Practice

What does a Noncontrolling Interest (NCI) on the balance sheet actually represent?

A company has NOPAT of $45M and average Invested Capital of $900M. What's its ROIC?

A company has Net Income of $75M and average Total Assets of $500M. What's its ROA?

A company has 2,000K shares outstanding at $2.00 per share and Net Income of $500K (EPS of $0.25). It raises $300K of Debt at 5% interest and uses the full amount to repurchase shares at $2.00 each. Walk through the immediate impact of the buyback, then the impact after one year of interest expense, including the effect on EPS. Assume a 25% tax rate.

A company buys $300K of equipment entirely with a new bank loan on January 1. Over the year, it pays 8% interest on the loan, repays 10% of the principal, and depreciates the equipment straight-line over 5 years. Assume a 25% tax rate. Walk through the year's impact on the income statement, cash flow statement, and balance sheet.

A company issues debt and uses the proceeds to buy back stock, which increases its EPS. Why should you be skeptical of that improvement?

A company has EBITDA of $150M and Interest Expense of $25M. What's its interest coverage ratio?

A company collects $300 upfront for services it hasn't delivered yet, increasing Deferred Revenue. Walk through the three statements at the moment of collection.

Parent Co. owns 65% of Sub Co., which has a Market Cap of $300M. What's the value of the Noncontrolling Interest based on Market Cap?

A company incurs $160 in operating expenses but doesn't pay cash yet, recorded as an increase in Accounts Payable. Walk through the three statements, assuming a 25% tax rate.

How does Paid-in-Kind (PIK) interest differ from ordinary cash interest, mechanically?

A company has Days Sales Outstanding of 20, Days Inventory Outstanding of 45, and Days Payable Outstanding of 50. What's its Cash Conversion Cycle?

A company grants $200 in stock-based compensation to employees. Walk through the three statements, assuming a 25% tax rate and using the simplified treatment where SBC results in cash-tax savings (the more precise treatment would show the Deferred Tax Asset increasing instead of cash, since SBC usually isn't cash-tax deductible when granted).

Why do we add back stock-based compensation on the cash flow statement, but still treat it as a real cost to the company in valuation?

Parent Co. owns 70% of Sub Co. (consolidated) and this stays unchanged all year. Parent's standalone Net Income is $150 with $30 in Dividends; Sub Co.'s Net Income is $50 with $10 in Dividends. Walk through the year's impact on Parent's consolidated statements.

A company's Working Capital increases from $50 to $95 over the year. What's the Change in Working Capital shown on its Cash Flow Statement?

A company has accumulated $600M in net operating losses. At a 25% tax rate, what's the value of the resulting deferred tax asset?

A company has Net Income of $99M and average Shareholders' Equity of $450M. What's its ROE?

A company grants $80 of SBC that isn't cash-tax deductible yet. At a 25% tax rate, what's the resulting Deferred Tax Asset?

A common misconception is that recent accounting rule changes eliminated the Available-for-Sale and Held-to-Maturity categories entirely. What actually changed?

Name two ways a company's cash flow statement might look different if it reports under IFRS instead of U.S. GAAP.

Walk me through how a $10 increase in depreciation flows through all three financial statements, assuming a 30% tax rate.

Why might a company choose to issue a Convertible Bond instead of a traditional bond?

Parent Co. already owns a 25% stake in Sub Co. (equity method). This year, Sub Co. earns $160 in Net Income and pays $60 in Dividends. Walk through the impact on Parent Co.'s three statements.

An acquirer buys a target for $600M in cash. The target's Common Shareholders' Equity is $350M. The deal allocates $100M to identifiable intangible assets, with the rest going to goodwill. Walk through what happens to the acquirer's balance sheet.

A company has Net Income of $28M and average Shareholders' Equity of $350M. What's its ROE?

How are Unrealized Gains and Losses treated differently for Trading (FVPL) securities versus Available-for-Sale (AFS) securities?

A company has EBIT of $200M and a 25% tax rate. What's its NOPAT?

A company has EBIT of $120M and a 25% tax rate. What's its NOPAT (Net Operating Profit After Tax)?

A company sells equipment listed at $180 on its balance sheet for $140 in cash. Walk through the three statements, assuming a 25% tax rate.

A company buys equipment for $450K with a 9-year useful life, depreciated straight-line. What's the annual depreciation expense?

Why might two companies with identical net income have very different cash flow from operations?

A company issues a $200 Face Value bond with $10 in Issuance Fees (straight-line amortization over 5 years) and a 6% coupon rate. It repays the entire principal early, at the end of Year 2. Walk through the Year 2 impact on all three statements, assuming a 25% tax rate.

Why does a company issuing a Convertible Bond split it into separate Liability and Equity components at issuance?

Why might a company issue debt at an Original Issue Discount (OID) instead of at par?

