Ch 23-29

Question 1

How will interest costs on pension liabilities be recognized in the income statement and in the DCF?

a)
As a financial cost and excluded from the calculation of enterprise value.

b)
As an operating cost and included in the calculation of net debt.

c)
The cost will be smoothed over five years and included in operating cost and as such have an impact on the calculation of enterprise value.

d)
As a financial cost and included in the calculation of enterprise value.

Answer 1

a)

As a financial cost and excluded from the calculation of enterprise value.

Question 2

Kelloggs has fair value of plan pension assets at year-end of 4677. The projected pension benefit obligation is 5117. Which amount is recognized in the balance sheet?

a)
4677

b)
440

c)
5117

d)
None, they are presented in the notes

Answer 2

b)

440

Question 3

23. How will services costs affect the DCF?

a)
It is operating and as such included in FCF and the calculation of the enterprise value.

b)
It is operating and as such excluded in FCF and the calculation of the enterprise value.

c)
It is nonoperating and as such excluded in FCF and the calculation of the enterprise value.

d)
It should be included in FCF calculated as a five year average to smooth out volatility.

Answer 3

a)

It is operating and as such included in FCF and the calculation of the enterprise value.

Question 4

23. How will expected return on plan assets be recognized in the income statement and in the DCF?

a)
The return on the plan assets are presented as financial and the assets will be included in enterprise value as working capital.

b)
The return on the plan assets are presented as financial and the assets will be excluded from enterprise value.

c)
The return on the plan assets are presented as operating and the assets will be excluded from enterprise value.

d)
If the return on the plan assets are interest income, they are presented as operating and the assets will be included in enterprise value. If the return is from shares, it will be excluded from operating earnings and the shares are included as financial in the calculation of net debt.

Answer 4

b)

The return on the plan assets are presented as financial and the assets will be excluded from enterprise value.

Question 5

23. How will excess pension assets be treated in the DCF?

a)
Include the return from the assets as a deduction of operating costs and include the assets as part of working capital.

b)
Include the return from the assets in the financial net and include the assets as part of working capital.

c)
Treat them as nonoperating, similar to a assets included in working capital

d)
Treat them as nonoperating, similar to a financial asset

Answer 5

d)

Treat them as nonoperating, similar to a financial asset

Question 6

23. How will an unfunded pension obligation be treated in in the DCF-valuation?

a)
As nonoperating, similar to debt

b)
As operating, similar to working capital

c)
Recognize the pension cost as an operating cost and the pension obligation (net) as operating, part of working capital.

d)
Recognize the pension cost as a financial cost and the pension obligation (net) as operating, part of working capital.

Answer 6

a)

As nonoperating, similar to debt

Question 7

24. There are three steps in capitalizing R&D investments. Which of the following is NOT one of them?

a)
Replace R&D-expenses by R&D cash outflow

b)
Adjust earnings by replacing expenses with amortizations.

c)
Adjust invested capital by the historical cost, net of cumulative amortizations.

d)
Capitalize and amortize, using an appropriate lifetime.

Answer 7

a)

Replace R&D-expenses by R&D cash outflow

Question 8

There are two reasons to why it is important to capitalize intangible investments?

a)
To get an accurate measurement of ROIC and reduce risk of manipulation

b)
It is important, because the revenue arising from each obligation is calculated as a group

c)
To get an accurate measurement of WACC and ROIC

d)
To get an accurate measurement of FCF and reduce risk of manipulation

Answer 8

a)

To get an accurate measurement of ROIC and reduce risk of manipulation

Question 9

24. How is free cash flow affected in the DCF from capitalizing R&D?

a)
The operating cash flow is increased and the financing cash flow is decreased

b)
The investment cash flow is decreased and the financing cash flow is increased.

c)
The operating cash flow is decreased and investing cash flow is increased

d)
It will not be affected

Answer 9

d)

It will not be affected

Question 10

24. When a company invests in production technology, a brand name or a distribution network, how is the outlay recognized in the accounts?

