Ch 1-9 Flashcards
- What connection did the authors found between companies with high employment growth and the same companies total return to shareholders?
a)
Companies create more jobs if less than 50 percent of earnings is distributed as dividend.
b)
Value-creating companies create more jobs if the sales growth stays above the peer group average.
c)
Value-creating companies create more jobs
d)
Value-creating companies lack job-creating capabilities
c)
Value-creating companies create more jobs
- If an acquisition of a subsidiary creates an increase in earnings per share - is this equal to create value?
a)
Yes, because investors do not link increased earnings per share with an increase in the debt in the company.
b)
No, because the debt in the company will simultaneously go up, increasing the cost for equity.
c)
No, because there is no empirical evidence linking increased earnings per share with the value created by a transaction.
d)
Yes, because there is plenty of empirical evidence linking increased earnings per share with the value created by a transaction.
c)
No, because there is no empirical evidence linking increased earnings per share with the value created by a transaction.
What connection did the authors found between companies that did put a lot of resources into R&D and the same companies total return to shareholders?
a)
It did not correlate with long-term TSR
b)
It correlated powerfully with long-term dividend growth
c)
It correlated powerfully with long-term TSR
d)
It correlated with long-term TSR, but only in connection to a high dividend pay-out ratio
c)
It correlated powerfully with long-term TSR
- What is an intrinsic value?
a)
It is the historical value created above the cost of capital
b)
The value is based on future cash flows, not historical
c)
It is equal to the discounted cash flow value
d)
The value is based on economic profit
b)
The value is based on future cash flows, not historical
Comparing Lily’s with Logan’s, the latter managed a faster growth but lower ROIC because of heavy investments. What factor declined?
a)
The cash flow
b)
The dividend
c)
The return on equity
d)
The debt to equity ratio
a)
The cash flow
- What was the return on invested capital in Lily’s and what was this figure compared to? What was the size of the comparable figure?
a)
It waas lower than the cost for equity
b)
It was 18 percent and it was compared to the stock market
c)
It was lower than the stock market
d)
It was 18 percent and it was compared to the WACC
b)
It was 18 percent and it was compared to the stock market
- What was the advice to the owners of Lily’s when they wanted to discuss closing down stores with low ROIC. Which tool was recommended instead?
a)
The ROIC versus cost of capital and the amount of capital
b)
The EPS versus the economic profit and the debt to equity ratio
c)
The growth versus peers and the TSR
d)
The dividend pay-out ratio versus the sector and the TSR
a)
The ROIC versus cost of capital and the amount of capital
- How is it possible in practice to see that most risks in a company are possible to diversify? What key-ratio is used?
a)
The cost of capital varies between 5-15 percent
b)
Large companies p/e-ratio is in a wide range of 8-25
c)
Large companies p/e-ratio is in a narrow range of 12-20
d)
ROIC varies between 7-9 percent
c)
Large companies p/e-ratio is in a narrow range of 12-20
- Explain the scenario approach in estimations.
a)
Multiple cash flow scenarios are estimated, value them at the same cost of capital, apply probabilities for the value of each scenario.
b)
Two cash flow scenarios are estimated, value them at the same cost of debt, but apply riskpremiums to get to different cost of capital. Value of each cash flow with the risk-adjusted cost of capital.
c)
Multiple cash flow scenarios are estimated, value them at the risk-adjusted cost of capital, apply event drive probabilities for the value of each scenario.
d)
A specific cash flow scenario is estimated, whcih it is valued using different cost of capital, depending on the assumed risk in the different scenarios.
a)
Multiple cash flow scenarios are estimated, value them at the same cost of capital, apply probabilities for the value of each scenario.
- What was the range of the WACC in 2019 for most large companies?
a)
Inflation + 5 percent
b)
Risk free interest rate + market riskpremium of 5 percent
c)
7-9 percent
d)
5-7 percent
c)
7-9 percent
- When companies are using hedging to smooth earnings (for example in oil production and mining), what is the most likely maximum time-frame to hedge?
a)
In theory - in eternity
b)
One year
c)
Two years
d)
Ten years
c) 2 years
- Tyson Foods managed to have a higher TSR than J&J Snack, although Tyson delivered lower growth and lower ROIC. What was the explanation?
a)
Tyson started with a higher EV/NOPAT than J&J
b)
Tyson started with a higher ROIC and free cash flow than J&J
c)
Tyson started with a lower EV/NOPAT than J&J
d)
Tyson started with a lower ROIC and free cash flow than J&J
C) Tyson started with a lower EV/NOPAT than J&J
- Define TSR using net income, the p/e-ratio and dividend yield.
a)
% change in net earnings + % change in P/E + dividend yield in %
b)
% change in net earnings + % change in P/E + % change in dividend
c)
% change in NOPAT + % change in EV/NOPAT + % change in FCF
d)
% change in equity + % change in P/E + dividend yield in %
B) % change in net earnings + % change in P/E + % change in dividend
- How does the dividend yield relate to TSR?
a)
% change in market value + TSR, % = Dividend yield, %
b)
% ROE + dividend yield, % = TSR
c)
% change in market value + dividend yield, % = TSR
d)
% change in equity + dividend yield, % = TSR
c)
% change in market value + dividend yield, % = TSR
- How does the “expectations treadmill” affect a company with low expectations, compared to one with high expectations?
a)
A company with low ROIC and free cash flow may have an easier time outperforming the stock market.
b)
A company with high expectations of success may have an easier time outperforming the stock market.
c)
A company with low expectations of success may have an easier time outperforming the stock market.
d)
A company with low expectations of success may have a more difficult time outperforming the stock market.
D)
A company with low expectations of success may have an easier time outperforming the stock market.
