CFF Exam 13 -15

1.

2 points

Practical constraints that may limit an injured firm's lost profits include all of the following except

Managerial capacity

Legal capacity

Production capacity

Financing capacity

2.

2 points

The beta parameter in the capital asset pricing model is best described as _____.

A measure of a market portfolio, such as the S&P 500 stock index.

The relationship between a risk free asset and the market portfolio.

The absolute riskiness of a particular asset

The sensitivity of an asset's return relative to the returns of a market portfolio.

3.

2 points

Using an ex ante approach, which is the amount of damages for the theft of a high school yearbook having Janis Joplin's signature, using the following information:
Date of theft: January 1, 1961
Date of thief's trial: January 1, 1971
Yearbook's value as of the date of theft: $5
Yearbook's value as of the date of trial: $1,000

$5

$5 plus prejudgment interest to date of trial

$1,000

Present value of $1,000 as of date of theft

4.

2 points

Brenda is married to Tom. Three years ago Tom confided in Brenda that he overstated certain expenses of his unincorporated business in order to lower the amount of taxes to be paid. Brenda knows that Tom has consistently done this for the last three years. Can Brenda avail herself of the innocent spouse rules contained in IRC Section 6015 for the amount owing for the last three years?

Yes, because Brenda did not commit this act of evasion.

Yes, but only if Brenda did not file separate tax returns during the last year.

Yes, if Brenda files the election referred to in IRC Section 6105 within two years after the IRS begins collection efforts against her.

No

5.

2 points

General kinds of damages include which of the following?

Causal damages

Liability damages

Compensatory damages

Mitigation damages

6.

2 points

An asset's value is best described as ______.

An exchange between buyers and sellers

The discounted expected future cash flows

The amount a person offers to pay

The trade-off between risk and return

7.

2 points

Which of the following statements about damages related to personal physical injuries is false?

Mitigation does not apply to parties with personal physical injuries

Damages are not taxable

Lost wages should be measured from after-tax wages, rather than gross wages

Future lost wages should be discounted using a rate of return on a safe investment

8.

2 points

In terms of calculations of prejudgment interest and present values of lost profits, an ex post approach generally applies:
1. All lost profits - discount to the date of injury
2. Future lost profits - discount to the date of trial
3. Prejudgment interest - calculated on the present value of all lost profits as of the date of injury to the date of trial
4. Prejudgment interest - calculated on lost profits to the date of trial

I & II

I & IV

II & III

II & IV

9.

2 points

When a mature injured firm has a sudden and permanent impairment of profits, the best compensatory damage measure is most likely ______.

Lost profits

Diminution of value

Unjust enrichment

Punitive

10.

2 points

In most jurisdictions, which of the following factors is the most important difference between business litigation and personal injury litigation?

Time horizon for estimating losses

Prejudgment interest

Discount rate for present value calculations

Preference of ex ante versus ex post approaches

11.

2 points

Unjust enrichment is a damage remedy applying which general damage model?

Before-and-after methodolgies

Yardstick (or benchmark) methodolgies

Market share methodologies

Wrongdoer's ill-gotten profits methodolgies

12.

2 points

Firm capital structure consists of ______

Debt and equity

Assets and liabilities

Current and noncurrent assets

Current and noncurrent liabilities

13.

2 points

Which of the following statements is true?

Boards of directors composed mainly of inside directors are no more indicative of an increased risk of fraud than boards not heavily composed of inside directors.

Voluntary management forecasts that contain overly optimistic financial results are not a red flag.

An improved financial condition of a company is a red flag but only if its industry is also experiencing similar improvements.

An abnormal decline in customer demand of products or services provided by a company is a red flag.

14.

2 points

When valuing a privately-owned business, we might assess all of the following firm characteristics to identify comparable firms except _____.

Total assets

Market capitalization

Financial ratios

Industry

15.

2 points

Stevens Construction Company, Inc. has two bank accounts at different banks and occasionally transfers money between the two accounts. Which of the following combinations shown in the following bank transfer schedule would overstate the balance of cash at June 30, the end of its fiscal year
Disbursements & dates recorded 1st by books then by bank 2nd answer Deposits

Disbursement 6/30 (Books) 7/2(Bank) Deposit 6/30 6/30

Disbursement 6/30(Books) 6/30(Bank) Deposit 6/30 7/3

Disbursement 7/3(books) 7/4(Bank) Deposit 6/30 7/2

Disbursement 7/3(books) 7/4(Bank) Deposit 7/2 7/3

16.

