FASEA Financial Analysis and Reporting 3 — Questions and Answers
Question 1: When using the dividend discount model (DDM) to value a stock, increasing the required rate of return while holding dividends constant will:
- Increase the intrinsic value
- Decrease the intrinsic value (Correct answer)
- Have no effect if the dividend growth rate also increases
- Double the intrinsic value
Correct answer: Decrease the intrinsic value
In DDM, intrinsic value = D1 / (r - g); a higher required return (r) increases the denominator, reducing the calculated intrinsic value.
Question 2: A client's SMSF financial statements show a large unrealised gain in listed equities. Under current tax treatment, this gain is:
- Taxable immediately at 15%
- Not taxable until the asset is disposed of (Correct answer)
- Exempt if the fund is in pension phase
- Taxable at the member's marginal rate
Correct answer: Not taxable until the asset is disposed of
Unrealised capital gains are not taxable in an SMSF (or any entity) until the asset is sold and the gain is realised.
Question 3: Which ratio best measures how efficiently a company uses its assets to generate sales revenue?
- Net profit margin
- Asset turnover ratio (Correct answer)
- Return on equity
- Current ratio
Correct answer: Asset turnover ratio
Asset turnover (revenue ÷ average total assets) directly measures how much sales revenue each dollar of assets generates.
Question 4: In preparing a client's consolidated financial picture, a financial adviser discovers two margin loans secured against the same portfolio. The primary risk this creates for the client is:
- Currency risk from foreign denominated debt
- Margin call amplification if the portfolio falls in value (Correct answer)
- Loss of franking credit entitlements
- Breach of superannuation borrowing rules
Correct answer: Margin call amplification if the portfolio falls in value
Multiple margin loans against one portfolio magnify the risk of simultaneous margin calls during a market downturn, potentially forcing asset sales at depressed prices.
Question 5: The FASEA Code of Ethics Standard 6 requires financial advisers to take into account the broad effects of their advice. This primarily addresses which analytical risk?
- Concentration risk in the client's portfolio
- Advice that serves the adviser's interests at the expense of the client (Correct answer)
- Incorrect calculation of internal rates of return
- Failure to consider tax-effective structures
Correct answer: Advice that serves the adviser's interests at the expense of the client
Standard 6 targets conflicts of interest, requiring advisers to prioritise client interests over their own financial benefit when giving advice.
Question 6: A client's superannuation annual statement shows a 'crediting rate' of 7.2% for the year. This figure represents:
- The fund's benchmark return target
- The return allocated to the member's account after fees and taxes (Correct answer)
- The gross return before management costs
- The risk-free rate used to assess fund performance
Correct answer: The return allocated to the member's account after fees and taxes
The crediting rate is the net return credited to a member's account in a pooled or defined-benefit superannuation fund, after the fund's fees and taxes.
Question 7: When an adviser converts a client's annual income statement into a monthly cash flow plan, which item would typically be treated as an irregular (non-monthly) outflow?
- Mortgage repayments
- Annual insurance premiums (Correct answer)
- Grocery expenses
- Mobile phone bill
Correct answer: Annual insurance premiums
Annual insurance premiums are paid once a year and must be annualised then divided (or budgeted as a lump sum) rather than appearing as a regular monthly expense.
FASEA Financial Analysis and Reporting 3
When using the dividend discount model (DDM) to value a stock, increasing the required rate of return while holding dividends constant will: