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Question 1

the sub-chapter “Advanced issues” four areas are singled out - which of the following are NOT one of them?

a)
Capitalized research and development

b)
Operating leases

c)
Acquisition of shares in a joint venture

d)
Retirement obligations

Answer 1

C) Acquisition of shares in a joint venture

Question 2

Define invested capital from the equity liability side of the balance sheet.

a)
Operating assets less debt

b)
Equity and liabilities

c)
Debt + equity

d)
Operating assets minus operating liabilities

Answer 2

C) DEBT + EQUITY

Question 3

In the chapter five non-operating assets are specified (excluding “other”) - which?

a)
Excess cash, consolidated subsidiaries, financial subsidiaries, overfunded pension assets, tax loss carry forward.

b)
Excess cash, non-consolidated subsidiaries, financial liabilities, overfunded pension assets, tax loss carry forward.

c)
Excess cash, non-consolidated subsidiaries, financial subsidiaries, overfunded pension assets, tax loss carry forward.

d)
Excess cash, non-consolidated subsidiaries, financial subsidiaries, underfunded pension assets, tax loss carry forward.

Answer 3

d)

Excess cash, non-consolidated subsidiaries, financial subsidiaries, underfunded pension assets, tax loss carry forward.

Question 4

What is the difference between “operating taxes” and “operating cash taxes”?

a)
Operating cash taxes = Operating taxes + operating deferred tax liabilities - operating deferred tax assets.

b)
Operating cash taxes = Operating taxes + non-operating deferred tax assets - non-operating deferred tax liabilities.

c)
Operating cash taxes = Operating taxes - operating deferred tax assets + operating deferred tax liabilities.

d)
Operating cash taxes = Operating taxes + operating deferred tax assets - operating deferred tax liabilities.

Answer 4

D) Operating cash taxes = Operating taxes + operating deferred tax assets - operating deferred tax liabilities.

Question 5

What is the difference between reported taxes and operating taxes?

a)
The taxes related to non-operating accounts and other non-operating taxes.

b)
Operating taxes is the same as reported taxes.

c)
The taxes related to financial accounts less operating taxes.

d)
The taxes related to operating accounts and other operating taxes.

Answer 5

a)

The taxes related to non-operating accounts and other non-operating taxes.

Question 6

Describe a “line items analysis” for factors in the balance sheet?

a)
Each line item is taken as a percentage of revenue

b)
Each line item is taken as a percentage of the total assets

c)
Each line item is taken in relation to the number of employees

d)
Each line item is taken as a percentage of gross profit

Answer 6

A) Each line item is taken as a percentage of revenue

Question 7

If you use EBITDA to measure ability to meet short-term obligations, which factors do you compare them to?

a)
Total liabilities

b)
Equity

c)
Interest costs/payments

d)
Revenue

Answer 7

C)

Question 8

If you use EBITDAR to measure ability to meet short-term obligations, which factors do you compare them to?

a)
Total liabilities

b)
Equity

c)
Interest costs/payments

d)
Revenue

Answer 8

C) Interest costs/payments

Question 9

What is the benefit of calculating the ratio for the inventory, to cost of goods sold rather than to sales?

a)
To avoid distortions caused by profit above/below a normal level

b)
To avoid distortions caused by changing prices

c)
To avoid distortions caused by acquisitions/divesments of subsidiaries

d)
To avoid distortions caused by temporary items in sales

Answer 9

b)

To avoid distortions caused by changing prices

Question 10

How was revenue affected (and why) in cell-phone companies from the introduction of a new revenue standard?

a)
They recognized an increase, as cell phone equipment sales can now be recognized immediately instead of over the life of the contract.

b)
They recognized a decrease, as cell phone equipment sales can now be recognized immediately instead of over the life of the contract.

c)
They recognized an increase as cell phone services can now be recognized immediately instead of over the life of the contract.

d)
They recognized an increase as cell phone equipment sales can now be recognized over the life of the contract instead of immediately.

Answer 10

A) They recognized an increase, as cell phone equipment sales can now be recognized immediately instead of over the life of the contract.

Question 11

Describe the three-step approach to estimating PP&E.

a)
a)Forecast net PPE as percentage of revenue; b) forecast depreciation as percentage of PPE; c) capital expenditures become the increase in PPE less the depreciations

b)
a) Forecast net PPE as percentage of total assets; b) forecast depreciation as percentage of total assets; c) capital expenditures become the increase in PPE and depreciations

c)
a) Forecast net PPE as percentage of revenue; b) forecast depreciation as percentage of revenue; c) capital expenditures become the increase in PPE

d)
a) Forecast net PPE as percentage of revenue; b) forecast depreciation as percentage of PPE; c) capital expenditures become the increase in PPE and depreciations

Answer 11

D)
a) Forecast net PPE as percentage of revenue; b) forecast depreciation as percentage of PPE; c) capital expenditures become the increase in PPE and depreciations

Question 12

How should you treat acquisitions in the estimation process?

a)
Set revenue growth from new acquisitions equal to zero and hold goodwill constant.

b)
Estimate acquisitions as part of other estimate of other line items in the balance sheet, as percentage of revenu for goodwill, PP&E, inventory, customers receivables, etc.

c)
Set revenue growth from new acquisitions equal to the average for a long-term trend

d)
Estimate goodwill from new acquisitions as a percentage of revenue

Answer 12

A)Set revenue growth from new acquisitions equal to zero and hold goodwill constant.

