Why value value?
Define the Value of Operations using estimates of free cash flow. a) Value of Operations = PV of FCF during the explicit forecast period + PV of FCF after the explicit forecast period. b) Value of Operations = PV of FCF during the explicit forecast period + financial assets - debt. c) Value of Operations = PV of all future FCF - net debt.
Value of Operations = PV of FCF during the explicit forecast period + PV of FCF after the explicit forecast period.
Net earnings are the profit available to equity holders. To whom is NOPLAT available to? a) To all investors b) To equity holders, bond holders, banks and the government c) To equity holders, bond holders, banks, the government and the trade creditor
a) To all investors
Write down the formula for calculating the WACC in its simplest form. a) (Target level of debt to enterprise value x cost of debt, adjusted for tax) + (target level of equity to enterprise value x cost of equity). b) (Target level of short term debt to enterprise value x cost of short term debt, adjusted for tax) + (Target level of debt to enterprise value x cost of debt, adjusted for tax) + (target level of equity to enterprise value x cost of equity). c) (Target level of debt to book value of capital employed x cost of debt, adjusted for tax) + (target level of equity to book value of capital employed x cost of equity).
a) (Target level of debt to enterprise value x cost of debt, adjusted for tax) + (target level of equity to enterprise value x cost of equity).
It is important to understand the reasons for variations in growth. Which are the three main components for growth? a) 1) Portfolio momentum. 2) Market share performance. 3) Mergers & Acquisitions. b) 1) Innovative business methods. 2) Unique resources. 3) Economies of scale c) 1) Product growth. 2) Price developments. 3) Product renewal.
a) 1) Portfolio momentum. 2) Market share performance. 3) Mergers & Acquisitions.
There are three steps to take, to secure the valuation model is technical robust, which? a) 1) The balance sheet must balance each year 2) the sum of invested capital and non-operating assets equals the cumulative source of financing 3) the change in excess cash and debt must line up with the cash flow statement. b) 1) The balance sheet must balance each year 2) the sum of net earnings equals the cumulative source of equity 3) the change in net debt must line up with the change in cash in the cash flow statement. c) 1) The interest rate on debt, must equal the cost for debt in the company 2) the change in cash must equal the cumulative change in cash for the estimation period 3) the debt to equity ratio must held stable during the estimation period
a) 1) The balance sheet must balance each year 2) the sum of invested capital and non-operating assets equals the cumulative source of financing 3) the change in excess cash and debt must line up with the cash flow statement.
If a company has a beta of 0.6 and the risk-free rate of return is 3.9 percent, the market risk premium is 5.4 percent, the risk premium for debt is 2,0 percent and the debt to equity ratio is 1,0x. What is the cost of equity? a) 7,14 percent b) 6,52 percent c) 4,57 percent
a) 7,14 percent
What is the theme that links most major financial crises and how does the pattern looks? a) Aggressive use of leverage b) High valuations, measured as high P/E-ratios c) High inflation
a) Aggressive use of leverage
How should you incorporate a discontinued business in the enterprise value? a) Assets and liabilities associated with the discontinued operations are disclosed on a separate line as a net asset to fair value on the balance sheet. The most recent book value is therefore usually a good approximation. b) Their value should be modeled as part of free cash flow and included in the DCF-value of operations. c) Their value should be modeled by using net earnings in the discontinued operations, shown last in the income statement, and using the cost of capital for equity.
a) Assets and liabilities associated with the discontinued operations are disclosed on a separate line as a net asset to fair value on the balance sheet. The most recent book value is therefore usually a good approximation.
Why should we not divide the equity value by the diluted number of shares? a) Because the financial instruments, like convertible debt or warrants, that causes the dilution, has already been valued separately. b) Because the financial instruments, like convertible debt or warrants, that causes the dilution is a transaction between shareholders. c) Because the financial instruments, like convertible debt or warrants, that causes the dilution is already included in the balance sheet as liabilities.
a) Because the financial instruments, like convertible debt or warrants, that causes the dilution, has already been valued separately.
How can you write the formula for calculating the continuing value, if RONIC is equal to WACC? a) CVt = NOPLATt+1/WACC b) CVt = FCFt+1/WACC c) CVt= NOPLATt+1/(WACC - g)
a) CVt = NOPLATt+1/WACC
To what should interest expenses be tied to in the estimation process to avoid the so-called circularity problem? a) Calculate the interest expense in percent on the ingoing debt for the year, and apply the ratio on the ingoing debt for the estimated period. b) Calculate the interest expense in percent on the outgoing debt for the year, and apply the ratio on the outgoing debt for the estimated period. c) Calculate the interest expense in percent on the average debt for the year, and apply the ratio on the average debt for the estimated period.
a) Calculate the interest expense in percent on the ingoing debt for the year, and apply the ratio on the ingoing debt for the estimated period.