a)
Production technology - expensed immediately, brand name - expensed immediately, distribution network - activated

b)
Production technology - expensed immediately, brand name - capitalized, distribution network - expensed immediatley

c)
Production technology - capitalized, brand name - expensed immediately, distribution network - expensed immediately

d)
Production technology - expensed immediately, brand name - expensed immediately, distribution network - expensed immediately

Answer 10

d)
Production technology - expensed immediately, brand name - expensed immediately, distribution network - expensed immediately

Question 11

28. What did a McKinsey study of 200 large U.S companies showed regarding the portfolio strategy?

a)
Those that acquired companies underperformed companies with an passive portfolio approach.

b)
Those that did not acquire businesses underperformed companies with an active portfolio approach.

c)
Those that did not sell businesses outperformed companies with an active portfolio approach.

d)
Those that did not sell businesses underperformed companies with an active portfolio approach.

Answer 11

d)

Those that did not sell businesses underperformed companies with an active portfolio approach

Question 12

Explain the five factors that are recognized in the book, regarding what makes an owner “the best”. Which of the following is NOT included?

a)
Distinctive skills

b)
Better insight and foresight

c)
Distinctive experience from the capital markets

d)
Access to critical shareholders

Answer 12

c)

Distinctive experience from the capital markets

Question 13

28. Why is diversification regarded as “a myth”? Which of the following is NOT correct?

a)
Myth: Investors pay higher prices for less volatile companies

b)
Myth: Diversified companies with stable cash flow can take on more debt

c)
Myth: Diversified companies are better positioned to take advantage of different business cycles in different sectors.

d)
Myth: Diversified companies generate smoother cash flow

Answer 13

c)

Myth: Diversified companies are better positioned to take advantage of different business cycles in different sectors.

Question 14

There are short-term value drivers. Which of the following is not one of them?

a)
Sales productivity

b)
Operating cost productivity

c)
Organizational productivity

d)
Capital productivity

Answer 14

c)

Organizational productivity

Question 15

29. Which are the long-term value drivers?

a)
Focus on strategic marketing and oraginizational skills

b)
Focus on product development and expanding into new market

c)
Focus on core business and identify growth opportunities

d)
Focus on core business and product development

Answer 15

c)

Focus on core business and identify growth opportunities

Question 16

29. Which are the financial value drivers?

a)
Revenue and ROIC

b)
ROE and dividend

c)
Growth and FCF

d)
ROIC above WACC, cash flow exceeds dividend

Answer 16

a)

Revenue and ROIC

Question 17

31. How to pay for an acquisition, cash or shares? What does the research show and what does the authors believe?

a)
Authors: Shares create a better stock return at the announcement than cash.

b)
Research: Cash creates a better stock return at the announcement than shares.

c)
Research: Shares create a better stock return at the announcement than cash.

d)
Authors: Cash creates a better stock return at the announcement than shares.

Answer 17

b) Research: Cash creates a better stock return at the announcement than shares.

Question 18

31. What was the conclusion in a study by McKinsey between 1997 and 2013, regarding the value creation from acquisitions?

a)
The combined value of the acquirer and the target company decreased by 1-3 percent.

b)
The combined value of the acquirer and the target company neither increased or decreased.

c)
The combined value of the acquirer and the target company increased by 5,8 percent

d)
The combined value of the acquirer and the target company increased if the acquisitions were performed within the same industry.

Answer 18

c)

The combined value of the acquirer and the target company increased by 5,8 percent

Question 19

Acquisitions tend to occur in waves. Which of the following factors does NOT tend to drive these waves?

a)
Low interest rates also tend to drive M&A especially in preivate-equity.

b)
There is more M&A close to the bottom of the cycle when companies have low valuations.

c)
There is more M&A when stock prices are rising and managers are optimistic

d)
Large acquisitions in an industry encourages others to do acquisitions.

Answer 19

b)

There is more M&A close to the bottom of the cycle when companies have low valuations.

Question 20

Which of the following is NOT an archetype that constitute an acquisition that creates value?

a)
Create market access for the target’s products.

b)
Improve the performance in the target company

c)
If the deal is executed when the economy is strong.

d)
Create market access for the buyers products.

Answer 20

c)

If the deal is executed when the economy is strong.

