First Examination Finance 3321

Fin 3321 – Spring - 2015 Exam 1 Moore

Exam 1 – Fin 3321 - Spring - 2015

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 Points Each) – 14 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 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. Accounting Conventions and Regulations 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 third 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

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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. Operating Income 5. Comprehensive Income

a. 2, 1, 3, 4, 5 b. 1, 5, 2, 4, 3 c. 3, 2, 4, 1, 5 d. 2, 3, 4, 1, 5 e. 1, 2, 3, 5, 4

6. An industry having a high degree of price competition would be characterized by: a. Low Industry Concentration, Low Legal Barriers to Entry, High Product Differentiation b. Few Exit Barriers, Low First mover advantage, Low Product Differentiation c. High Industry Concentration, High Distribution Access, Low Firm Excess Capacity d. Low Concentration, High Product Differentiation, Low First Mover Advantage e. Supply < Demand, No First Mover Advantage, High Fixed to Variable Cost Ratio

7. Which of the following would lead to the lowest degree of industry price competition? a. Low Industry Concentration, Low Legal Barriers to Entry, Low Product Differentiation b. Few Exit Barriers, High First Mover Advantage, Low Product Differentiation c. Low Industry Concentration, Low Distribution Access, Low Customer Switching Costs d. High Industry Concentration, High Fixed-Variable Cost Ratio, Hi product differentiation e. Supply < Demand, High Legal Barriers to Entry, Steep Industry Learning Curves

Short Problem 2 – Overs and Unders (10 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 on the GAAP stated Financials resulting from the decision not to Hedge.

Net Assets Liabilities Equity Revenues Expenses Income The company used too large a discount rate to estimate the present 1 value of future payments on a defined benefit pension plan

The company used a warranty failure and replacement rate that was half the size of 2 competitors. Nothing about the company's production and quality control methods differs from its competition.

The company capitalized 3 all Super Bowl Luxury Box/Suite costs as a deferred marketing cost.

The company book the total payments to be received on a lease 4 contract as revenues when the lease is signed. These car leases last for 48 months.

The U.S. based company, an importer, did not mark-to-market 5 its Euro-based Accounts receiveable in a year when the dollar was strengthening.

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) (10 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. ______

2. ______

3. ______

Short Essay Problem 2 (Use bullet points with complete sentences for clarity) (6 Points)

This Essay is directly related to the company your group is analyzing. Identify 3 (three) 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. Provide specific examples.

Short Essay Problem 3 (Use complete sentences for clarity) (5 Points)

In class on Thursday, we discussed how companies may choose to NOT IMPARE GOODWILL when they spend money on customer service, quality improvement, etc. Further, the FASB and GAAP do not object to this “substitution effect” for Goodwill.

 Briefly explain why this is a justifiable approach to maintain an unimpaired goodwill balance. (in the eyes of GAAP). Next, what type of financial performance should you be able to measure and observe if this argument is correct?

Take-Home Portion of Exam

You must email the completed excel file (in .xls format) to my ttu email address no later than 10pm on Sunday, March 1, 2015 to receive any credit for these problems.

The submitted file must have the following name:

Exam1-Fin3321-Fall2015-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 (30 Points) – Restate the 2009 and 2010 Financials in good form.

 Use the Trial Balance worksheet approach that Includes both income statement and Balance Sheet accounts.

 Be sure to include the Debit and Credit checking of totals as well as the income summary account. You will need to have both “as-Stated” and “Re-Stated” account figures. You may have to open new accounts that appear when you re-state. Income summary account must be used.

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Your Personal 4-Digit Exam Code:

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