Ch 17..

Question 1

17. There are three steps to take, to secure the valuation model is technical robust. Which of the following is NOT included?

a)
Check that change in excess cash and debt line up with the cash flow statement.

b)
Check that the sum of invested capital plus nonoperating assets equals the cumulative source for financing

c)
Check that invested capital equals the equity plus long-term liabilities.

d)
Check that net income flows correctly though shareholders’ equity.

Answer 1

c)

Check that invested capital equals the equity plus long-term liabilities.

Question 2

Assume a typical company with a forward-looking p/e of 15-16. If the cost of capital is increased by 0,5 percent, how will the value change?

a)
The value will decrease by approximately 20 percent.

b)
The value will decrease by approximately 10 percent.

c)
The value will increase by approximately 10 percent.

d)
There will be no change, since the increase in cost of capital by 0,5 percent will be equalized by an increase in the P/E from 15 to 16.

Answer 2

b)

The value will decrease by approximately 10 percent.

Question 3

Assume a typical company with a forward-looking p/e of 15-16. If the growth rate for the coming 15 years is changed by 1,0 percent, how will the value change?

a)
It will increase by approximately 6 percent.

b)
It will decrease by approximately 6 percent.

c)
It will increase by approximately 15 percent.

d)
It will not change, since the stability in the growth rate will lower the cost of capital.

Answer 3

a)

It will increase by approximately 6 percent.

Question 4

17. There are four steps to take, to secure the model is economical consistent. Which of the following is not included?

a)
Check if ROIC is equal to the cost of equity by the end of the explicit forecasting period.

b)
Avoid large step changes in key assumptions from one year to another.

c)
Check if the patterns are consistent with industry dynamics.

d)
Does invested capital turnover increase over time for sound economic reasons.

Answer 4

A)

Question 5

Why EV/EBITA and not EV/EBIT?

a)
The replacement of the intangibles (relating to A) is already incorporated in earnings through marketing and selling expenses.

b)
EBITA is the most commonly used factor when companies communicate with investors.

c)
The amortizations represents the cash that should be re-invested in the company, not possible do distribute as a dividend

d)
The intangibles (relating to A) is an extraordinary item and add no explanatory value.

Answer 5

A) The replacement of the intangibles (relating to A) is already incorporated in earnings through marketing and selling expenses.

Question 6

How is the multiple based on operating metrics in the audio/video streaming business calculated?

a)
Per invested dollar the current year

b)
Per paying user or subscriber

c)
Per estimated dollar in sales

d)
As the EV/EBITA, excluding marketing expenses in EBITA

Answer 6

b)

Per paying user or subscriber

Question 7

18. Why is it better to evaluate the valuation by using a multiple based on EBITA or NOPAT, rather than a multiple based on net earnings?

a)
It is not distorted by tax

b)
It is more stable than multiples based on net earnings

c)
It is not distorted by capital structure

d)
It mirrors the value better than net earnings multiples

Answer 7

c)

It is not distorted by capital structure

Question 8

18. Why should a multiple be based on forward estimates?

a)
Because the cash flow distributed as dividend is distributed approximately one year forward.

b)
Since the DCF is forward-looking it is natural to use a forward-looking multiple

c)
It has a lower variation across peers

d)
It is adjuster for extraordinary items

Answer 8

c)

It has a lower variation across peers

Question 9

18. A company has 100 million in excess cash and 200 million in a stake in a nonconsolidated subsidiary. The market value of debt and equity is 1200 million and EBITA is 100 million. What is the EV/EBITA multiple?

a)
1200/100

b)
1200/(300-100)

c)
(1200-300)/100

d)
(1200+300)/100

Answer 9

C)

Question 10

There are three major ways to find the peer group. Which one does the authors recommend?

a)
Require the company to present competitors

b)
Use information data bases as Standard & Poors or Morgan Stanley.

c)
Do not use peer groups, look at the individual companies and compare, one by one.

d)
Have a smaller number of peers that more specifically competes in the same market

Answer 10

D)

Question 11

18. When calculating the PEG-ratio, what is the standardized time-horizon for growth?

a)
One year estimates, because this is normally what the company presents.

b)
There is no standardized time-horizon

c)
Three years, because this is normally what is publicly available in public databases.

d)
The same time-horizon as in the DCF-model for the same company

Answer 11

B)

Question 12

18. Why EV/EBITA and not EV/EBITDA?

a)
Because depreciation does not represent future investments

b)
Because depreciation mirrors setting aside cash to replace existing assets.

c)
Because depreciation represents sunk costs

d)
Because estimating the cash flow implies a non-cash expense like depreciation should be excluded.