Which of the following are NOT non-equity claims? a) Call options b) Minorityinterests c) Preferred stock
a) Call options
Define FCF. a) Cash flow before financing (in the in the cash flow statement), add back interest income and interest costs and adjust for taxes on interest income and interest costs. b) EBIT (or EBITA) less adjusted taxes, less investments in PP&E. c) NOPLAT, add back depreciation.
a) Cash flow before financing (in the in the cash flow statement), add back interest income and interest costs and adjust for taxes on interest income and interest cost
What is the correlation in the U.S and Europe between total return to shareholders and employment growth? a) Companies with the highest TRS had the largest increase in employment. b) Companies with the lowest TRS had the largest increase in employment. c) There were poor correlation between TRS and employment.
a) Companies with the highest TRS had the largest increase in employment.
The majority of corporate taxes are related to earnings (the statutory rate), but the authors gives some examples of non-operating tax effects that are not included in the statutory rate. Which of the following is NOT one of the examples. a) Depreciations on property, plant and equipment (PPE) at an accelerated rate. b) Tax credits related to ongoing research and development. c) One-time tax credits, for example tax rebates related to historical tax disputes.
a) Depreciations on property, plant and equipment (PPE) at an accelerated rate.
If you use EBITDA and EBITDAR to measure the ability to meet short-term obligations, which factors do you compare them to? a) EBITDA to interest expenes, EBITDAR to interest expenses plus rental expenses. b) EBITDA to debt, EBITDAR to debt plus present value of future lease- payments. c) EBITDA to fixed assets plus accumulated depreciations, EBITDAR to fixed assets plus accumulated depreciations, with the present value of future lease- payments added.
a) EBITDA to interest expenes, EBITDAR to interest expenses plus rental expenses.
Which are the three most common non-operating assets? a) Excess cash, non-consolidated subsidiaries and financial subsidiaries. b) Excess cash, government bonds and shares in listed companies. c) Excess cash, excess real estate and pension assets.
a) Excess cash, non-consolidated subsidiaries and financial subsidiaries.
Define IR. a) IR = Net Investments / NOPLAT. b) IR = 1 - (g / ROIC). c) IR = FCF / NOPLAT
a) IR = Net Investments / NOPLAT
Define the value of the company at time 0 using economic profit for year 1. a) Invested capital at time 0 + (Economic profit at time 1 / (WACC - g)) b) Invested capital at time 0 + (Economic profit at time 1 / (WACC)) c) Invested capital at time 0 + (Economic profit at time 1 / (ROIC-WACC))
a) Invested capital at time 0 + (Economic profit at time 1 / (WACC - g))
Describe how growth, return on invested capital (ROIC) and the investment rate are tied mathematically. a) Investment rate = Growth / Return on invested capital b) Investment rate = Growth x Return on invested capital c) Investment rate = Growth + return on invested capital
a) Investment rate = Growth / Return on invested capital
Which of the following are NOT examples of why you should not use the statutory tax rate when estimating operating taxes? a) Many companies pay lower taxes than the statutory rate because interest on loans are tax deductible b) Many companies pay lower taxes than the statutory rate because of low foreign taxes c) Many companies pay lower taxes than the statutory rate because of operating tax credits
a) Many companies pay lower taxes than the statutory rate because interest on loans are tax deductible
Define NOPLAT. a) Net profit less adjusted taxes. b) Revenues less operating costs, less a standard tax rate on that income. c) Net Operating Profit Less Amortizations and Taxes.
a) Net profit less adjusted taxes.
Assume a company has a constant growth rate, what will happen to the value if ROIC increase? a) The value will increase, because expanding ROIC at a constant growth rate will increase FCF. b) The value will decrease, because expanding with ROIC below the cost of capital destroys value. c) The value will increase, because expanding with ROIC below the cost of capital increase value.
a) The value will increase, because expanding ROIC at a constant growth rate will increase FCF.
Grade the following three sectors according to historical ROIC - Pharmaceuticals, consumer goods and commodities. What is the reason for the differences in performance? a) Pharmaceuticals are at the top, because pharmaceuticals can develop innovative products that are protected by patents. b) Consumer goods are at the top, because large consumer goods companies can protect their market share trough extensive use of marketing. c) Commodities are at the top, because the global industrialization creates a long- term demand for commodities, constantly increasing the average prizes.
a) Pharmaceuticals are at the top, because pharmaceuticals can develop innovative products that are protected by patents.
Grade the following three sectors according to historical ROIC - Pharmaceuticals, consumer goods and commodities. What is the reason for the differences in performance? a) Pharmaceuticals, consumer goods, commodities. Pharmaceuticals are at the top because they can develop innovative products protected by patents. b) Consumer goods, pharmaceuticals, commodities. Consumer goods are at the top because they have the highest risk adjusted ROIC due to high entries of barriers. c) Commodities, pharmaceuticals, consumer goods. Commodities has the highest ROIC over time because the fluctuations in ROIC increases the demand from investors to compensate with a high level of ROIC.
a) Pharmaceuticals, consumer goods, commodities. Pharmaceuticals are at the top because they can develop innovative products protected by patents.
