CFA Level 1 Practice Question 61
Laxman Ltd reported a return on equity of 27%. Net profit margin of 6% and Asset turn over ratio of 1.4X. If the company had Equity of 550 crs what would be the company's Average total assets
a. Rs. 1767 crs
b. Rs.183.3 crs
c. Rs.2475 crs
Ans A: This question uses dupont analysis. Financial leverage = RoE/ (NPM * 1.4) = 0.27/ (0.06 * 1.4) =3.2X. Assets = Equity * Financial leverage = 3.2* 550 = 1767.
CFA Level 1 Practice Question 62
Natural Pharma a bio pharma company sold a new molecule about which it has researched and established commercial feasibility to Pfizer inc . The molecule is yet to be commercially developed. Natural Pharma has so far spent Rs.120 crs in researching this molecule and the molecule has been sold to Rs.200 crs. What would be the incremental profit before tax recognized by Natural Pharma during the year of sale?
a) Rs.0
b) Rs. 80 crs
c) Rs. 200 crs
Financial Reporting & Analysis - CFA Level 1 video
This video is part 1 of quick review of 'Financial Reporting & Analysis' topics in CFA level 1 curriculum
CFA Level 1 Practice Question 63
It is a normal inflationary situation and prices are increasing. MAS ltd which uses FIFO inventory valuation reported a Net Loss of Rs.125 crs and earnings before tax of Rs.( -125 crs). The company reported an operating cash flow of Rs. (-75 crs). All else being the same if the company has used LIFO instead of FIFO MAS's Net loss and Operating cash flow would have been
Net Loss and OCF:
a) Lower and Higher
b) Same and Higher
c) Higher and Same
CFA Level 1 Practice Question 63
It is a normal inflationary situation and prices are increasing. MAS ltd which uses FIFO inventory valuation reported a Net Loss of Rs.125 crs and earnings before tax of Rs.( -125 crs). The company reported an operating cash flow of Rs. (-75 crs). All else being the same if the company has used LIFO instead of FIFO MAS's Net loss and Operating cash flow would have been
Net Loss and OCF:
a) Lower and Higher
b) Same and Higher
c) Higher and Same
Answer:C. LIFO leads to higher COGS in inflationary environment. Higher COGS means higher loss. The difference between LIFO and FIFO inventory will create difference in CFO only through tax (i.e Tax = EBIT * Tax rate, if EBIT is lower with LIFO tax will be lower leading to higher CFO and vice versa). In this case since company is making losses there in no tax and hence CFO under both LIFO and FIFO will be same.
CFA Level 1 Practice Question 64
Happy Inc which uses LIFO inventory valuation system reported the following
2011 Inventory – 325
2012 Inventory – 345
2011 LIFO reserve – 35
2012 LIFO reserve – 45
For the year 2012 the 2012 Happy Inc reported as sales Rs.1250 crs and Gross profit of Rs.470 crs. An analyst makes the necessary adjustment for converting the inventory to LIFO and calculates happy Inc's Inventory turnover ratio. The analyst's estimate would be closest to
a) 3.33X
b) 1.98X
c) 2.05X
How many books have you completed so far?
CFA Level 1 Practice Question 64
Happy Inc which uses LIFO inventory valuation system reported the following
2011 Inventory – 325
2012 Inventory – 345
2011 LIFO reserve – 35
2012 LIFO reserve – 45
For the year 2012 the 2012 Happy Inc reported as sales Rs.1250 crs and Gross profit of Rs.470 crs. An analyst makes the necessary adjustment for converting the inventory to LIFO and calculates happy Inc's Inventory turnover ratio. The analyst's estimate would be closest to
a) 3.33X
b) 1.98X
c) 2.05X
Ans C: FIFO Inventory = LIFO inventory + LIFO Reserves
FIFO COGS = LIFO COGS – Increase in LIFO Reserves.
