CFC Financial Analysis and Valuation 2

Question 1

A company's price-to-book (P/B) ratio of 0.8 suggests the market values the company at:

Accepted Answer

80% of its stated net asset value

Answer

A P/B ratio below 1.0 means investors are willing to pay only $0.80 for each $1.00 of the company's net book value, possibly indicating distress or undervaluation.

Question 2

Which financial statement links the income statement to the balance sheet by explaining changes in equity?

Accepted Answer

Statement of changes in stockholders' equity

Answer

The statement of changes in stockholders' equity reconciles beginning and ending equity balances by incorporating net income, dividends, share issuances, and other comprehensive income.

Question 3

Operating leverage refers to the degree to which a firm's:

Accepted Answer

Fixed operating costs amplify the impact of revenue changes on operating income

Answer

High operating leverage means a large proportion of fixed costs, so a given percentage change in revenue produces a larger percentage change in operating income (EBIT).

Question 4

The weighted average cost of capital (WACC) is used in DCF analysis as the:

Accepted Answer

Discount rate that reflects the blended cost of all capital sources

Answer

WACC weights the after-tax cost of debt and cost of equity by their proportions in the capital structure, serving as the appropriate discount rate for free cash flows to the firm.

Question 5

Which accounting principle requires recognizing revenue only when it is earned and expenses when incurred, regardless of cash timing?

Accepted Answer

Accrual accounting

Answer

Accrual accounting matches revenues and expenses to the periods they are earned or incurred, providing a more accurate picture of financial performance than cash basis.

CFC - Certified Financial Consultant Practice Test

CFC - Certified Financial Consultant Practice Test

CFC Financial Analysis and Valuation 2