Which are the three factors determining if a company can have a sustainable high ROIC? a) Product life cycle, persistence of competitive advantage, product renewal b) Frequent innovation, high investment rate, persistent marketing investments c) Niche products, global presence, well developed use of suppliers
a) Product life cycle, persistence of competitive advantage, product renewal
How can you calculate ROIC, using the relationship to revenue? a) ROIC = EBITDA/Revenues x Revenues/invested capital x (1- operating cash tax rate) b) ROIC = net earnings/Revenue x Revenue/equity capital c) ROIC = operating margin x turnover of invested capital, adjusted for the operating cash tax rate
a) ROIC = EBITDA/Revenues x Revenues/invested capital x (1- operating cash tax rate)
Which is most stable over time - ROIC, growth or cash flow? a) ROIC. b) Growth. c) Cash flow
a) ROIC.
What was the reason the fast growing company Walgreen and the significantly slower growing company Wrigley, between 1968-2007 had nearly the same shareholder return? a) Return on invested capital in Wrigley was higher. b) The debt to equity ratio in Wrigley was lower. c) The dividend distribution ratio in Wrigley was higher.
a) Return on invested capital in Wrigley was higher.
How does the "stock approach" for estimating assets differ from "the flow approach"? Which method is recommended? a) Stock approach - forecast the number in the balance sheet in percentage of revenue. Recommended. b) Flow approach - forecast the change in the item in the balance sheet as a percentage of revenue. Recommended. c) Stock approach - forecast the current assets as a number in the balance sheet, in percentage of revenue and forecast the investments in fixed assets, as a percentage of revenue. Recommended.
a) Stock approach - forecast the number in the balance sheet in percentage of revenue. Recommended.
What are the conclusions regarding growth strategies based on organic growth, compared to acquisitions. a) Strategies based on organic growth frequently have the highest return because they do not require much new capital. b) Strategies based on organic growth frequently have the lowest return because they require much development expenses. c) Strategies based on acquisitions frequently have the highest return because they substitute high marketing costs and margin compression.
a) Strategies based on organic growth frequently have the highest return because they do not require much new capital.
Compared to a EV/EBITA-multiple, what additional important restrictions does the Price/Sales-multiple (P/S) require? a) The P/S requires similar operating margins on the company's existing business. b) The P/S must be compared to growth, to be comparable to the EV/EBITA- multiple. c) The P/S must be compared to the EBITDA-margin, to be comparable to the EV/EBITA-multiple.
a) The P/S requires similar operating margins on the company's existing business.
How does the capital structure (debt or equity) affect the DCF- model? Which factor in the valuation model is affected? a) The capital structure does not affect the FCF, only the calculation of WACC. b) The capital structure does not affect the WACC, only the calculation of FCF. c) The capital structure does affect net earnings and the weighted average cost for equity.
a) The capital structure does not affect the FCF, only the calculation of WACC.
What is the most important principle underlying a successful implementation of the cost of capital (WACC)? a) The most important principle is consistency between the components of the WACC and the free cash flow. Free cash flow is available to all investors, therefore the WACC must include the required return to all investors. b)Themostimportantprincipleistheconsistencybetweenthecomponentsofthe WACC and EBIT. Since EBIT is available to all stakeholders before tax, therefore WACC must include the required return to all stakeholders before tax. c) The most important principle is the consistency between the components of the WACC and earnings per share, EPS. Since EPS is available to residual equity holders, WACC must include the required return of equity.
a) The most important principle is consistency between the components of the WACC and the free cash flow. Free cash flow is available to all investors, therefore the WACC must include the required return to all investors
Why is it better to evaluate the valuation by using a multiple based on EBITA, than a multiple based on net earnings? a) The p/e-ratio is distorted by capital structure and non-operating gains and losses. b) Deferred taxes and a financial net that normally deviates from the required cost of debt, distort the p/e-ratio. c) The p/e-ratio is distorted by amortization of acquired intangible assets, which are not affecting the cash flow.
a) The p/e-ratio is distorted by capital structure and non-operating gains and losses.
Assume a company has a cost of capital that is higher than the achieved ROIC. What will happen to the value of the company if the growth increases? a) The value will decrease, because expanding with ROIC below the cost of capital destroys value. b) The ROIC will increase and increase the value, because competitors will be forced out of the sector. c) The value will increase.
a) The value will decrease, because expanding with ROIC below the cost of capital destroys value.