2 points

In case law, "Profits" in the term of lost profits generally means ____.

Net income

Pretax income

Cash flow

Whatever measure is appropriate given the facts and circumstances of a particular case.

17.

2 points

One principal underlying the income approach is that investors _____.

Are adverse to risk

Minimize their risk

Seek to minimize their returns

Are subject to investor sentiment

18.

2 points

Multiple deliverable arrangements provide opportunities to engage in ______.

Channel stuffing

Recording sham sales

Overstating expenses

Premature revenue recognition

19.

2 points

All of the following statements about the asset approach are generally true except _____.

For a large operating business that is highly profitable, the asset approach is more costly than the income or market approaches on average.

For a successful operating business with $100 M in sales, all assets that the firm owns are likely to appear in its audited financial statements.

The asset approach shares general valuation models with the income and market approaches

A holding company's unrecognized taxes on capital assets that have appreciated in value may be a liability for valuation purposes

20.

2 points

In civil litigation, mitigation is best explained as

A wrongdoer has the duty to minimize harm

An injured party has the burden of proving that its damages were caused by the wrongdoer

A wrongdoer must have violated some law.

An injured party has a responsibility to act in a way that minimizes its losses to the extent it is reasonable

21.

2 points

Which of the following characteristics about punitive damages is false?

Makes an injured party whole.

Awarded in addition to compensatory damages

Could be based on wrongdoer's net worth

Could be based on wrongdoer's liquidity

22.

2 points

Which of the following items about the equity risk premium (ERP) is false?

The ERP in cost of capital estimates is expectational in nature

A proxy for the ERP is the average historical differences between stocks and risk-free assets

An ERP measurement depends on which risk-free asset is selected

Risk-free assets for ERP estimates are commonly AAA-rated corporate bonds

23.

2 points

In observing the prices of comparable firms having different sizes, we will likely _______

Use only comparable firms having the same size of what we are valuing

Adjust the prices by the consumer price index to make the prices comparable over time

Use the observed price as is

Scale the prices using some common characteristics

24.

2 points

Using the market approach, all of the following might be comparable to something being priced except _____

Municipal bond

Benchmark rates of returns

Tomatoes

Piece of furniture

25.

2 points

Earnings management is _______.

Expressly forbidden by GAAP.

Often expected by the market.

Universally accepted as an ethical practice.

Engaged in by companies only during periods in which they experience dismal operating performance.

26.

2 points

Stevens Construction Company, Inc. has two bank accounts at different banks and occasionally transfers money between the two accounts. Which of the following combinations shown in the following bank transfer schedule would overstate the balance of cash at June 30, the end of its fiscal year
Disbursements & dates recorded 1st by books then by bank 2nd answer Deposits

Disbursement 6/30 (Books) 7/2(Bank) Deposit 6/30 6/30

Disbursement 6/30(Books) 6/30(Bank) Deposit 6/30 7/3

Disbursement 7/3(books) 7/4(Bank) Deposit 6/30 7/2

Disbursement 7/3(books) 7/4(Bank) Deposit 7/2 7/3

27.

2 points

Tom, in anticipation of preparing annual financial statements, failed to adjust the perpetual inventory records to the physical count taken at year-end. Most likely, Tom has committed _______.

Ordinary negligence

Gross negligence or constructive fraud

Fraud

None of the above.

28.

2 points

What is the present value of a bond paying annual interest payments of $80, having a face amount of $1,000, and five-years to maturity when the market interest rate is 8 percent.

$945

$1,000

$1,053

$1,107

29.

2 points

Damage models using Yardstick (or benchmark) methodologies might use all of the following observations except

Injured firm's performance at another location

Industry average performance

Injured firm's performance before the injury

Average performance of similar firm's

30.

2 points

Overstated contingent liabilities that management can use to artificially increase income of subsequent periods are sometimes called _______.

Accrued liabilties

Cookie jar reserves

Accrued revenues

None of the above

31.

2 points

In US Federal courts, Daubert-type evidentiary rules on the admissibility of expert testimony explicitly address's the expert's:
1. Qualifications
2. Methodology
3. Application of the case facts

I only

II only

I & II

II & III

32.

2 points

The market approach ______

Is mathematical in nature

Is observational in nature

Is not forward looking

Observes market returns

33.

2 points

When measuring lost profits damages, avoided costs are best described as _____.

