ACCT7106 Final Exam - Semester 2, 2021  

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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.  
4. Unless otherwise stated, answer questions based on the methods/theories taught in lectures.  
ACCT7106 Final Exam - Semester 2, 2021  

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Question 1. Which of the following is NOT one of Porter’s Five Forces? (1 mark)  

[ ] A. The threat of substitute products or services.  
[ ] B. The threat of entry of new firms.  
[ ] C. The threat of exit between existing firms.  
[ ] D. Rivalry between existing firms.  


Question 2. Which of the following should NOT be classified as an operating liability on the  
reformulated statement of financial position? (1 mark)  

[ ] A. Deferred revenue.  
[ ] B. Accrued compensation.  
[ ] C. Trade payables.  
[ ] D. Lease liability.  


Question 3. John works for a brokerage firm as an equity analyst. He calculated the value of a  
company equal to $ 8 per share using the dividend discount model (DDM) and used beta of 0.7  
in the calculation. He later found that there was a calculation error and the correct beta should  
have been 0.8. Assuming beta of 0.8 and no change in other parameters, the value of that  
company from the same valuation model will be: (1 mark)  

[ ] A. More than 8.  
[ ] B. Equal to 8.  
[ ] C. Less than 8.  
[ ] D. Cannot say without further information.  

Question 4. A firm has a P/E ratio of 18 and a profit margin of 5 percent. What should be the  
price-to-sales (P/Sales) ratio? (1 mark)  

[ ] A. 3.6  
[ ] B. 0.9  
[ ] C. 0.278  
[ ] D. Cannot say without further information.  

Question 5. What is the most appropriate classification of share of profits/loss on equity- 
accounted investments on the reformulated statement of profit and loss? (1 mark)  

[ ] A. Core operating income from sales.  
[ ] B. Core other operating income.  
[ ] C. Unusual operating income.  
[ ] D. Core net financial income.  


Question 6. Which of the following is FALSE? (1 mark)  

ACCT7106 Final Exam - Semester 2, 2021  

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[ ] A. ∆CSE = CI - d  
[ ] B. ∆NOA = OI - FCF  
[ ] C. ∆NFO = NFE + FCF - d  
[ ] D. FCF = F + d  


Question 7. What is a key determinant of sales revenue for a retailer? (1 mark)  

[ ] A. Profit margin.  
[ ] B. Outlook of senior management.  
[ ] C. The number of stores.  
[ ] D. Gross margin.  


Question 8. Sales growth is mean-reverting. What does it mean? Select the most appropriate  
answer. (1 mark)  

[ ] A. A firm with below-average rates of sales growth will tend to revert to a more ‘normal’  
level in the future.  
[ ] B. A firm with above-average rates of sales growth will tend to revert to a more ‘normal’  
level in the future.  
[ ] C. A firm with above- or below-average rates of sales growth will tend to revert to a more  
‘normal’ level in the future.  
[ ] D. None of the above.  


Question 9. It is expected that a company’s dividend at the end of year t+1 will be $10. The  
cost of equity for this company is 7 percent and WACC is 6 percent. The stock for this company  
is trading at $ 200 on the stock exchange. Assuming that after year t+1 the company’s dividends  
will grow at a constant rate, what is the implied terminal growth rate of dividends for this  
company? (1 mark)  

[ ] A. 1.9%  
[ ] B. 2.86%  
[ ] C. 1%  
[ ] D. 2%  


Question 10. Which of the following is a levered figure? (1 mark)  

[ ] A. Comprehensive income.  
[ ] B. Operating income after tax.  
[ ] C. Net operating assets.  
[ ] D. None of the above.  



Question 11. A firm incurred wage expenses of $ 48 M. The cash paid for wages was $ 40 M.  
What is the change in wages payable in this period? (1 mark)  

ACCT7106 Final Exam - Semester 2, 2021  

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[ ] A. Increase of $ 88 M.  
[ ] B. Decrease of $ 88 M.  
[ ] C. Increase of $ 8 M.  
[ ] D. Decrease of $ 8 M.  


Question 12. Which of the following is NOT a 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. Most of the long-term assets are reported at historical cost.  
[ ] B. Some intangible assets are not recognised on the statement of financial position.  
[ ] C. Financial statements may not capture future growth opportunities.  
[ ] D. R&D expenditures and advertising expenditures are always capitalised.  


Question 13. What is the correct classification of impairment losses on the reformulated  
statement of profit and loss? (1 mark)  

[ ] A. Core operating income from sales.  
[ ] B. Core other operating income.  
[ ] C. Unusual operating income.  
[ ] D. Core net financial income.  


