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ACCT 574 DEVRY FINAL EXAM (2 DIFFERENT VERSIONS)

19. (TCO F) Determine

19. (TCO F) Determine the value of the option for the Bayer Company by delaying its investment for one year. Consider the value of the option is the difference between traditional present value analysis and real option analysis. The initial investment is for $700,000, but the investment will not be made until next year. The investment is being delayed so that Bayer’s management can better determine the market for its product. There are two alternatives for sales in the next year of $1,000,000 or $800,000. Each sales level has an occurrence probability of 50%. The cost of capital for Bayer is 8%. If traditional present value analysis shows that the net present value of the project is $75,000, what is the value of the option (the ability to wait one year before executing or abandoning the project)? 20. (TCO G) One/some of the most important IRS guidelines for gift and estate tax purposes: 21. (TCO G) The “cost approach” to business valuation involves: 22. (TCO G) The Indy Company experiences the following annual incomes over the last five years: $60,000, $70,000, $110,000, $150,000, $160,000 (from oldest to most current). A firm like Indy Company commands a 10% discount rate and a price earnings ratio of 10. Using a non-weighted earnings model, what is the value of the firm? 23. (TCO G) “Equitable distribution” in divorce cases is driven by: 24. (TCO G) A 100% controlling interest in a business: 25. (TCO G) Goodfood Products produces breakfast cereal. The company’s weighted average cost of capital is 15%. The company forecasted the following free cash flows for the next 20 years. Year………………………….Free Cash Flows 1……………………………… $10,000,000 2…………………………………15,000,000 3…………………………………20,000,000 4…………………………………22,000,000 5…………………………………25,000,000 6-10…………………………….20,000,000 per year 11-20…………………………..15,000,000 per year

Use the discounted cash flow approach to value the Goodfood Products Company. Note – you will need a present value table or a financial calculator to solve this problem. 1. (TCO F) Define a real option. Why is there any value attributed to a real option? 2. (TCO G) Why would a forensic accountant need to perform a business valuation? Can people not just look up the value at a particular date on the appropriate stock exchange? Explain. 3. (TCO D) What three elements must be proven to win in a fraud dispute? Explain.

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