Why is it better to calculate the ratio for the inventory to cost of goods sold, rather than to sales? a) To avoid distortions caused by changing prices on the products b) To avoid distortions from changing capital turn-over c) To avoid distortions caused by changing sales volumes
a) To avoid distortions caused by changing prices on the products
When calculating the beta in Home Depot the result was that, within two standard deviations, the beta was between 0.85 and 1.71, which was not particularly useful. How did the authors proceed to come up with something more useful? a) Use industry beta, rather than company beta b) Use volatility in return on equity, rather than the share price c) Use the company DCF-value over three years, calculated with a beta of 1.0 and compare the volatility in the value to peers.
a) Use industry beta, rather than company beta
Which are the three major factors that can distort the analysis of year-to-year revenue growth? a)1)Effectsofchangesincurrencyvalues,2)Mergers&Acquisitions,3)changes in accounting policy b) 1) Change in inflation rate, 2) change in the price of the products, 3) volume change of the products c) 1) Joint ventures, 2) Discontinued operations, 3) Non-consolidated subsidiaries
a)1)Effectsofchangesincurrencyvalues,2)Mergers&Acquisitions,3)changes in accounting policy
Which is most stable over time - ROIC or growth? a) ROIC b) Growth c) More or less similar.
a)ROIC
Explain the four parts in valuing a company according to the DCF- model. a) 1) Discount future dividends with the cost of capital 2) Identify surplus values in assets. 3) Identify surplus values in debt and non-equity claims. 4) Add/subtract the net surplus value to the discounted dividend value. b) 1) Discount free cash flow with the cost of capital 2) Value non-operating assets. 3) Value debt and non-equity claims. 4) Add the calculated continuing value. c) 1) Discount free cash flow with the cost of equity. 2) Identify and value non- operating assets. 3) Identify and value debt and non-equity claims. 4) Add the calculated continuing value.
b) 1) Discount free cash flow with the cost of capital 2) Value non-operating assets. 3) Value debt and non-equity claims. 4) Add the calculated continuing value.
Describe the three-step approach to estimating PP&E. a) 1) Forecast PP&E as a percentage of total assets, 2) calculate depreciation as a percentage of PP&E, 3) the investment is 1) and 2) b) 1) Forecast PP&E as a percentage of revenue, 2) calculate depreciation as a percentage of PP&E, 3) the investment is the sum of 1) and 2) c) 1) Forecast PP&E as a percentage of revenue, 2) calculate depreciation as a percentage of revenue, 3) the investment is the sum of 1) and 2)
b) 1) Forecast PP&E as a percentage of revenue, 2) calculate depreciation as a percentage of PP&E, 3) the investment is the sum of 1) and 2)
Which are the four sources of competitive advantage, to cost and capital efficiency? a) 1) Innovative products 2) Quality 3) Brand 4) Customer lock-in b) 1) Innovative business methods 2) Unique resources 3) Economies of scale 4) Scalable products c) 1) Product growth. 2) Price developments. 3) Product renewal 4) Rationale price dicipline
b) 1) Innovative business methods 2) Unique resources 3) Economies of scale 4) Scalable products
It is important to understand the reasons for variations in growth. Which are the three main components for growth? a) 1) Innovative business methods. 2) Unique resources. 3) Economies of scale b) 1) Portfolio momentum. 2) Market share performance. 3) Mergers & Acquisitions. c) 1) Product growth. 2) Price developments. 3) Product renewal.
b) 1) Portfolio momentum. 2) Market share performance. 3) Mergers & Acquisitions.
There are two unsuitable alternatives to calculating taxes, which? a) 1) To use the average taxes paid over a long period 2) to use the statutory rate b) 1) To use the statutory rate 2) To use the effective rate without adjustments c) 1) To use the average taxes paid over a long period 2) to use the effective rate without adjustments
b) 1) To use the statutory rate 2) To use the effective rate without adjustments
Explain the so-called S-curve in sustaining growth a) A new product starts with low sales growth. By using sophisticated marketing channels the company can reach key-customer groups, which increases growth. Customers outside the key-customer group are starting to buy the product and sales reach its peak. After the maximum penetration in the key- customer group growth rates declines and reach the same level as for the economy. b) A new product reaches early adopters and then spread to other users. After the maximum penetration is reach the growth rates declines to the same growth rate as for the economy. c) A new product reaches early adopters and then spread to other users. After the maximum penetration is reach the company creates growth through acquisitions. The synergies within marketing and production lower the cost of the product. The price of the product is lowered and sales growth pick-up speed again. When a high market share is reached the sales growth levels out on the same level as for the economy.
b) A new product reaches early adopters and then spread to other users. After the maximum penetration is reach the growth rates declines to the same growth rate as for the economy.
Why is it not possible to increase the value of a company by borrowing capital and repurchase shares, even if this leads to an increase in earnings per share? a) Because the growth prospects will be lower. b) Because the total cash flow of the business has not changed. c) Because the return of equity has not changed.
b) Because the total cash flow of the business has not changed.
Which are the sources of competitive advantage, to allow companies to charge price premiums? a) Unique resources, production efficiency and price discipline. b) Innovative products, economies of scale and scalable products. c) Quality, brand and customer lock-in.
c) Quality, brand and customer lock-in.