Answer 12

B)

Question 13

19. How can the D/E-ratio for a business unit be established?

a)
Use median D/E for the peers to the group

b)
Use median D/E for publicly traded peers

c)
Use the same weightings as for the group capital structure.

d)
Use the D/E for the group

Answer 13

b)

Use median D/E for publicly traded peers

Question 14

Why is a standardized practice among sophisticated investors to value a company separated in parts?

a)
It is the most practical way to exclude nonoperating assets from the valuation

b)
You get better estimates and better insights into the business of the company

c)
You may have subsidiaries that are nonoperating

d)
The cost for equity in different parts of the business may be different

Answer 14

B)You get better estimates and better insights into the business of the company

Question 15

19. How should the WACC be calculated when business units are valued?

a)
Each business segment should be valued using the group WACC

b)
Each business segment should be valued using its own WACC

c)
Each business segment should be valued using peer group WACC for each segment

d)
Each business segment should be valued using the peer group WACC for the group.

Answer 15

b)

Each business segment should be valued using its own WACC

Question 16

19. Which are the four problem areas when financial statements for business units are created?

a)
Overhead costs, intercompany transactions, financial subsidiaries, incomplete information.

b)
Overhead costs, external business transactions, financial subsidiaries, incomplete information.

c)
Extraordinary costs, intercompany transactions, financial subsidiaries, incomplete information.

d)
Overhead costs, intercompany transactions, financial subsidiaries, superior information.

Answer 16

a)

Overhead costs, intercompany transactions, financial subsidiaries, incomplete information.

Question 17

The majority of corporate taxes are related to earnings (the statutory rate), but the authors gives some examples in TaxCo of non-operating tax effects that are not included in the statutory rate, which?

a)
Tax disputes

b)
Foreign subsidiaries

c)
Change in deferred tax liabilities

d)
R&D credits

Answer 17

a) Tax disputes

Question 18

What is the is the starting tax rate for calculating operating taxes?

a)
The effective tax rate

b)
The statutory tax rate

c)
The cash tax rate

d)
Change in deferred taxes

Answer 18

b)

The statutory tax rate

Question 19

20. What is the biggest difference in TaxCo between the statutory tax rate and the effective tax rate?

a)
R&D tax credits

b)
Change in deferred taxes

c)
Foreign income adjustment

d)
Change in tax based accelerated depreciation

Answer 19

c)

Foreign income adjustment

Question 20

20. What does a tax reconciliation table explain?

a)
Why cash taxes do not equal the statutory tax rate multiplied earnings before tax.

b)
Why reported taxes do not equal the pretax profit multiplied by the statutory rate.

c)
Why the statutory tax rate do not equal the cash tax rate multiplied by the earnings before tax.

d)
Why taxes in foreign operations differ from the effective tax rate.

Answer 20

b)

Why reported taxes do not equal the pretax profit multiplied by the statutory rate.

Question 21

20. How can we convert operating taxes to operating cash taxes?

a)
Adjust for the difference between the operating statutory tax rate and the operating effective tax rate.

b)
Adjust for the change in operating-related deferred tax assets, net of deferred tax liabilities.

c)
No adjustment is necessary. Effective tax rate equals cash tax rate.

d)
Adjust for the difference between taxes in the income statement and taxes in the cash flow statement.

Answer 21

b)

Adjust for the change in operating-related deferred tax assets, net of deferred tax liabilities.

Question 22

21. In what category does “restructuring charges” fall into and what is the preferred treatment in NOPAT and invested capital?

a)
Nonoperating, exclude from NOPAT, include as equity in invested capital

b)
Operating, exclude from NOPAT, include as working capital in invested capital

c)
Operating, include in NOPAT, include as working capital in invested capital

d)
Nonoperating, exclude from NOPAT, include as debt in invested capital

Answer 22

d)

Nonoperating, exclude from NOPAT, include as debt in invested capital

Question 23

How should gains and losses on the sale of assets be treated?

a)
Nonoperating, since the gain/loss has been created in the past, they are backward-looking

b)
Operating, since the gain/loss has been created in the past and affected operating earnings (for example too high/low depreciations). Consequently the gain/loss must be a part of operating earnings.

c)
Nonoperating, since they will not affect free cash-flow

d)
Operating, since the gain/loss is included in free cash-flow.

Answer 23

a)

Nonoperating, since the gain/loss has been created in the past, they are backward-looking

Question 24

Write-downs of goodwill can artificially increase ROIC the coming years. What is the recommended treatment to avoid this?

a)
Treat write-downs as nonoperating and eliminate the goodwill from the balance sheet.

b)
Treat write-downs as nonoperating and add back accumulated write-downs to invested capital.

c)
Treat write-downs as nonoperating and write-off the goodwill in the balance sheet against equity.

d)
Treat write-downs as operating and add accumulated write-downs to invested capital

Answer 24

b)

Treat write-downs as nonoperating and add back accumulated write-downs to invested capital.

Question 25

21. The authors categorize provisions into four categories. Which of the following examples are NOT included in the categories?

a)
Nonoperating - plant decommissioning

b)
Operating - product warranties

c)
Operating - restructuring charges

d)
Nonoperating - unfunded retirement plans

Answer 25

c)

Operating - restructuring charges

Question 26

21. How should you treat amortizations of acquired intangibles when calculating NOPAT?

a)
You should deduct amortizations on acquired intangibles from NOPAT, but add them back in FCF.

b)
You should deduct amortizations on acquired intangibles from NOPAT.

c)
You should not deduct amortizations on acquired intangibles from NOPAT.

d)
You should not deduct amortizations on intangibles from NOPAT.

