following question.
The required return on equity for you to invest in Gold Coast Ltd is 14%. Will you invest in
this company? Clearly explain your answer. (2 marks)
Question 29. FantasticBiz Ltd has recently recorded an increase of more than 71 percent in its
operating income for 2022. You are surprised with this result and suspect that FantasticBiz Ltd
may have manipulated the financial statements. You obtained the following information by
analysing the financial statements.
2019 2020 2021 2022
$m $m $m $m
Gross trade receivables 2.10 2.50 2.90 3.30
ACCT7106 Final Exam - Semester 1, 2023
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Allowance for doubtful debt 0.20 0.24 0.28 0.16
Inventories 1.10 1.30 1.50 2.50
Deferred revenue 2.20 2.44 2.88 1.36
Sales 10.00 12.00 14.00 16.00
OI (after-tax) 1.00 1.20 1.40 2.40
Adjusted CFO (C) 1.10 1.30 1.50 1.70
Using the information above, identify the red flag(s) for FantasticBiz Ltd and discuss how
managers may have manipulated their operating income for the most recent financial year.
Clearly explain your answer. (4 marks)