Why is it necessary to treat a finance subsidiary, even 100 percent controlled, as a non-operating asset in the calculation of enterprise value? a) Because a finance subsidiary includes only financial assets and liabilities. b) Because, including the finance subsidiary distort the return on invested capital and the free cash flow, which distort your perspective on the valuation. c) Because finance subsidiaries are accounted for using the equity method, meaning they are valued close to market value in the group account.
b) Because, including the finance subsidiary distort the return on invested capital and the free cash flow, which distort your perspective on the valuation.
Which are the steps in the forecasting process? a) Analyze the debt to equity ratio, calculate the risk free rate and the risk premium for debt and equity, weigh the cost for debt and equity together after tax. b) Build the revenue forecast; forecast the income statement and forecast the balance sheets, invested capital and non-operating assets. c) Calculate NOPLAT, deduct investment in working capital and in fixed assets.
b) Build the revenue forecast; forecast the income statement and forecast the balance sheets, invested capital and non-operating assets.
Write the recommended formula for calculating the continuing value? a) CVt = NOPLATt+1/WACC b) CVt = (NOPLATt+1 (1 - g/RONIC))/(WACC - g) c) CVt= FCF/(WACC - g)
b) CVt = (NOPLATt+1 (1 - g/RONIC))/(WACC - g)
Define invested capital from the equity liability side of the balance sheet. a) Liabilities + Equity b) Debt + Equity c) Operating assets, less operating liabilities
b) Debt + Equity
Which of the following are common "non-cash operating expenses" that you add back when converting NOPLAT to cash flow? a) Revaluation of real estate and provisions for restructuring costs. b) Depreciation and noncash employee compensation c) Revaluation of biological assets and revaluation of financial instruments.
b) Depreciation and noncash employee compensation
Define NOPLAT. a) EBIT (or EBITA) less amortization on tangible assets. b) EBIT (or EBITA) less adjusted taxes. c) EBIT (or EBITA) less associated companies and taxes.
b) EBIT (or EBITA) less adjusted taxes.
What is the top-down approach for revenue forecasting? a) Estimate revenue by forecasting for the countries the company is involved in: Industrial production, the change in producer prices and salary increases. b) Estimate revenue by forecasting the total market, market share and prices. c) Estimate the demand for existing customers, the customer turn-over and the potential for new customers.
b) Estimate revenue by forecasting the total market, market share and prices.
Describehowgrowth,returnoninvestedcapitalandtheinvestment rate are tied mathematically. a) Investment rate = growth x return on invested capital b) Investment rate = growth / return on invested capital c) Return on invested capital = investment rate x growth
b) Investment rate = growth / return on invested capital
What is the problem with using the statutory tax rate when computing operating taxes? a) It fails to recognize long-term deferred taxes. b) It fails to recognize that foreign earnings are often taxed at different levels. c) It fails to exclude the effect from one-time non-operating items.
b) It fails to recognize that foreign earnings are often taxed at different levels.
What is the SCP-structure? a) It is the sector-company-profitability, which will drive the long-term performance in an industry. b) It is the structure-conduct-performance framework, which is the structure of an industry that influences the conduct of competitors, which in turn drives the performance of the companies in the industry. c) It is the value drivers that influence an industry - strategic thinking, competitive advantage and performance efficiency, which is in turn drives the performance of an industry.
b) It is the structure-conduct-performance framework, which is the structure of an industry that influences the conduct of competitors, which in turn drives the performance of the companies in the industry.
Which type of growth strategy has a value creation below average? a) Make bolt-on acquisitions to accelerate product growth b) Make large acquisitions. c) Convince large customers to buy more of a product.
b) Make large acquisitions.
Explain "portfolio momentum". a) Total revenue growth thanks to acquired expansion in the subsidiaries included in the company portfolio b) Organic revenue growth thanks to overall expansion in the markets represented in its product portfolio c) Revenue growth thanks to expansion in the associated companies represented in its equity portfolio
b) Organic revenue growth thanks to overall expansion in the markets represented in its product portfolio
Which type of industry tend to have a high median ROIC? What is the characteristic for this group of companies? a) Basic metals industries, because the raw material is a scarce resource. b) Pharmaceuticals, because the products are protected by patents. c) Computer technology, because the barriers of entrance are high.
b) Pharmaceuticals, because the products are protected by patents.
If ROIC is calculated without goodwill, what does it measure, compared to if goodwill is included in the calculation? a) ROIC calculated including goodwill measures the competitiveness of the underlying business. b) ROIC calculated excluding goodwill measures the competitiveness of the underlying business. c) ROIC calculated including goodwill measures the competitiveness of the underlying subsidiaries.
b) ROIC calculated excluding goodwill measures the competitiveness of the underlying business.