Answer 26

c)

You should not deduct amortizations on acquired intangibles from NOPAT.

Question 27

21. Is restructuring charges operating or non-operating? What is important in that decision?

a)
Operating, because it has a cash flow effect.

b)
Nonoperating, if the restructuring charge is unlikely to occur frequently

c)
Nonoperating, but take the accumulated amount of restructurings the last five years and take 1/5 as deduction of NOPAT each year.

d)
Operating, because it occurs at least one year out of five in at least half of the U.S companies

Answer 27

b)

Nonoperating, if the restructuring charge is unlikely to occur frequently

Question 28

21. Is litigation charges operating or non-operating? What is important to consider?

a)
Operating, if it occurs frequently and grows in line with revenue

b)
Nonoperating, since the company is protected against litigation charges via insurances. Since the insurance premium already has affected earnings, the litigation charge should be eliminated and netted against the insurance pay-out.

c)
Nonoperating, since it is outside the management control

d)
Operating, if it occurs infrequently and grows in line with revenue.

Answer 28

a)

Operating, if it occurs frequently and grows in line with revenue

Question 29

21. Which are the two major write-offs?

a)
Inventory write-offs and write-downs of shares in associated companies

b)
Goodwill impairments and write-offs of investment property

c)
Write-offs of activated product development and impairment of goodwill.

d)
Asset write-offs and goodwill impairments.

Answer 29

d)

Asset write-offs and goodwill impairments.

Question 30

2. Describe the three-step process to find non-operating expenses. Which of the following is NOT included.

a)
Analyze each nonoperating line item separately and determine whether it will show up in the future

b)
Search for items in the notes and the management report that lack impact on cash flow.

c)
Treat items that grow in line with revenue as operating

d)
Search for embedded one-time items in the notes and the management report

Answer 30

b)

Search for items in the notes and the management report that lack impact on cash flow.

Question 31

Which are the typical non-operating expenses? Which of the following is NOT included?

a)
Amortizations of activated development expenses

b)
Litigation expenses

c)
Restructuring charges

d)
Amortizations of acquired intangibles

Answer 31

a)

Amortizations of activated development expenses

Question 32

Which of the following provisions and reserves should be included as debt in the DCF-valuation?

a)
Provision for plant decomissioning

b)
Product warranties

c)
Ongoing operating provisions

Answer 32

a)

Provision for plant decomissioning

Question 33

22. Which are the three steps in adjusting historical financial statements for operating leases?

a)
Historical lease commitments are discounted at the companies borrowing rate. The lease payments beyond the fifth year are included as a lump sum and discounted using an annuity method.

b)
Summarize the nominal amounts presented in the note to the annual report and add them as an asset and a liability.

c)
Historical lease commitments are discounted at the companies borrowing rate. The lease payments beyond the fifth year are included as a nominal lump sum.

d)
Historical lease commitments are discounted at the companies WACC. The lease payments beyond the fifth year are included as a lump sum and discounted using an annuity method.

Answer 33

a)
Historical lease commitments are discounted at the companies borrowing rate. The lease payments beyond the fifth year are included as a lump sum and discounted using an annuity method.

Question 34

22. For companies that use IFRS, how is nearly all leases accounted for?

a)
The asset less the corresponding liability is capitalized and presented as a net asset on the balance sheet. Lease expenses less depreciation are presented as an interest expense.

b)
The asset and the corresponding liability is capitalized on the balance sheet and lease expenses are presented as interest expenses.

c)
The asset and the corresponding liability is capitalized on the balance sheet and lease expenses are presented as depreciation.

d)
The asset and the corresponding liability is capitalized on the balance sheet and lease expenses are split between depreciation and interest expense.

Answer 34

d)
The asset and the corresponding liability is capitalized on the balance sheet and lease expenses are split between depreciation and interest expense.

Question 35

In 2019 the accounting rules for operating leases were changed. How?

a)
Companies are required to capitalize nearly all asset leases on their balance sheet

b)
Companies are required to capitalize nearly all financial leases on their balance sheet.

c)
Companies are required to present nearly all asset leases as operating cash flow in the cash flow statement, from previously beeing financial.

d)
Companies are required to present the rent for nearly all asset leases as depreciation in the income statement.

Answer 35

a)

Companies are required to capitalize nearly all asset leases on their balance sheet

Question 36

What adjustment of leasing (according to IFRS) have to be executed when calculating the enterprise value?

a)
The assets and the liability relating to leases must be included as a part of working capital.

b)
None

c)
The financial cash flow in the cash flow statement must be eliminated and included in operating cash flow.

d)
Depreciation and interest relating to leases must be eliminated and the lease payment being included in EBITDA.

Answer 36

b)

None

Question 37

22. How is the lease expense accounted for in the income statement?

a)
As an operating expense included in EBITDA

b)
As depreciation

c)
As depreciation and an interest cost

d)
As an interest cost

Answer 37

c)

As depreciation and an interest cost