If inventory costs are rising, how do LIFO and FIFO differently affect a company's reported Net Income and Cash Flow?

A company that follows U.S. GAAP signs a 5-year operating lease with a Present Value of $400 and pays $80 in cash rent per year. The discount rate is 6%. Walk through the first year's impact on all three statements (including the initial signing), assuming a 25% tax rate.

Why can a company's reported Net Income sometimes exceed its Pre-Tax Income?

How might the financial statements of a company based in the U.K. or Germany look different from a U.S. company's, even though the underlying business is similar?

A company's Pension Liability (Projected Benefit Obligation) is $600M and its Pension Plan Assets are $450M. What's its Unfunded Pension?

A company's Depreciation increases by $60. Walk through the three statements, assuming a 25% tax rate.

A company grants $60 of SBC that's not initially cash-tax deductible. By the time employees exercise their options, it's worth $180. Walk through the tax impact at grant and at exercise, assuming a 25% tax rate and U.S. GAAP treatment.

A company holds $250 in Trading/FVPL Equity Securities and records an Unrealized Loss of $60 on them this year. Walk through the impact on all three statements, assuming a 25% tax rate.

A company has accumulated $200M in net operating losses. At a 25% tax rate, what's the value of the resulting deferred tax asset?

A company decides to prepay an entire year of rent upfront in exchange for a discount, rather than paying month to month. Does this improve its cash flow?

What's the difference between the Face Value, Book Value, and Market Value of a company's Debt?

Why is the majority of a company's Pension Expense on the income statement non-cash?

What's the practical difference between cash accounting and accrual accounting, using a sale made on credit as an example?

A company has NOPAT of $75M and Average Invested Capital of $500M. What's its ROIC?

A company's Cash Flow Statement starts with Operating Income instead of Net Income. What should you do before using it in a model?

What happens to a Convertible Bond's Liability and Equity components if it actually converts into shares before maturity?

A company has a Days Sales Outstanding of 5 and a Days Payable Outstanding of 60. What does that combination tell you about the company?

A company issues a $300 Face Value bond with 4% cash interest and 6% PIK interest (ignore Issuance Fees). Walk through Year 1's impact on all three statements, assuming a 25% tax rate.

A company signs a 10-year finance lease with a Present Value of $180 (already calculated from the future lease payments) and pays $25 in cash rent per year. The discount rate is 5%. Ignoring taxes, walk through the first year's impact on the income statement, cash flow statement, and balance sheet.

A company sells equipment listed at $150 on its balance sheet for $210 in cash. Walk through the three statements, assuming a 25% tax rate.

A company has Net Income of $45M and average Shareholders' Equity of $300M. What's its Return on Equity?

SBC granted at $50 is later worth $170 when employees exercise their options. At a 25% tax rate, what's the Excess Tax Benefit?

A company has Total Debt of $90M and EBITDA of $60M. What's its leverage ratio?

A company's Working Capital increases from $80 to $150 over the year. What's the Change in Working Capital shown on its Cash Flow Statement?

A company buys equipment for $840K with a 7-year useful life, depreciated straight-line. What's the annual depreciation expense?

A company has EBIT of $360M and a 25% tax rate. What's its NOPAT?

What's the difference between goodwill and other intangible assets created in an acquisition?

A company buys equipment for $600K with a 6-year useful life, depreciated straight-line. What's the annual depreciation expense?

How does Stock-Based Compensation's tax treatment change once employees actually exercise their options or receive their shares?

Your company acquires a target for $400, split 50/50 between new Debt and new Common Stock. The target has $240 in Assets, no Liabilities, and $240 in Common Shareholders' Equity. The purchase premium is split evenly between Goodwill and Other Intangible Assets. In Year 1, the acquired business contributes $150 in Revenue and $82 in OpEx, the Other Intangibles amortize over 5 years, and the new Debt carries a 6% interest rate. Walk through (1) the balance sheet immediately after the deal closes, and (2) the first year's impact on all three statements. Assume a 25% tax rate.

A company issues $150 of Debt with $9 in Issuance Fees, amortized straight-line over 3 years. What's the annual Amortization of Issuance Fees?

Could you construct a company's Income Statement using only its Balance Sheet and Cash Flow Statement? Why or why not?

Why doesn't goodwill amortize the way other intangible assets do?

What's the difference between EBIT and EBITDA, and why is EBITDA often used as a cash flow proxy?

What does "Unfunded Pension" mean, and why does it get added to Enterprise Value?

A company issues a $150 Face Value Convertible Bond with a Liability Component of $110 (so an Equity Component of $40), $5 in Issuance Fees (straight-line amortization over 5 years), and a 2% coupon rate. Walk through (1) the initial issuance and (2) Year 1's impact on all three statements, assuming a 25% tax rate.

A company has a $400 Face Value bond with 3% cash interest and 5% PIK interest. What's the total Interest Expense in Year 1?