Describe how companies in the United States and the United Kingdom are governed, compared to for example in the Netherlands and Germany. a) The Netherlands/Germany - minimize stakeholders risk b) The U.S - maximize shareholders value c) The U.S - concentration of the decision making process through a combined role as chairman and CEO.
b) The U.S - maximize shareholders value
In the DCF-model, why must non-operating assets be valued separately? a) The assets have a value, but the cash flow from the assets is not included in net earnings. b) The assets have a value, but the cash flow from the assets is not included in NOPLAT. c) The assets have a value, but the market value of the assets deviates from the book value.
b) The assets have a value, but the cash flow from the assets is not included in NOPLAT.
What is important to think of when "g", the growth rate, is included in the calculation of continuing value? a) The growth rate cannot be higher than the average historical growth rate for dividends. b) The best estimate is probably the expected long-term rate of consumption for the industry's products, plus inflation. c) The growth rate cannot be higher than the average historical return on equity.
b) The best estimate is probably the expected long-term rate of consumption for the industry's products, plus inflation.
What are the characteristics relating to "the steady state" in the estimation process? a) The company grows at a constant rate and earns a constant rate of return on existing and new capital invested. b) The company grows at a constant rate by reinvesting a constant proportion of its operating profits, as well as earning a constant rate of return on both existing and new capital invested. c) The company grows at a constant rate by reinvesting a constant proportion of its operating profits while keeping the debt to equity ratio at a constant.
b) The company grows at a constant rate by reinvesting a constant proportion of its operating profits, as well as earning a constant rate of return on both existing and new capital invested.
In what way does the length of the forecast affect a company's value? a) The longer the estimate, the more volatile value b) The length of the estimate does not affect the company's value c) The shorter the estimate, the more stable value
b) The length of the estimate does not affect the company's value
Assume a company has a cost of capital that is higher than achieved ROIC. What will happen to the value of the company if the growth increases? a) The value will increase, because expanding at a constant growth rate will increase the present value of future FCF. b) The value will decrease, because expanding at a constant growth rate will lower the present value of future FCF. c) The value will decrease, because expanding when ROIC is below the cost of capital will increase the risk premium in equity.
b) The value will decrease, because expanding at a constant growth rate will lower the present value of future FCF.
Assume a company has a cost of capital that is higher than the achieved ROIC. What will happen to the value of the company if the growth increases? a) The ROIC will increase and increase the value, because competitors will be forced out of the sector. b) The value will decrease, because expanding with ROIC below the cost of capital destroys value. c) The value will increase.
b) The value will decrease, because expanding with ROIC below the cost of capital destroys value.
: Define TRS. a) Total Return to Stakeholders, which is the increase in the enterprise value over a period of time. b) Total Return to Shareholders, which is the sum of the increase in the share price and the total dividends received, over a period of time. c) Total Return to Stakeholders, which is the present value of the continuing value and the total FCF, over a period of time.
b) Total Return to Shareholders, which is the sum of the increase in the share price and the total dividends received, over a period of time.
If a stock is rarely traded, is it better to calculate the beta on a: a) ...daily basis? b) ...weekly basis? c) ...monthly basis?
c) ...monthly basis?
Explain the four parts in valuing a company according to the DCF- model. a) 1) Discount future dividends with the cost of capital 2) Identify surplus values in assets. 3) Identify surplus values in debt and non-equity claims. 4) Add/subtract the net surplus value to the discounted dividend value. b) 1) Discount free cash flow with the cost of equity. 2) Identify and value non- operating assets. 3) Identify and value debt and non-equity claims. 4) Add the calculated continuing value. c) 1) Discount free cash flow with the cost of capital 2) Value non-operating assets. 3) Value debt and non-equity claims. 4) Add the calculated continuing value.
c) 1) Discount free cash flow with the cost of capital 2) Value non-operating assets. 3) Value debt and non-equity claims. 4) Add the calculated continuing value.
Explain the four parts in valuing a company according to the DCF- model. a) 1) Discount free cash flow with the cost of capital. 2) Identify and value non- operating assets. 3) Identify and value debt and non-equity claims. 4) Add the calculated continuing value. b) 1) Discount dividends with the cost of equity. 2) Identify and value surplus values in assets. 3) Identify and value surplus values in debt and non-equity claims. 4) Add or subtract the calculated net surplus value to the equity value. c) 1) Discount free cash flow with the cost of capital. 2) Identify and value non- operating assets. 3) Identify and value debt and non-equity claims. 4) Subtract the value of non-equity financial claims.
c) 1) Discount free cash flow with the cost of capital. 2) Identify and value non- operating assets. 3) Identify and value debt and non-equity claims. 4) Subtract the value of non-equity financial claims.