Question 21

There are different characteristics that can be identified that differentiate deals that are successful those that are not. Which of the following are NOT one of the four characteristics that did not matter?

a)
Being the sole bidder.

b)
Whether the transaction increased EPS at the acquirer.

c)
The degree to which the two companies were related (being in the same sector).

d)
The relative P/E between the acquirer and the target company.

Answer 21

a)

Being the sole bidder.

Question 22

There are the five characteristics that can be identified that differentiate deals that are successful, in terms of the return to the acquirer’s shareholders. Which of the following is NOT one of them.

a)
Acquirers whose earnings grew at a rate above industry average for 3 years before the announcement presented positive returns on announcement.

b)
Acquirers whose share price grew at a rate above industry average for 3 years before the announcement presented positive returns on announcement.

c)
Acquirers paying a high premium earn negative return on announcement.

d)
Acquisitions of private companies and subsidiaries from large companies have low excess return.

Answer 22

Acquisitions of private companies and subsidiaries from large companies have low excess return.

Question 23

31. Some empirical studies have examined the stock market reaction to large M&A announcements. What was the conclusion?

a)
It increased the stock price in the target company by 1-3 percent.

b)
It lowered the stock price in the acquirer by 1-3 percent.

c)
It increased the stock price in the acquirer by 5,8 percent.

d)
It increased the stock price in the acquirer if the acquisition was performed within the same sector.

Answer 23

b)

It lowered the stock price in the acquirer by 1-3 percent.

Question 24

31. In a McKinsey study the researchers analyzed how acquisitions created value. What was the conclusion?

a)
Three-quarter of the deals did create value.

b)
One-third of the deals did create value and 80 percent of those were acquisitions within the same industry.

c)
Three-quarter of the deals did NOT create value

d)
One-third of the deals did create value

Answer 24

D) One-third of the deals did create value

Question 25

32. What can be said about a carve-out of a business?

a)
The parent company sell at least 66 percent ownership (for tax purposes) through an IPO.

b)
Carving out a minority stake has gained popularity after the tax reform 2017.

c)
The parent company sell at least 33 percent ownership (for legal reasons) to institutional investors (not to the general public).

d)
The parent company sell a minority ownership stake through an IPO.

Answer 25

d)

The parent company sell a minority ownership stake through an IPO.

Question 26

32. What is the conclusion from academic research, regarding a company’s possibility to create value through divestitures?

a)
There is significant positive excess returns unless the divestiture is an IPO on the stock market.

b)
There is significant positive excess returns at announcement.

c)
There is significant positive excess returns if the company is sold to another company in the same industry.

d)
There is significant positive excess returns if the divestment is an IPO on the staock market.

Answer 26

b)

There is significant positive excess returns at announcement.

Question 27

According to a study by McKinsey, most executives seem to shy away from an active approach to divestitures – why?

a)
The divestiture creates problem with the calculation of ESOP’s (employee stock options).

b)
The divestiture lowers the size of the remaining company, which have a negative effect on management bonus systems.

c)
The divestiture can lower important performance indicators, like earnings per share.

d)
The divestiture lowers the size of the remaining company, which have a negative effect on management status in the business community.

Answer 27

c)

The divestiture can lower important performance indicators, like earnings per share.

Question 28

32. What is the most common form of public restructuring of a business, and how is it conducted?

a)
By selling 80-90 percent of the subsidiary’s shares to large institutional investors and the remaining to the shareholders in the parent.

b)
By distributing the subsidiary’s shares to the parent’s shareholders.

c)
By selling the subsidiary’s shares to the parent’s shareholders.

d)
By selling some of the subsidiary’s shares to large institutional investors and keep less than 50 percent in the parent company.

Answer 28

b)

By distributing the subsidiary’s shares to the parent’s shareholders.

Question 29

32. Is it better to divest a business through a private transaction or a public?

a)
Private

b)
Private, if the buyer is in the same industry

c)
Public, business indicators are in an upward trend and Federal Reserve increases the policy rate.

d)
Public, if the stock market stands higher than the average for the previous 18 months.

Answer 29

a)

Private