A company has Net Income of $18M and average Total Assets of $600M. What's its ROA?

A company's Working Capital decreases from $300 to $180 over the year. What's the Change in Working Capital shown on its Cash Flow Statement?

A company has Days Sales Outstanding of 40, Days Inventory Outstanding of 55, and Days Payable Outstanding of 35. What's its Cash Conversion Cycle?

What's the difference between accounts receivable and deferred revenue?

A company starts offering customers a 12-month installment plan instead of requiring full payment upfront. How does this affect its cash flow in the short term versus the long term?

A company has NOPAT of $84M and average Invested Capital of $700M. What's its ROIC?

A company collects $480 upfront for a 12-month service contract (Deferred Revenue). By year-end, it has delivered 3 months of the contract. Walk through the full year's combined impact on all three statements, assuming a 25% tax rate.

A company has Days Sales Outstanding of 50, Days Inventory Outstanding of 30, and Days Payable Outstanding of 20. What's its Cash Conversion Cycle?

A company has Days Sales Outstanding of 35, Days Inventory Outstanding of 60, and Days Payable Outstanding of 40. What's its Cash Conversion Cycle?

Using the same scenario (prices rose from $8/unit to $18/unit, 25 units sold), what's the COGS under FIFO?

A company has accumulated $150M in net operating losses. At a 30% tax rate, what's the value of the resulting deferred tax asset?

A company sells equipment listed at $200 on its balance sheet for $160 in cash. At a 25% tax rate, what's the resulting change in Net Income (state it as a positive or negative number)?

A company has Total Debt of $180M and EBITDA of $45M. What's its leverage ratio?

A company's EBITDA has grown 20% a year for three years, but it just filed for bankruptcy. How is that possible?

Why doesn't IFRS allow companies to use the LIFO inventory method?

A company has accumulated $320M in net operating losses. At a 25% tax rate, what's the value of the resulting deferred tax asset?

What's a net operating loss carryforward, and how does it show up on the balance sheet?

What is a deferred tax liability, and when does it increase vs. decrease?

Walk me through the three financial statements.

A company buys Inventory throughout the year; prices rose from $8/unit to $18/unit. It sells 25 units. Under LIFO, what's the COGS?

A company writes down a factory by $120 due to storm damage. Walk through the three statements, assuming a 25% tax rate (write-downs are not cash-tax deductible).

What's the difference between Defined-Contribution and Defined-Benefit pension plans, and why is the accounting so much more complex for the latter?

A company issues $250 of Debt on January 1 at 8% interest and repays 12% of the principal by year-end. Walk through the full year's impact on all three statements, assuming a 25% tax rate and ignoring what the debt proceeds were used for.

A company has EBIT of $80M and a 30% tax rate. What's its NOPAT?

A company prepays $120 in insurance for future coverage. Walk through the three statements at the moment of prepayment.

Why aren't Preferred Dividends tax-deductible, even though they reduce the income available to common shareholders?

A company buys equipment for $1,000K with a 10-year useful life, depreciated straight-line. What's the annual depreciation expense?

What do the leverage ratio and interest coverage ratio each tell you about a company?

What is working capital and why does it matter?

A company has Net Income of $60M and average Shareholders' Equity of $400M. What's its ROE?

What's the difference between Return on Equity and Return on Invested Capital, and when would you prefer one over the other?

A company has NOPAT of $60M and average Invested Capital of $400M. What's its ROIC?

How can a company artificially boost its Return on Equity by using leverage, and what would you check to catch it?

A company's Working Capital increases from $120 to $200 over the year. What's the Change in Working Capital shown on its Cash Flow Statement?

What's the difference between the equity method and consolidation accounting, and what determines which one applies?

Where does an increase in inventory show up across the three financial statements?

A company has EBITDA of $60M and Interest Expense of $12M. What's its interest coverage ratio?

A company has EBITDA of $45M and Interest Expense of $15M. What's its interest coverage ratio?

A company keeps recording "Loss on Debt Extinguishment" whenever it repays debt early. Why does this happen?

Why does an increase in a company's Working Capital reduce its cash flow, even though "more working capital" sounds like a good thing?

What's the difference between an operating lease and a capital (finance) lease?

A company has Total Debt of $350M and EBITDA of $70M. What's its leverage ratio?

A company has Total Debt of $240M and EBITDA of $60M. What's its leverage ratio?

A company has Net Income of $40M and average Total Assets of $800M. What's its ROA?

A company buys $250 of inventory for cash, ahead of selling it. Walk through the three statements at the moment of purchase.

A company has EBITDA of $80M and Interest Expense of $10M. What's its interest coverage ratio?

A company delivers $200 of services to a customer but doesn't collect cash yet, increasing Accounts Receivable by $200. Walk through the three statements, assuming a 25% tax rate.