Profitability analysis Flashcards
What does the ROIC express?
a) Abnormal profits
b) Return on invested capital
c) Return on equity
d) The return on capital invested in a firm’s net operating assets as a percentage
e) a + b
f) b + d
g) d + a
f)
How do you calcualte ROIC - both before and after tax?
After tax:
ROIC=(Net operating profit after tax (NOPAT))/(Invested capital)*100
Before tax:
ROIC=EBIT/(Invested capital)*100
A higher ROIC will, ceteris paribus, lead to a ________ estimated value and make a company more ___________ to provide loans from a bank’s perspective
a) Lower, attractive
b) Higher, uncertain
c) Higher, attractive
d) lower, uncertain
c) Higher, attractive
How is WACC calculated?
WACC=D/(D+E)r_d(1-τ)+E/(D+E)*r_e
(Market values for debt and equity)
How is EVA calculated?
EVA=(ROIC-WACC)*Invested capital_t-1
When does a company create excess return (value for shareholders)?
a) ROIC=WACC
b) ROIC>WACC
c) ROIC<WACC
d) ROIC is not compared to WACC when looking at EVA
b)
How is ROIC calculated based on Equity?
ROIC=((MV_Equity-BV_Equity )*(WACC-g))/(Invested capital)
Which of the following effect ROIC?
a) Differences in accounting policies
b) Inflation
c) Average age of assets
d) Differences in operating risks
e) Product lifecycle
f) All of the above
a, c, d + e)
What is true about the IRR?
a) IRR is not related to accounting
b) ROIC is the accounting equivalent to IRR
c) It is used as a financial ratio for measuring ROIC
d) It shows what investor can expect to earn on average each year during the lifetime of a project
e) IRR and ROIC is always equal
b, c + d)
e) is not true as it depends on the depreciation scheme –> depreciation must increase over time for the two to be equal
IRR = ROIC is typical for:
a) Start ups
b) Stabil businesses
c) Firms under liquidation
d) All of the above
a+c)
Assuming no financial leverage, the expected return is estimated by:
E[r_i ]=r_f+β_a [r_m-r_f ]=r_f+β_a*risk premium
When the expected return increases, what happens to the beta unlevered?
a) Decreases
b) Increases
c) Increases exponentially
d) Is not affected
b)
The following statement characterises which stage of the product lifecycle?
“Investments in R&D, marketing, building sales organisation etc.”
Introduction
The following statement characterises which stage of the product lifecycle?
“Organisation is geared to handle the growth (capital intensive)”
Growth
The following statement characterises which stage of the product lifecycle?
“Moderate growth pace as the product has been accepted in the market. Companies are reaping the gains of the previous phases of investments. Increases competition”
Maturity
