Level 1 Assessment

EY Financial Analysis Prodegree

NAME:________________________________________________________________________________ DATE:__________________
Marking Scheme:
Questions 1- 17 and 26 – 31 will carry 1 mark each for correct attempt.
Questions 18 – 24 carry 3 marks each for correct attempt. Partial credit will be given if answers are
partially correct
Question 25 carries 9 marks
Questions 26 – 31 use closing nos. to calculate ratios instead of average balance sheet nos. wherever
applicable. For other questions, specific comments have been made if closing nos. are to be taken instead
of average. Wherever such comment is not made, you need to calculate ratios using average balance sheet
nos.

1. A brand new company has a building costing $10,000, machinery costing $5,000, cash of $700, and a
bank loan of $7,850. What is the owner’s equity?
A. $8,850
B. $15,700
C. $7,750
D. Cannot be Determined
E. $7,850

Assets = Liabilities + Equity

$10,000 + $5,000 + $700 = $7850 + Equity

2. If a company has owner’s equity of $100, 000, _______________.

A. Assets Minus Liabilities Equal $100,000
B. Total Assets Must Equal $100,000
C. Net Income for the Past Year Was $100,000
D. A Total of $100,000 was Invested by the Owner
E. None of the Above

Use the following information to answer the next four questions.

Joseph Forbes is the owner of his own business. On December 31, Forbes’ assets, liabilities, revenues and
expenses were:

Insurance Expenses (EXP) $3,000 Accounts Payable $4,000

Miscellaneous Expenses Accounts Receivable (CURR.
900 5,000
(EXP) ASSET)
Rent Expenses (EXP) 2,500 Cash (CURR. ASSET) 14,000

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Salaries Expense
3. On December (EXP)
31, total 19,000
assets are equal to: Equipment (ASSET) 11,000
A. Supplies
$25,700 Expense (EXP) 1,200 Notes Payable 4,600
B. $19,700
C. Services
$22,100 Performed (INC) 45,000 Supplies on hand (CURR. ASSET) 700
D. $30,700
E. None of the Above

4. On December 31, net income is equal to:

A. $18,400
B. $45,000
C. $17,400
D. None of the Above

5. On December 31, if net income equals $15,000 and the ending owner’s equity is $20,000, and Forbes
invested an additional $2,600 in his business, while withdrawing $6,000 during the year, the
beginning owner’s equity for this year was:
A. $7,100
B. $7,400
C. $8,400
D. $7,430
E. None of the Above

6. On December 31, current assets equal:

A. $9,000
B. $19,700
C. $19,000
D. $23,000
E. None of the Above

7. A truck was purchased on July 1 for $20,000. The estimated salvage value is $2,000. The estimated
useful life is 3 years. Using straight-line method of depreciation, the amount of depreciation at fiscal
year-end on December 31 is:
A. Depreciation Expense-Truck $555.56
B. Depreciation Expense- Truck $1,500
C. Depreciation Expense- Truck $500
D. Depreciation Expense- Truck $3,000
Using the following 2 tables, answer the next three questions.
Table of Inventory Purchases

Date Units Unit Cost Total cost

Beginning Inventory 10 $3 $30

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February 3 5 4 20

April 10 15 5 75
June 12 12 7 84

August 20 20 8 160
Total 62 369

Sales

Date Units Identified Units Price Total

March 5 February 5 $6 $30

May 2 April 10 6 60

July 4 June 2 10 20
September 1 June 8 10 80

25 $190

8. Determine the ending inventory using FIFO.

A. $179
B. $190
C. $269
D. $369

9. Determine the ending inventory using LIFO

A. $185
B. $174
C. $190
D. $369

10. Determine the ending inventory under weighted average method.

A. $190
B. $220
C. $249
D. $369

11. From merchandiser’s income statement you know that Sales revenue is $ 650,000 and the gross
margin is 20%. What is the cost of Goods Sold?
A. $650,000
B. $130,000
C. $26,000
D. $520,000

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 Level 1 Assessment
EY Financial Analysis Prodegree