FIFO Inv 2012= 345+45 = 390; FIFO inv 2011 = 325+35=360;
Change in LIFO Reserves 2012 = 45-35=10
LIFO COGS 2012 = 1250-470 = 780
FIFO COGS 2012 = 780-10 = 770
Inventory Turnover = COGS/ Average inventory = 770/ Average (390, 360) = 770/375= 2.05X
CFA Level 1 Practice Question 65
Edusuper limited bought a patented learning system and recognized Rs.80 crs of intangible assets in relation to this purpose. Edusuper should
a) Ammortize this expense every year
b) Test the impairment of the patent every year
c) Both amortize every year and test for impairment
CFA Level 1 Practice Question 65
Edusuper limited bought a patented learning system and recognized Rs.80 crs of intangible assets in relation to this purpose. Edusuper should
a) Ammortize this expense every year
b) Test the impairment of the patent every year
c) Both amortize every year and test for impairment
Ans C: Patent is for specific years and this is an identifiable intangible asset. Identifiable intangible asset with finite life should be amortized every year. This also should be checked for impairment every year.
On the other hand Intangible Assets with infinite life will ONLY be tested for impairment every year.
CFA Level 1 Practice Question 66
Hayden and Gill were discussing about effect of ESOPs on accounting statements and they made the following statements
Hayden: Companies can get tax benefits when ESOPs are exercised which will be shown as part of operational activities. This may artificially increase the effective tax rate of the company which an analyst should adjust for analytic purpose.
Gill: It is an irony that while money spent on stock buyback, for issuing shares during exercise of ESOP is considered as financing cash flow the tax benefit arising out of this is considered as operational cash flow. This results in situation wherein more is the difference between ESOP strike price and actual stock price more will be the operational cash flow of the company.
a) Both are wrong
b) Only Hayden is wrong
c) Only Gill is wrong
CFA Level 1 Practice Question 66
Hayden and Gill were discussing about effect of ESOPs on accounting statements and they made the following statements
Hayden: Companies can get tax benefits when ESOPs are exercised which will be shown as part of operational activities. This may artificially increase the effective tax rate of the company which an analyst should adjust for analytic purpose.
Gill: It is an irony that while money spent on stock buyback, for issuing shares during exercise of ESOP is considered as financing cash flow the tax benefit arising out of this is considered as operational cash flow. This results in situation wherein more is the difference between ESOP strike price and actual stock price more will be the operational cash flow of the company.
a) Both are wrong
b) Only Hayden is wrong
c) Only Gill is wrong
Ans B: Exercising of ESOP will happen when current market price is greater than strike price. This will lead to loss, which will result in effecting tax rate artificially decreasing and not increasing. Other statements are correct
CFA Level 1 Practice Question 67
Nestle Ltd reported a net profit of Rs.9620 million for the year ending December 2011. At the start of 2011 the company had 48.2 million shares outstanding. The company issued a 1:1 bonus on 1-July-2011. The company also had 5 million ESOPs outstanding at an exercise price of Rs.7000/share (at the start of the year) throughout the year. Nestle's closing share price on 31-December-2011 was Rs.4500/share and average share price (adjusted for bonus) during the year was Rs.4300/share. Calculate the diluted EPS for the company.
a) Rs.129.72
b) Rs.133.06
c) Rs.94.64
CFA Level 1 Practice Question 67
Nestle Ltd reported a net profit of Rs.9620 million for the year ending December 2011. At the start of 2011 the company had 48.2 million shares outstanding. The company issued a 1:1 bonus on 1-July-2011. The company also had 5 million ESOPs outstanding at an exercise price of Rs.7000/share (at the start of the year) throughout the year. Nestle's closing share price on 31-December-2011 was Rs.4500/share and average share price (adjusted for bonus) during the year was Rs.4300/share. Calculate the diluted EPS for the company.
a) Rs.129.72
b) Rs.133.06
c) Rs.94.64
Ans A:
Pre-bonus shares: 48.2*12 months =578.4
Post Bonus shares: 48.2* 6 months=289.2
Weighted average shares outstanding = (578.4 + 289.2)/12 = 72.3 mn
Post bonus the ESOP will become 10 million shares (5 million adjusted for 1:1 bonus) outstanding with a strike price of Rs.3500 (i.e 7000/2)
By treasury stock method, if 10 million options were exercised company would receive
10*3500= 35000mn. Using this company can buy shares at Rs.4300 (average price). i.e 35000/4300=8.14 mn shares. So dilutive shares added would be 10 €“ 8.14 =1.86 mn.