Which are the three major factors that can distort the analysis of year-to-year revenue growth? a) 1) Change in inflation rate, 2) change in the price of the products, 3) volume change of the products b) 1) Joint ventures, 2) Discontinued operations, 3) Non-consolidated subsidiaries c) 1) Effects of changes in currency values, 2) Mergers & Acquisitions, 3) changes in accounting policy
c) 1) Effects of changes in currency values, 2) Mergers & Acquisitions, 3) changes in accounting policy
To assure consistency the cost of capital must meet three criteria - which? a) 1) It must include opportunity costs to the equity holders 2) it must weight the required return of equity by its target market based weight 3) any financing related benefits/costs must be incorporated. b) 1) It must include opportunity costs of all investors 2) it must weight each security's required return by its book value weight 3) any financing related benefits/costs must be incorporated. c) 1) It must include opportunity costs of all investors 2) it must weight each security's required return by its target market based weight 3) any financing related benefits/costs must be incorporated
c) 1) It must include opportunity costs of all investors 2) it must weight each security's required return by its target market based weight 3) any financing related benefits/costs must be incorporated
Which are the three factors determining if a company can have a sustainable high ROIC? a) 1) Economies of scale. 2) Low cost of capital. 3) Scalable products/processes. b) 1) High Quality. 2) High productivity. 3) High capital turnover c) 1) Length of product life cycle. 2) Persistent of competitive advantage. 3) Potential for product renewal.
c) 1) Length of product life cycle. 2) Persistent of competitive advantage. 3) Potential for product renewal.
Why EV/EBITA and not EV/EBIT? a) Adjusting EBIT for taxes is necessary to receive an earnings figure that is possible to distribute to shareholders. Not excluding adjustments for taxes will understate the multiple. b) Adjusting EBIT for amortizations on interest bearing debt is necessary to end up in a cash flow figure that is possible to distribute to shareholders. Since it is tied to future cash flows, not adjusting for amortizations will understate the multiple. c) Adjusting EBIT for a value decline on intangibles is an accounting item that arises from acquisitions. Since it is not tied to future cash flows, it will distort an enterprise valuation multiple
c) Adjusting EBIT for a value decline on intangibles is an accounting item that arises from acquisitions. Since it is not tied to future cash flows, it will distort an enterprise valuation multiple
Why EV/EBITA and not EV/EBITDA? a) Because depreciation is a non-cash expense. b) Because depreciations are replaced by the investment in capital expenditure, when calculating the free cash flow. c) Because depreciation is the accounting equivalent of future replacement costs of an asset
c) Because depreciation is the accounting equivalent of future replacement costs of an asset
Which of the following are NOT primary areas in calculating investments in invested capital? a) Investments in goodwill. b) Change in operating working capital. c) Change in deferred tax assets.
c) Change in deferred tax assets.
What is the only way to sustain consistently high growth? a) Consistently find economies of scale to keep cost and prices low. b) Consistently find new geographical markets. c) Consistently find new product markets.
c) Consistently find new product markets.
Which of the following are NOT non-equity claims? a) Unfundedretirementliabilities b) Employee stock options c) Deferred tax liabilities.
c) Deferred tax liabilities.
How should you treat acquisitions in the estimation process? a) Historical revenue includes acquired revenue and this is the natural starting point for the estimation process. Therefore revenue growth from acquisitions is included automatically. b) Analyze the growth in goodwill and estimate the revenue growth to the historical growth in goodwill. c) Do not estimate potential acquisitions because the typical M&A fails to create value.
c) Do not estimate potential acquisitions because the typical M&A fails to create value.
Describe a "line items analysis" for factors in the balance sheet? a) Each line item is taken as a percentage of invested capital b) Each line item is taken as a percentage of total assets c) Each line item is taken as a percentage of revenue
c) Each line item is taken as a percentage of revenue
What is the difference between "free cash flow" and "cash flow from operations", reported in the annual report? a) Free cash flow is independent of taxes. Cash flow from operations is not. b) Free cash flow is independent of investments in PPE. Cash flow from operations is not. c) Free cash flow is independent of financing. Cash flow from operations is not.
c) Free cash flow is independent of financing. Cash flow from operations is not
Define the value formula when the cash flow in a company is growing at a constant rate. a) NOPLAT, divided by the sum of weighted average cost of capital in percent, less the growth rate. b) Free cash flow, divided by the weighted average cost of capital in percent. c) Free cash flow, divided by the sum of weighted average cost of capital in percent, less the growth rate.
c) Free cash flow, divided by the sum of weighted average cost of capital in percent, less the growth rate.
What is the recommended formula for economic-profit valuation? a) IC at the beginning of the period + PV of economic profit during the forecast period + (NOPLATt+1 (1-g/RONIC)) / (WACC - g) b) IC at the beginning of the period + PV of economic profit during the forecast period + (FCF/WACC). c) IC at the beginning of the period + PV of economic profit during the forecast period + PV of economic profit after the forecast period.
c) IC at the beginning of the period + PV of economic profit during the forecast period + PV of economic profit after the forecast period.
Describe the expectations treadmill a) The treadmill analogy shows that the most important factor for managers is to keep expectations high. b) A company with low expectations of success among shareholders will have a more difficult time outperforming the stock market. c) If a company beats expectations the company's stock price normally increases, which increases expectations, which makes it more problematic to beat expectations. Management must run even faster just to maintain the new stock price.
c) If a company beats expectations the company's stock price normally increases, which increases expectations, which makes it more problematic to beat expectations. Management must run even faster just to maintain the new stock price.
