Accounting and Valuation

1

100

What is a 10-K report for a publicly traded company?

• A quarterly financial summary submitted to investors every three months
• An annual report filed with the U.S. Securities and Exchange Commission containing detailed financial and business information
• A document used exclusively to announce dividend payments
• A report prepared only when a company goes bankrupt

Correct answer: B. An annual report filed with the U.S. Securities and Exchange Commission containing detailed financial and business information

100

A business sells goods on credit for $1,000. Which is the correct double-entry at the time of sale?
A. Debit Cash $1,000; Credit Revenue $1,000
B. Debit Accounts Receivable $1,000; Credit Revenue $1,000
C. Debit Revenue $1,000; Credit Accounts Receivable $1,000
D. Debit Cash $1,000; Credit Accounts Receivable $1,000

Correct answer: B. Debit Accounts Receivable $1,000; Credit Revenue $1,000

100

A company pays $600 in cash to settle a previously recorded account payable. What is the correct doble-entry?
A. Debit Accounts Payable $600; Credit Cash $600
B. Debit Cash $600; Credit Accounts Payable $600
C. Debit Expenses $600; Credit Cash $600
D. Debit Accounts Payable $600; Credit Revenue $600

Correct answer: A. Debit Accounts Payable $600; Credit Cash $600

100

A company records rent expense of €1,200 for the month but has not yet paid it. What is the correct double-entry?
A. Debit Rent Expense €1,200; Credit Cash €1,200
B. Debit Rent Expense €1,200; Credit Accounts Payable €1,200
C. Debit Cash €1,200; Credit Rent Expense €1,200
D. Debit Accounts Payable €1,200; Credit Cash €1,200

Correct answer: B. Debit Rent Expense €1,200; Credit Accounts Payable €1,200

100

A trainee accountant records a credit sale in the journal and later posts it to the ledger. Which of the following best describes the difference between these two steps?

A. The journal groups transactions by account, while the ledger records transactions in chronological order

B. The journal is only used for cash transactions, while the ledger is used for credit transactions

C. The journal records transactions in chronological order, while the ledger organizes them by individual account

D. In accounting terminology the journal refers to the Income Statement while the ledger refers to the Balance sheet

Correct answer: C. The journal records transactions in chronological order, while the ledger organizes them by individual account

2

100

Debts or obligations expected to be settled within a year are classified as: 

A. Current Assets

B. Depreciations & Amortizations

C. Current Liabilities

D. Good Will

Correct answer: C. Current Liabilities

100

A company prepares its financial statements for the year ending 31 December 2025. On 15 December 2025, it pays $2,400 for insurance covering the period from 1 January 2026 to 31 December 2026.

How should this insurance payment be accounted for on 31 December 2025?

A. Recognized as an expense in the 2025 income statement, reducing profit for the year

B. Recorded in the balance sheet as “prepayment assets” in the current asset

C. Recognized as a liability because the company has an insurance obligation for the following year

Correct answer: B. Recorded in the balance sheet as “prepayment assets” in the current asset

100

A company reports the following information for the year ended December 31, 2025:

• Opening equity: $420,000
• Net income for the year: $85,000
• Dividends paid to shareholders: $20,000
• Purchase of new equipment: $50,000
• Increase in accounts receivable: $12,000
• Issue of new shares during the year: $40,000
• Bank loan received: $100,000

What is the company’s closing equity at the end of the year?

• $525,000
• $545,000
• $485,000
• $440,000

Correct answer: A. $525,000

100

A company reports:

• High value of (cash + marketable securities) / current liabilities
• Low value of EBIT / interest expenses
• Moderate value of total debt / total equity

What is the most accurate assessment?

• Strong liquidity, weak solvency
• Weak liquidity, strong solvency
• Strong liquidity, but weak sales
• Fully healthy financial position

Correct answer: Strong liquidity, weak solvency

100

Which of the following items is NOT included in COGS?

• Cost of raw materials used in production
• Labor costs directly allocated to the production process
• Depreciation of machinery used in manufacturing operations
• Interest paid on financing used to purchase production machinery

Correct answer: D. Interest paid on financing used to purchase production machinery

3

100

Which financial ratio is most useful to assess, through its evolution over time, whether a company has a high proportion of fixed costs versus variable costs in its cost structure?

• Inventory over Sales
• EBIT over Sales
• Current Assets over Current Liabilities
• Total fixed Assets over Equity

Correct answer: B. EBIT over Sales

100

Which of the following best represents the correct breakdown of Return on Equity (ROE) in the DuPont analysis?

• ROE = Net Profit Margin × Asset Turnover × Financial Leverage
• ROE = EBIT Margin × Total Assets × Debt Ratio
• ROE = Net Income × Sales × Total Assets
• ROE = Operating Margin + Financial Leverage + Tax Rate

Correct answer: A. ROE = Net Profit Margin × Asset Turnover × Financial Leverage

100

Which of the following is NOT an example of a provision in financial accounting?

A. Provision for Legal Claims
B. Provision for Warranties
C. Provision for Restructuring
D. Provision for Dividends

Correct Answer (WRONG): D. Provision for Dividends

100

In financial modeling, which of the following statements correctly describes the relationship between CAPEX, depreciation, and amortization?

• CAPEX is expensed immediately in the income statement, while depreciation and amortization are cash outflows related to financing activities.
• CAPEX represents cash outflows used to acquire or maintain long-term assets, while depreciation and amortization spread these costs over time as non-cash expenses in the income statement.
• Depreciation and amortization are cash expenses that directly reduce CAPEX in the same period.
• CAPEX and depreciation are unrelated, as CAPEX only affects revenue and depreciation only affects liabilities.

