ACC 4320 Fisher College Financial Statement Analysis Questions Financial Statement Analysis assignment (only 2 short answer question,and rest of them are m

ACC 4320 Fisher College Financial Statement Analysis Questions Financial Statement Analysis assignment (only 2 short answer question,and rest of them are motiple choice question)Better be over 90% correct.Also, I have some slide pps might help. ACC4320 – Financial Statement Analysis
You have twenty-five questions and each question is worth 4 points, for a total
possible score of 100 points.
Good luck!
__________________________
1. Cookie Monster wants to merge his cookie manufacturing business with the milk business
that is owned by Matilda Milk, Inc. Cookie Monster would like for you to explain the
difference between buying the stock of Matilda Milk, Inc or buying the assets of Matilda
Milk, Inc. Please explain the general differences between a stock acquisition or an asset
acquisition.
Answer:
Well first, I think the difference between Asset acquisition and Stock acquisition are:
Stock Acquisition
1. Due to the different accounting methods adopted, the target company may or may not
exist as an independent legal entity.
2. Consideration will be paid to the shareholders of the target company.
3. Acquiring everything that the company owns as well as liable.
Asset Acquisition
1
1. You can obtain some or all of the company’s assets as needed. It is beneficial when you
only want to acquire part of the business.
2. Target companies still exist as a separate legal entity.
3. Consideration will be paid to the target company.
2. In the organizational chart below, which company is shown to be a corporation based on
the definitions that we have used in class?
a.
b.
c.
d.
Shareholder is a circle and a circle represents a corporation.
Company A is a corporation.
Company B is a corporation.
Company B is a limited liability company.
Shareholder
Company
A
Company B
2
Answer:_____________
3. In the definition of EBITDA, what does the “I” represent?
a. Interest income.
b. Interest expense.
c. Intangibles.
d. Innovation.
Answer:____________
4. When a corporation makes a distribution to it’s shareholders, the distribution is treated
according to the “Distribution Ordering Rules”. Which is the first step for determining how
to treat a distribution?
a.
b.
c.
d.
The distribution is a dividend to the extent that the corporation has E&P.
The distribution is a capital gain if the company is a corporation.
The distribution must be pro rata.
The distribution is taxable to all shareholders.
Answer:__________
5. In determining the value of a company base on a industry multiple of EBITDA, what would
be the value of Cookie Monster, Inc if we assumed that the company had $10 million of
EBITDA and we used an industry multiple of 4, and the company had 25 million shares
outstanding?
3
a.
b.
c.
d.
$100 million.
$25 million.
$40 million.
$410 million
Answer:___________
6. If a company has $100 million in assets and $25 million in debt on its balance sheet, what is
the debt to equity ratio of the company?
a.
b.
c.
d.
$25/100 = ¼
100/25 = 4
2 to 1 (debt to equity)
8 to 1 (debt to equity)
Answer:_____________
7. A company borrows money as part of a distribution that it will make to shareholders at the
end of the year. Please complete this sentence: The borrowed money will be:
a.
b.
c.
d.
Included in the revenue of the company.
Included in the taxable income of the shareholders.
Impact the statement of cash flow, but NOT the income statement.
Impact the statement of cash flow, and the income statement.
Answer:__________
4
8. True or False. If a corporation needs capital/money as part of a growth strategy, the
company is always better borrowing from a shareholder than borrowing from a bank.
a. True.
b. False.
Answer:_______
9. True or False. The primary purpose of a corporation is to generate wealth for the public.
a. True.
b. False.
Answer:__________
10. What is one primary difference between a corporation and a partnership?
a. A partnership can have more owners.
b. A corporation is subject to federal regulation.
c. A corporation is subject to two layers of taxation.
d. A partnership is subject to two layers of taxation.
Answer:__________
5
11. Which of the following is NOT an approach to firm valuation?
a. Dividends approach.
b. Free Cash Flows
c. Compound Growth.
d. Earnings.
Answer:___________
12. If a company has 25 million shares outstanding, with the value of each share being $10, and
the company has a marginal tax rate of 40 percent and EBITDA of $215,500, what is the
total market capitalization of the company?
a.
b.
c.
d.
$40,000,000
$2,150,000
$250,000,000
None of these options.
Answer:_________
13. What is the general method of depreciating tangible assets for financial reporting purposes?
a. Double declining balance method (DDB)
b. Straight line (SL)
c. 150% decliding method (150 DB)
d. Marginal calculation.
Answer:__________
6
14. Cookie Monster, Inc is a manufacturing company that makes chocolate chip cookies. Cookie
Monster, Inc. projects that it will make 25,000 cookies in 2020, and that it will have a cost of
$5 per cookies, and will sell each cookie for $10, what is the projected gross profit per
cookie in 2020?
a.
b.
c.
d.
$10 per cookie
$5 per cookie
$20 per cookie
None of these options.
Answer:__________
15. What is the formula for determining Return on Common Equity?
a.
b.
c.
d.
Net income – preferred stock dividends/average common shareholders equity.
Net income – tax/average price per share.
Net income before tax – minus basis.
None of these options.
Answer:____________
16. True or False. A disregarded entity exists for tax purposes to benefit a shareholder.
7
a. True.
b. False.
Answer:_________
17. Cookie Monster, Inc. is a publicly traded company that is trading at $25 per share on the
Dow Jones Industrial Average (DJIA) market. If the share drops in value to $20 per share,
does this impact the income statement of the company?
a. No. A drop in the share price does not affect the income statement because it is not a
revenue event.
b. Yes. A drop in the share price affects the balance sheet of the company and thus
indirectly the income statement.
c. No. The drop in the share price only affects nonowners of the shares.
d. Yes. The drop in the price impacts the income statement as it makes the company less
valuable.
Answer:___________
18. The formula for a balance sheet is:
a.
b.
c.
d.
Assets + Liabilities = equity.
Assets = Liabilities minus equity.
Assets = Liabilities plus equity.
Assets = Shareholder equity.
Answer:__________
8
19. What is the owner of a limited liability company called?
a.
b.
c.
d.
A shareholder.
A partner.
A unit holder.
A member.
Answer:__________
20. True or False. Two companies with the same Earnings Per Share (EPS) should have the
same value.
a. True.
b. False.
Answer:_________
21. True or False. When looking at a companies current ratio, we ignore long-term liabilities
and long-term assets.
a. True.
b. False.
Answer:_________
9
22. During our review of the current M&A Cycle (see image below), we discussed some of the
risks and opportunities for buying a target companies stock or assets during the current
environment (i.e., Covid-19). What are some of the risks in current Covid-19 environment
of buying a company’s assets or stock? Please choose the best option.
a. Not knowing if the company that you buy (stock or assets) will exist or be able to
be run after the Covid-19 crisis is over.
b. Buying a companies assets or stock at this time is a crazy idea.
c. No one is buying company assets or stock at this time.
d. I don’t care about the answer
Answer:_________
23. True or False. Based on the image below, Cookie Monster is the shareholder of Cookie
Management Company (France), and he is also the shareholder and owner of Sub 1
(Chocolate Chip Manufacturing Facility (Germany)).
a. True.
b. False.
Answer:_________
10
Types of Mergers, Acquisitions, and Reorganizations
EQUITY