Question 14. Use the following information:  
Net operating assets (FY2020) = $ 150 M  
Common stockholders’ equity = $ 100 M  
Weighted average cost of capital (WACC) = 6 %  
Cost of equity = 7 %  
Operating income after tax (During FY2021) = $ 15M  

What was the Residual Operating Income (ReOI) during FY2021? (1 mark)  

[ ] A. $ 8 M  
[ ] B. $ 4.5 M  
[ ] C. $ 9 M  
[ ] D. $ 6 M  


Question 15. Is the following statement true?  
It is reasonable to assume that the terminal growth rate will be higher than the nominal GDP  
growth rate for a rapidly growing company. (1 mark)  

[ ] A. True.  
[ ] B. False.  
[ ] C. Cannot say without further information.  

Question 16. Which of the following statements are TRUE? (2 marks)  
There can be more than one correct answer. Please select all the correct answers.  

ACCT7106 Final Exam - Semester 2, 2021  

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[ ] A. Held for trading securities are reported at the fair value on the statement of financial  
position with gains/losses recognised in the statement of profit and loss.  
[ ] B. Available for sale securities are reported at the fair value on the statement of financial  
position with gains/losses recognised in the statement of profit and loss.  
[ ] C. Held to maturity debt securities are reported at the fair value on the statement of financial  
position with gains/losses recognised in other comprehensive income (OCI).  
[ ] D. Available for sale securities are reported at the fair value on the statement of financial  
position with gains/losses recognised in other comprehensive income (OCI).  


Question 17. Which of the following statements are TRUE? (2 marks)  
There can be more than one correct answer. Please select all the correct answers.  

[ ] A. Levered valuation models do not require forecasting the company’s capital structure.  
[ ] B. Unlevered valuation models require forecasting the company’s capital structure.  
[ ] C. Residual Income Model (RIM) is an unlevered valuation model as it is used to calculate  
‘enterprise value’.  
[ ] D. Discounted Cash Flow Model (DCF) is an unlevered valuation model as it is used to  
calculate ‘enterprise value’.  


Question 18. Which of the following statements are FALSE? (2 marks)  
There can be more than one correct answer. Please select all the correct answers.  

[ ] A. Under the equity method of accounting, the share of profits/losses of associates is  
recognised in the statement of profit and loss.  
[ ] B. Equity method of accounting is used when a company has made passive investments (<  
20 % ownership) in another company.  
[ ] C. Consolidation method is used when a company has significant influence over another  
company (20 - 50 % ownership).  
[ ] D. Under the Consolidation method, subsidiary and parent’s accounts are added together  
to prepare the financial statements.  

Question 19. The following information is available:  
Beta = 1.2  
Market risk premium = 6%  
Risk-free rate = 1.8%  
After-tax cost of borrowing = 5%  
Market value of equity = $ 80M  
Net financial obligation = $ 20M  
Corporate income tax rate = 30%  
What will be the weighted average cost of capital (WACC) and cost of equity for this firm? (2  
marks)  
There can be more than one correct answer. Please select all the correct answers.  

[ ] A. WACC = 8.2%  
[ ] B. Cost of equity = 6.84%  
[ ] C. WACC = 6.47%  
[ ] D. Cost of equity = 9%  
ACCT7106 Final Exam - Semester 2, 2021  

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Question 20. Which of the following statements are TRUE? (2 marks)  
There can be more than one correct answer. Please select all the correct answers.  

[ ] A. A Strong form of efficient market hypothesis (EMH) refers to market efficiency when  
market prices only reflect all publicly available information.  
[ ] B. A Semi-strong form of efficient market hypothesis (EMH) refers to market efficiency  
when market prices only reflect all information available in past prices.  
[ ] C. If someone believes that semistrong-form inefficiencies exist in the market then the best  
trading strategy for them will be to buy and hold an index portfolio.  
[ ] D. None of the above.  


ACCT7106 Final Exam - Semester 2, 2021  

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Part II – Written questions  
Question 21. Below are financial statements that have been reformulated. The numbers shown  
are in dollars. There aresome items that are missing and they are indicated by capital letters  
from A to K. Calculate the missingvalues. (5 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). Do not use  
dollar sign ($) or comma (,) in your answers.  

Reformulated Statement of Financial Position  
June 2020 June 2021  

Operating assets $ 24,367 $ 26,803  
Financial assets A 14,521  
37,936 B  

Operating liabilities C 12,233  
Financial liabilities 16,785 15,107  
Common equity 8,795 D  
E F  

Reformulated Statement of Profit and Loss  
For the year ending on June 30, 2021  
Operating income after tax G  
Interest Income 45  
Interest Expense 472  
Comprehensive Income 2,285  
Reformulated Cash Flow Statement  
For the year ending on June 30, 2021  
Cash flow from operations $ 1,235  
Cash investment H  
Free Cash Flow I  

Net transactions with the shareholders (d) J  
Total financing flows (F) K  

A. What should be the value of G?  

B. What should be the value of H?  

C. What should be the value of I?  

ACCT7106 Final Exam - Semester 2, 2021  

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D. What should be the value of J?  