Total shares to be used for calculating diluted EPS = 72.3+1.86 = 74.16 mn.
Diluted EPS = 9620/74.16 = 129.72
CFA Level 1 Practice Question 68
Rabi Ltd reported an Total Asset turn over ratio of 1.9X and Net profit margin of 8.6% for year 2011. At the end of 2012 Rabi used its entire net profit for 2011 to repay its debt and brought down the debt equity ratio to 0.6X. If the sales for 2012 remained exactly same as 2011 then Rabi's Total Asset turn over ratio for 2012 would be (no equity capital raised during the year)
a) Same as 1.9X
b) Below 1.9X
c) Above 1.9X
CFA Level 1 Practice Question 68
Rabi Ltd reported an Total Asset turn over ratio of 1.9X and Net profit margin of 8.6% for year 2011. At the end of 2012 Rabi used its entire net profit for 2011 to repay its debt and brought down the debt equity ratio to 0.6X. If the sales for 2012 remained exactly same as 2011 then Rabi's Total Asset turn over ratio for 2012 would be (no equity capital raised during the year)
a) Same as 1.9X
b) Below 1.9X
c) Above 1.9X
Ans A:
If the company uses its entire profit to repay the debt then the size of the balance sheet will remain the same. i.e the increase in owner's equity will be offset by decrease in Debt. The point to note here is irrespective of Debt repayment equity will increase, a decrease in debt will be offset by decrease in cash. If the balance sheet remains size the same as does the sales then both numerator and denominator of asset turn over ratio will remain the same. This would lead to same asset turn over ratio.
Let us see some numbers
Year 0 (Y0) -- Equity = 50 ; Debt = 50; total asset = 100;
Net profit in Y1 = 10;
Step 1 – Profit gets added to R&S;
Y1—Equity = 60; debt = 50; TA = 110; simultaneously cash increases by 10 on Asset side (assuming everything is cash profit)
Step 2 – Debt Repayment
Y1—Equity = 60; debt = 40; TA =100; simultaneously cash would decrease by 10 on Asset side towards debt repayment.
Hence Total asset remains at 100.
CFA Level 1 Practice Question 69
All else remaining equal during the initial years of life of an asset, the Operating Cash flow (CFO) of a company that follows Double declining Balance depreciation (DDB) for the asset compared to a company that follows Straight line (SL) depreciation for the asset would be
a) CFO of DDB company = CFO of SL company
b) CFO of DDB company > CFO of SL company
c) CFO of DDB company
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CFA Level 1 Practice Question 69
All else remaining equal during the initial years of life of an asset, the Operating Cash flow (CFO) of a company that follows Double declining Balance depreciation (DDB) for the asset compared to a company that follows Straight line (SL) depreciation for the asset would be
a) CFO of DDB company = CFO of SL company
b) CFO of DDB company > CFO of SL company
c) CFO of DDB company
Ans B: CFO of DDB will be higher.
Let us see how this works. Let us assume the company does not have capex or change in working capital requirements
For SL Company
Gross profit = 100; depreciation =25; EBT=100-25=75; Tax @33.3% =25; so Net profit = 75-25=50;
CFO = Net profit+ Non cash charges-capex-increase in working capital;
CFO= 50+25-0-0=75
For DDB company
Gross profit = 100; depreciation =35; EBT=100-35=65; Tax @33.3% =21.7; so Net profit = 65-21.7=43.3;
CFO =43.3+35 -0-0 = 78.3
The difference arises because of the tax shield on depreciation expenses. If the effective tax rate is zero then only CFO of SL company = CFO of DDB company
CFA Level 1 Practice Question 70
Given below are particulars of Blake Ltd. Calculate the diluted EPS
• Net Profit Rs.220 million
• 10 million shares outstanding.
• Average share price is Rs.300.
• Year-end share price is Rs.330.
i. 100,000 Convertible Debentures with Face value of 1000 and coupon of 8% p.a
ii. Each bond can be converted in to 4 shares of Blake Ltd.
iii. Tax rate 30%
a) Rs.21.69
b) Rs.20.00
c) Rs.21.92