Mergers

Horizontal Merger – two or more firms within the
same industry (e.g., automotive, pharma, telecom)
merge (taxable, nontaxable)

Vertical Merger – Integration of companies with
supplementary or interrelated relationships (e.g.,
beverage manufacturing, beverage bottling)

Acquisitions

Assets – Specific assets (.e.g., tangible assets,
intangible assets)

Equity – Generally acquiring sufficient ownership
interest to have control (e.g., majority interest as to
the value and vote of the acquired company

Cash Flow of the business is an asset that other
companies would try to buy
Cookie
Cookie
Management
Management
Company
Company
(France)
(France)
ASSETS
Sub 1
Chocolate Chip
Manufacturing Facility
(Germany)
12
24. True or False. We discussed in class the difference between Free-Cash-Flows Based
Valuation model of a business and Dividends-Based Valuation Model. Free-Cash-Flow
Based Valuation was looking at the cash that is “free” for the company after looking at the
flow of cash into the company versus the flow of cash out of the business. True or False –
Free Cash Flow valuation results in a higher valuation.
a. True.
b. False.
Answer:_________
11
25. Please answer this question based on the picture below. Cookie Monster and Miss Piggy
are shareholders in Parent Holding Company, and Parent Holding Company is the owner of
Subsidiary 1 and Subsidiary 2. The image below shows the structure before a split up and
the structure after the split up. Please explain what happens to Parent Holding Company
after the split up? HINT: Parent company is holding nothing after the split up.
Answer:
Reorganizations – Split Up
• Focus is more on separating businesses for various reasons (management focus,
specialization, regulatory restriction (e.g., SEC merger term), need for cash)
Before Split-Up
Parent
Holding
Company
1
Subsidiary 1
2
Subsidiary 1
After Split-Up
1. Parent
Holding
Company
exchanges
S1 shares
for PHC
shares
Subsidiary 2
2. PHC
exchanges
S2 shares
for PHC
shares
What happened to Parent
Holding Company?
15
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Subsidiary 2

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