What is the problem with using the statutory tax rate in a DCF-valuation? a) It leads to a downward-biased estimate of operating taxes, because it fails to recognize the effects from long-term untaxed reserves. b) It underestimate the volatility in the tax rate, because it fails to recognize that taxes on one-time non-operating items often are taxed at a different tax rate. c) It leads to an upward-biased estimate of operating taxes, because it fails to recognize that foreign earnings are often taxed at different levels.
c) It leads to an upward-biased estimate of operating taxes, because it fails to recognize that foreign earnings are often taxed at different levels.
Assume a company has a constant growth rate, what will happen to the value if ROIC increase? a) Nothing, the value is constant if the growth rate is constant. b) It will decrease, because more cash is required to achieve an increase in growth. c) It will increase, because more cash can be distributed to shareholders without having a negative impact on growth.
c) It will increase, because more cash can be distributed to shareholders without having a negative impact on growth.
Assume a company has a cost of capital that is equal to the achieved ROIC. What will happen to value if growth increases? a) It will increase. b) It will decrease. c) It will not change.
c) It will not change.
Which of the following is NOT a definition of Economic Profit a) Invested capital X (ROIC - WACC). b) NOPLAT - (Invested capital X WACC) c) NOPLAT + depreciation - Invested Capital
c) NOPLAT + depreciation - Invested Capital
When should you measure ROIC excluding goodwill? a) ROIC excluding goodwill measures the aggregate value creation for shareholders. b) ROIC excluding goodwill measures the cash flow generating capacity for the business and is used to compare the financial strength against peers. c) ROIC excluding goodwill measures the underlying operating performance and is used to compare performance against peers.
c) ROIC excluding goodwill measures the underlying operating performance and is used to compare performance against peers.
What is the SCP-structure and who/which developed the structure further in the beginning of the eighties? a) Strategy-capital-productivity.McKinsey&Co. b) Structure-capital-portfoliostrategy.Miller/Modigliani. c) Structure-conduct-performance. Michael Porter
c) Structure-conduct-performance. Michael Porter
Compared to a EV/EBITA-multiple, what additional important restrictions does the Price/Sales-multiple (P/S) require? a) The P/S must be compared to growth, to be comparable to the EV/EBITA- multiple. b) The P/S must be compared to the EBITDA-margin, to be comparable to the EV/EBITA-multiple. c) The P/S requires similar operating margins on the company's existing business.
c) The P/S requires similar operating margins on the company's existing business.
What was the reason the fast growing company Walgreen and the significantly slower growing company Wrigley, between 1968-2007 had nearly the same shareholder return? a) Wrigley managed to create a much higher market share. b) The stability in NOPLAT was much higher in Wrigley. c) The ROIC in Wrigley was substantially higher.
c) The ROIC in Wrigley was substantially higher.
What is the conclusions regarding superior performance in ROIC over time? a) Of the best performing companies 95 percent had reversed to the mean ROIC of 10 percent within 15 years. b) Of the best performing companies 95 percent had reversed to the mean ROIC within 7 years. c) The best performing companies did not revert all back to the aggregate median of 10 percent. Instead the ROIC dropped to 15 percent over 15 years.
c) The best performing companies did not revert all back to the aggregate median of 10 percent. Instead the ROIC dropped to 15 percent over 15 years.
What was the conclusion drawn from the work of Miller and Modigliani, regarding the relationship between financial risk and value? a) They presented research that showed that an increase in the interest coverage ratio should decrease the credit cost. b) They presented research that showed that an increase in the beta value of the company should decrease the value of the company. c) They presented research that showed that an increase in the debt to equity ratio should not affect the value of the company.
c) They presented research that showed that an increase in the debt to equity ratio should not affect the value of the company.
Define TRS. a) Total Return to Stakeholders, which is the increase in the enterprise value over a period of time. b) Total Return to Stakeholders, which is the present value of the continuing value and the total FCF, over a period of time. c) Total Return to Shareholders, which is the sum of the increase in the share price and the total dividends received, over a period of time.
c) Total Return to Shareholders, which is the sum of the increase in the share price and the total dividends received, over a period of time.
In the chapter there is an example comparing the two companies Value Inc and Volume Inc. Both have the same earnings growth. Which of the two companies has the highest value, and why? a) Value Inc has the highest value, because they use a larger part of less expensive debt, instead of the more expensive equity capital. b) Value Inc has the highest value, because they have higher growth in revenue. c) Value Inc has the highest value, because they generate the same growth as Volume Inc, but invest a smaller percentage of profit.
c) Value Inc has the highest value, because they generate the same growth as Volume Inc, but invest a smaller percentage of profit.
Which of the following is NOT a definition of the investment rate (IR) a) Netinvestment/NOPLAT b) g/ROIC c) WACC - g
c) WACC - g