12. A manufacturer has beginning and ending finished goods inventory of $70, 000 and $90,000
respectively. Also, the cost of goods manufactured is $200,000. What is the Cost of Goods Sold?
A. $20,000
B. $70,000
C. $180,000
D. $270,000

13. Smith. Corp. sold 100 shares of $50 par value common stock for $70 per share. What would be the
correct journal entry?
A. Cash $7,000
Equity Share Capital $7,000

B. Cash $7,000
Equity Share Capital $5,000
Securities Premium $2,000

C. Equity Share Capital $7,000

Cash $7,000

D. Cash $7,000
Equity Share Capital $2,000
Securities Premium $5,000

14. Park Inc. earned EBIT $10,000,000 last year. Tax rate was 40%, interest expense $2,000,000.

Number of common shares were as follows:

Beginning of year: 500,000
Issued on October 1: 1,000,000
Calculate the EPS of the company. Year ending of the company is March 31
A. $8.00
B. $6.00
C. $4.80
D. $4.00

15. Given the following balance sheets of three firms, which appears to have greater financial leverage?

Firm A Firm B Firm C

Debt $2 $40 $15
Equity $8 $60 $35

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Total Assets $10 $100 $50

A. Firm A
B. Firm B
C. Firm C
D. All the Same

16. Given the following income statements of three companies, which appears to have greater financial
leverage (i.e. greater debt) based upon the interest coverage ratio?

Firm A Firm B Firm C

EBIT $50 $100 $75

Interest 10 15 5

EBT 40 85 70

Taxes 20 45 50

EAT 20 40 20

A. Firm A
B. Firm B
C. Firm C
D. All the Same

17. A company is being sued for $100,000. What would be recorded on the balance sheet?
A. Nothing
B. $100,000 Set-aside Cash
C. $100,000 Liability
D. $100,000 Contingent Liability

18. Total Debt / EBITDA is 5x as of Mar 2014. Revenues in this period have increased by 20% and EBITDA
margins are 20%. D&A is 5% of Revenues for Mar 2014. Debt : Equity ratio as of Mar 2014 is 0.5x.
Calculate the Total Asset Turnover ratio for Mar 2014 (Note: Assume Total Asset Turnover ratio is
calculated on Closing Total Assets i.e. Total Assets as of Mar 2014 rather than Average Total Assets).
Please also calculate the average interest cost on debt assuming the interest coverage ratio is 3x

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 Level 1 Assessment
EY Financial Analysis Prodegree

19. If Net Profit Margin for 2014 is 10% and assuming that all the information in question 18 applies to
this question as well, please calculate the Return on Equity for 2014. (Note: Assume Closing nos.
instead of average nos. for all calculations)

20. Super quick ratio at the end of the year is 0.25x. Revenues are INR 120 Cr and the Gross Profit Margin
of the Company is 25%. Assuming that Opening Stock = Closing Stock and Accounts Payable Turnover
Ratio is 6x, please calculate the cash balance. Please note that Opening Accounts Payable = 1.25 times
Closing Accounts Payable and there are no other liabilities in the balance sheet [Hint: Super Quick
Ratio assumes only Cash in the Numerator]

21. The Price / Book ratio for Company A at the beginning of the year was 3.25x. At the end of the year, the
Price / Book ratio was 2.8x and the share price had increased by 25% between the years – the share
price at the end of the year was INR 125. Assuming that the P/E ratio at the beginning of the year was
10x and it had decreased to 8x at the end of the year, please calculate the Return on Equity for the
year.