E. What should be the value of K?  

Question 22. The following information is available for companies A, B, C, and X for the  
fiscal year 2021. Assume that companies A, B, and C are comparable to company X. (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). Do not use  
dollar sign ($) or comma (,) in your answers.  
A B C X  
Stock Price (in $) 12 90 144  
Shares outstanding in millions 100 70 50 20  

Assets (in $M) 300 3,360 1,580 140  
Liabilities (in $M) 60 210 140 20  

Sales (in $M) 600 2,100 7,200 80  
NPAT (in $M) 80 300 600 20  

A. What should be the value of company X per share if we use P/E multiple (average) for  
valuation?  
B. What should be the value of company X per share if we use P/B multiple (average) for  
valuation?  
C. What should be the value of company X per share if we use P/Sales multiple (average) for  
valuation?  

Question 23. State two limitations of using the multiples method for valuation. (2 marks)  

Question 24. A company has 1000 shares outstanding and net financial obligations(NFO) of  
$3,000 at the end of the fiscal year 2021. It is estimated that the company will generate free  
cash flows of $1,100 in FY 2022 and $1,210 in FY 2023 respectively. After FY 2023, free cash  
flows are expected to grow at 5 percent forever. The weighted average cost of capital (WACC)  
for this company is 10 % and the cost of equity is 12 %. The stock for this company is currently  
trading at $ 25 on the stock exchange. Use the discounted cash flow (DCF) model to value this  
company. (4 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). Do not use  
dollar sign ($) or comma (,) in your answers.  
A. What is the terminal value of the enterprise at the end of FY 2023?  
ACCT7106 Final Exam - Semester 2, 2021  

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B. What is the present value of the terminal value of the enterprise?  
C. What is the total value of the enterprise?  
D. What is the value of equity per share?  

Question 25. State two limitations of the discounted cash flow (DCF) model for valuation. (2  
marks)  

Question 26. You are valuing a company using analyst forecasts. You have obtained the  
following consensus analysts forecasts for dividends per share and earnings per share. Assume  
that after FY 2023, the company will achieve a steady state. (4 marks)  
FY22 FY23  
DPS (in cents) 110 121  
EPS (in cents) 210 231  

Also, make use of the following:  
Beta = 0.8  
Market Risk Premium = 8%  
Risk free rate = 3.6%  
Weighted average cost of capital (WACC) = 9%  
Terminal growth rate = 5%  
Common stockholders’ equity = $ 700M  
Number of shares outstanding = 70M  

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). Do not use  
dollar sign ($) or comma (,) in your answers.  
A. What is the value per share of the company from the Dividend Discount Model (DDM)?  

B. What is the value per share of the company from the Residual Income Model (RIM)?  


Question 27. In the previous question, do you obtain the same valuation or different valuation  
from DDM and RIM? Please explain why do you obtain the same or different valuation using  
these two models. (2 points)  


Question 28. The following information is available for a company. Answer all questions from  
A to H. Clearly label your answers. (8 marks)  

FY20 FY21  
Net Operating Assets $ 1,375 $ 1,625  
Common Stockholders' Equity 1,125 1,375  
ACCT7106 Final Exam - Semester 2, 2021  

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FY21  
Sales $ 2,600  
OI (after-tax) 150  
CI 125  
NFE 25  


A. What was the net borrowing cost (NBC) during FY21?  

B. What was the return on common equity (ROCE) during FY21?  

C. What was the return on net operating assets (RNOA) during FY21?  

D. What was the financial leverage (FLEV) of this company during FY21?  

E. Explain why ROCE is higher or equal to or lower than RNOA.  

F. What is most likely to happen to the relationship between ROCE and RNOA when this  
company increases its financial leverage?  

G. What was the profit margin during FY21?  

H. What was the asset turnover ratio during FY21?  


Question 29. Nathan is your friend who is valuing a company using consensus analyst  
forecasts. He has obtained forecasts for earnings per share (EPS) and dividends per share (DPS)  
for the next three years. He also noticed that the company is growing very fast. Which valuation  
model will you recommend to Nathan? Clearly explain your choice. (3 marks)  


Question 30. Your friend, Laura, told you that earnings can be manipulated by managers. She  
argues that dividends and cash flows cannot be manipulated. Thus, she is recommending that  
one should always use the dividend discount model (DDM) or the discounted cash flow (DCF)  
model for valuation. Do you agree or disagree with her? Clearly explain your argument. (2  
marks)