Variable costs

Fixed costs

Extra out-of-pocket costs

Costs not incurred

34.

2 points

Winsome Company borrowed money from one its major customers, Quirky, two years ago. The current balance of the liability is $100,000 (Winsome's only liability), and the current balance of the accounts receivable that Quirky owes Winsome is $20,000. The total equity of Winsome is now $400,000. Winsome wants to offset the liability with the receivable and report a net liability in the financial statements. Will this proposal of Winsome, if carried out, have any effect on the debt-to-equity ratio of Winsome?

No

Yes, it will decrease the debt to equity ratio of Winsome

Yes, it will increase the debt to equity ratio of Winsome

Yes, and Winsome proposal is appropriate under GAAP

35.

2 points

All of the following items describe a firm's cost of capital except _____

risk-free rate plus equity-risk premium

Equal to the required rate of returns

Consists of costs for debt and equity capital

Influenced by changes in the capital markets

36.

2 points

King Company sold merchandise to Princeton, Inc. for $100,000 near the end of its fiscal year. King used the $100,000 it received from the sale to pay off a loan it owed Princeton. This type of transaction is specifically called ______.

A conditional sale.

Round-tripping

A sale

A consignment sale

37.

2 points

For valuation purposes, discount cash flow models discount future cash flows using the _____.

Actual return

Average return

Expected return

Historical return

38.

2 points

When a mature injured firm has a temporary impairment of profits, the best compensatory damage measure is _____.

Lost profits

Diminution of value

Unjust enrichment

Punitive

39.

2 points

The standard three valuation approaches are all of the following except?

Asset

Income

Revenue

Market

40.

2 points

Which of the following is not a general valuation model?

Relative value

Option pricing

Absolute value

Restrictive value

41.

2 points

Candace was instructed by her supervisor to change the dates on certain accounts receivable. She couldn't remember which way to re date the receivables. Which of the following acts is the one her supervisor most likely wants her to perform?

Change the date so it is farther out in the future.

Change the date so it is closer to the present date.

Either A or B

Neither A Nor B

42.

2 points

The capital asset pricing model specifies how many risk factors?

None

One

Two

Three

43.

2 points

Using an ex post approach, what is the amount of damages for the theft of a high school yearbook having Janis Joplin's signature using the following information:
Date of theft: January 1, 1961
Date of thief's trial: January 1, 1971
Yearbooks value as of date of theft: $5
Yearbooks value as of date of trial: $1,000

$5

$5 plus prejudgment interest to date of trial

$1,000

Present value of $1,000 as of date of theft

44.

2 points

The reason tax consequences related to subsequent events (for example, exercise of options) are considered is that _______.

Receipt of these assets pursuant to a distribution of the marital estate should be avoided.

Inadequate consideration of tax consequences can create in inequality that may be overlooked by the court and create a hardship on a party to the divorce action.

The tax consequences must be disclosed to the IRS by the date the divorce is finalized.

The court should determine whether one or both parties have not complied with tax law.

45.

2 points

Often, the rationalization for committing financial statement fraud is ______.

To help others, such as employees and stockholders.

To satisfy a level of greed by the perpetrator of the fraud.

To inflict damage to the capital markets

To compensate for a feeling of helplessness.

46.

2 points

The standard discounted cash flows model includes all of the following components except ______.

Amount of cash flows

Timing of cash flows

Return on assets

Required return

47.

2 points

Evidentiary laws generally require injured parties to prove they suffered lost profits by what standard?

Certainty

Reasonable certainty

Beyond a reasonable doubt

More likely than not.

48.

2 points

The 1933 US Supreme Court opinion that viewed circumstances using the "book of wisdom" is best explained as

Use all information up to the present time

Use only information known as of the time of injury

Use present lost profits discounted back to the date of injury

Use past lost profits and prejudgment interest up to the present

49.

2 points

According to federal income tax laws, to be includible in the income of the recipient and deductible by the payer, alimony payments must meet all but which of the following?

The payments must be pursuant to a written divorce or separation agreement.

At the time the payments are made, the recipient and payer are not members of the same household.

If a requirement exists to make payments after the recipient's death, the payments must be to a qualified individual (for example, a child of the taxpayer).

The payments must be in cash or its equivalent.

50.

2 points

When valuing a privately-owned business, all of the following might be a comparable except ______.

The S&P 500 stock portfolio

Earlier sale of some of the business's stock

Stock of a publicly registered company

Business unit sold by a publicly-registered company.