22. A company has 10,000 equity shares outstanding throughout the year (there have been no share
issuances during the year). During the year, the Company clocked sales of INR 150 Cr and had an
EBITDA margin of 20%. D&A as a % of Capex was 5% and Capex for the year was INR 20 Cr. The
company also had debt in its balance sheet to the tune of INR 50 Cr – this was issued at an interest rate
of 13%. The debt is convertible into equity with a ratio of 1 equity share for every Rs. 50,000 of debt.
The effective tax rate for the Company is 30%. Calculate the Basic and Diluted Earnings per share.
[Hint: Factor interest cost in your calculations of diluted EPS]

23. In question 22, assume that all information stays the same. However, instead of debt of INR 50 Cr, the
Company has issued convertible preference shares of INR 50 Cr and the dividend on these shares is
8%. Calculate the Basic and Diluted Earnings per Share

24. Compare the Basic and Diluted EPS arrived at in questions 22 and 23. Explain with reasons as to why
one of the diluted EPS (either diluted EPS arrived at in question 22 or diluted EPS arrived at in
question 23) should be higher or lower than the other

25. On 1 April 2014, Company A recently acquired 75% of the equity shares of Company B. Company B
had total shares outstanding of 100,000 of a face value of Rs. 10. It had also issued convertible
debentures. Company B had issued 20,000 such debentures and each debenture was convertible into
2.5 equity shares of a face value of Rs. 10. The debentures were convertible into equity shares before
any company acquired a majority stake in Company B.

Further, Company B had made profits of INR 10 Crore in the financial year ended 31 March 2014,
which represented only 5% of its total reserves on the balance sheet as on April 1, 2014. Company A
on the other hand had made a profit of INR 100 Crore for the financial year ended 31 March 2014.

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 Level 1 Assessment
EY Financial Analysis Prodegree

Company A’s outstanding and paid up share capital was INR 200 Crores and its reserves and surplus
were INR 500 Crore.

Company A acquired Company B by paying a consideration of INR 450 Crore. Using the above
information, please calculate:

A. Goodwill on Consolidation
B. Minority Interest
C. Company A’s Share in Consolidated Profits
D. Minority Share in Consolidated Profits

26. Holding all else equal, ROE will rise with an increase in:
A. Total Assets.
B. Sales.
C. Stockholders’ Equity.
D. None of These.

Suppose a company with the following financial information:

Income Statement $ Balance Sheet $

Sales 12,500,000 Cash 550,000
Cost of Goods Sold 6,550,000 Accounts Receivable 1,450,000
Gross Profit 5,950,000 Inventory 1,040,000
Operating Expenses 2,400,000 Total Current Assets 3,040,000
Interest Expense 450,000 Total Fixed Assets 10,000,000
Taxes 750,000 Total Current Liabilities 2,500,000
Net Income 2,350,000 Long-term Liabilities 6,000,000
Paid-in Capital 2,000,000
Number of Outstanding Shares 1,000,000 Retained Earnings 2,540,000
Current Market price 37.90

27. What is the net profit margin?

A. 18.80%
B. 27.20%
C. 32.40%
D. 47.60%

28. What is the return on equity?

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EY Financial Analysis Prodegree

A. 17.50%
B. 51.76%
C. 92.52%
D. 117.50%

29. What is the receivables turnover?

A. 2.50
B. 4.87
C. 6.30
D. 8.62

30. What is the inventory turnover?

A. 2.50
B. 4.87
C. 6.30
D. 8.62

31. All else equal, a rise in Asset Turnover will result in a rise in:
A. Depreciation.
B. Leverage.
C. Profit Margin.
D. ROE

32. Prepare a Cash Flow statement for March 14 based on the excel attached. (10 Marks)

33. Calculate the following ratios based on the balance sheet, income statement and cash flow prepared in
question 33 above (for March 14): (1 Mark per Ratio)
a. ROE
b. Return on Capital Employed (post-tax)
c. Net Profit Margin
d. EBITDA Margin
e. Effective Tax Rate
f. Operating Cost Ratio
g. Gross Profit Margin
h. Total Asset Turnover Ratio
i. Fixed Asset Turnover Ratio
j. Receivables Turnover Ratio
k. Leverage Ratio [Avg. Total Assets / Avg. Total Equity]
l. FCF / EBITDA
m. Interest Coverage Ratio
n. Debt Service Coverage Ratio
o. Basic EPS (Assume Face Value of each share is INR 10)
p. Debt : Equity Ratio

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 Level 1 Assessment
EY Financial Analysis Prodegree

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