Correct answer: B. CAPEX represents cash outflows used to acquire or maintain long-term assets, while depreciation and amortization spread these costs over time as non-cash expenses in the income statement.

 

100

You calculated a DCF-based enterprise value = $600M and an EBITDA multiple-based enterprise value = $640M. The company has $100M debt and $20M cash. What is the range of equity value implied by these methods?

A. $480M – $520M

B. $500M – $540M

C. $550M – $590M

D. $520M – $560M

Correct answer: D. $520M – $560M

4

100

A firm purchases machinery for €3,600,000 with a useful life of 9 years (straight-line depreciation, no residual value).

After one year, the firm purchases additional machinery for €2,400,000 with a useful life of 6 years (straight-line depreciation, no residual value).

After 2 years of operations from the first acquisition, what is the total accumulated depreciation and the net book value of all machinery reported on the balance sheet?

A. €1,200,000 and €4,800,000

B. €1,000,000 and €5,000,000

C. €1,400,000 and €4,600,000

D. €1,600,000 and €4,400,000

Correct answer: A. €1,200,000 and €4,800,000

100

In which of the following situations is EBITDA most likely to be similar to pre-tax Free Cash Flow to the Firm (FCFF)?

• When CAPEX is significantly higher than Depreciation & Amortization (D&A) and working capital requirements are increasing rapidly.
• There is no situation in which EBITDA and pre-tax FCFF can be similar, because EBITDA is an accounting metric while FCFF is a cash flow metric.
• When CAPEX is broadly similar to D&A and changes in working capital are minimal.
• When depreciation is close to zero and inventories are growing quickly.

Correct answer: C. When CAPEX is broadly similar to D&A and changes in working capital are minimal.

100

Which of the following statements about approaches used to estimate the Terminal Value of an investment project in a DCF model is INCORRECT?

• The Gordon Growth or Perpetuity Method estimates Terminal Value by assuming the project’s FCFF grows at a constant perpetual growth rate.
• The Exit Multiple Method estimates Terminal Value by applying a valuation multiple (e.g., EV/EBITDA) to a financial metric in the final forecast year.
• Terminal Value can be estimated by assuming future cash flows stop completely after the explicit forecast period.
• A liquidation value approach may be used in long-life investment projects (e.g., a nuclear power plant) by estimating the liquidation value of the assets at the end of the horizon, which may include decommissioning and regulatory costs.

Correct answer (INCORRECT): C. Terminal Value can be estimated by assuming future cash flows stop completely after the explicit forecast period.

100

You are valuing a mature company (INDITEX) with the following projections in € $ and a WACC of 7%

Years

FCFF

EBITDA

May 2026 – April 2027

5,000

11,000

May 2027 – April 2028

5,350

11,660

May 2028 – April 2029

5,671

12,243

The present value of the FCFF over the three forecasted years, discounted at the WACC, is €12,766. You then consider whether it is more appropriate to use a terminal value based on perpetuity with a 3.6% growth rate (which is within the range used in valuation practice) or an exit value based on an EBITDA multiple of 14x (the historical average multiple value of mature listed companies). In the first case, the present value of the perpetuity would be €141,055, and in the second case €139,915. This would result in an enterprise value of €153,821 and €152,681, respectively.

Which answer is INCORRECT?

• Enterprise value = €153,821, based on FCFF + Perpetuity terminal value (Gordon Growth method).
• Enterprise value = €152,681, based on FCFF + Exit multiple terminal value.
• Enterprise value = €12,766, based only on the discounted FCFF of the explicit forecast period (no terminal value included).
• We can use either enterprise value, the one based on FCFF + Perpetuity, or the one based on FCFF + Exit value and indeed the value offered by both is almost the same.  

Correct answer (INCORRECT): C. Enterprise value = €12,766, based only on the discounted FCFF of the explicit forecast period (no terminal value included).

100

You are valuing a rental apartment using a perpetuity approach under the following assumptions:

• Annual gross rent: €29,000
• Operating costs + taxes: 30% of rental income
• Required return (discount rate): 5.5%
• Expected inflation / rental growth (g): 2.7%

What is the value of the apartment based on the perpetuity model?

• €362,500
• €517,000
• €725,000
• €1,025,000

Correct answer: C. €725,000

5

100

Which of the following statements about trailing multiples and forecast (forward) multiples is INCORRECT?

• Trailing multiples are based on historical financial metrics, such as last twelve months (LTM) EBITDA or earnings.
• Forecast (forward) multiples are based on expected future financial metrics, such as next year’s EBITDA or earnings.
• Forward EV/EBITDA multiples typically use the company’s current enterprise value divided by forecast future EBITDA.
• Trailing multiples are always more appropriate for high-growth companies than forward multiples because historical financial information is more reliable than forecasts.

Correct answer (INCORRECT): D. Trailing multiples are always more appropriate for high-growth companies than forward multiples because historical financial information is more reliable than forecasts.

100

A listed company has:

• EBITDA (Next 12 months forecast) = €420 million
• Net debt = €1,150 million
• Industry forward EV/EBITDA multiple = 9.0x
• Shares outstanding = 250 million

Using the forward EV/EBITDA multiple approach, what is the implied value per share?

• €10.5
• €15.1
• €17.4
• €22.3

Correct answer: A. €10.5