Question 13

To what should interest expenses be tied to in the estimation process?

a)
Tied to the prior-year total debt

b)
Tied to revenue

c)
To the historical average of the long-term interest expense

d)
Tied to the outgoing total debt

Answer 13

a)

Tied to the prior-year total debt

Question 14

When estimating the income statement, to what factor is the most line items tied to?

a)
Total assets

b)
Revenues

c)
Employees

d)
Gross profit

Answer 14

B) Rev

Question 15

If you are an external analyst (not working in the company), which are the two suggested ways to calculate estimated depreciation?

a)
To an amount slightly below the estimated investments, or to the long-term average for investments in PPE.

b)
Percentage of PPE or last years depreciation increased by an estimated growth factor.

c)
Percentage of revenue or PPE

d)
Percentage of revenue or gross profit

Answer 15

C)

Question 16

What is “the plug” when estimating investors funds?

a)
The plug: Change in equity, less present net earnings

b)
The plug: Excess cash, debt and newly issued shares

c)
The plug: Excess cash less total liabilities

d)
The plug: Excess cash, debt and newly issued debt

Answer 16

D)The plug: Excess cash, debt and newly issued debt

Question 17

What is the top-down approach for revenue forecasting?

a)
Forecast revenue growth as a long-term historical average and adjust for the potential in new products, as well as for products that will decay.

b)
Forecast revenue growth as a long-term historical average

c)
Size the total market and determine market share och forecasting prices

d)
Forecast demand from existing customers, the customer turnover and the potential for new customers

Answer 17

c)

Size the total market and determine market share och forecasting prices

Question 18

Which of the following are NOT included in the six steps in the forecasting process?

a)
Analyze historical financial reports

b)
Forecast the FCF as a long-term historical average

c)
Build the revenue forecast

d)
Reconcile the balance sheet with investor funds

Answer 18

B) Forecast the FCF as a long-term historical average

Question 19

In some cases multiples are used for calculating the continuing value. What is the problem with this approach?

a)
The multiple we calculate today, reflects the interest rate today, which is not necessarily the same interest rate as when the company reaches the steady state.

b)
The multiple we calculate today, reflects the industry conditions today, which is not necessarily the same conditions as when the company reaches the steady state.

c)
The multiple we calculate today, reflects the industry growth today, which is not necessarily the same growth as when the company reaches the steady state.

d)
The multiple we calculate today, reflects the inflation today, which is not necessarily the same inflation as when the company reaches the steady state.

Answer 19

B) The multiple we calculate today, reflects the industry conditions today, which is not necessarily the same conditions as when the company reaches the steady state.

Question 20

Write the recommended formula for calculating the continuing value?

a)
NOPAT(t+1) x (1-(g/RONIC)) / (WACC-g)

b)
NOPAT(t+1) x (1-(g/RONIC)) / (WACC+g)

c)
NOPAT(t+1) / (1-(g/RONIC)) / (WACC-g)

d)
NOPAT(t+1) x (1-RONIC) / (WACC-g)

Answer 20

A)
Rätta svaret är:
NOPAT(t+1) x (1-(g/RONIC)) / (WACC-g)

Question 21

How does length of forecast affect a company’s value?

a)
It does not

b)
The longer period the higher value

c)
The longer period for the PV of the explicit forecasting period, the higher value.

d)
The shorter period the higher value

Answer 21

a)

It does not

Question 22

What is the recommended formula for economic-profit valuation?

a)
Invested capital, plus PV of economic profit during the explicit forecast period, less PV of economic profit after the explicit forecast period.

b)
Invested capital, less PV of economic profit during the explicit forecast period, plus PV of economic profit after the explicit forecast period.

c)
Invested capital, plus PV of economic profit during the explicit forecast period, plus PV of economic profit after the explicit forecast period.

d)
Invested capital, plus PV of economic profit during the explicit forecast period, plus PV of economic profit after the explicit forecast period, less net debt

Answer 22

c)
Invested capital, plus PV of economic profit during the explicit forecast period, plus PV of economic profit after the explicit forecast period.

Question 23

What is important to remember when the WACC is included in the calculation of the continuing value?

a)
It must incorporate a stronger capital structure and an estimate of business risk that is higher than the average for the industry

b)
It must incorporate a risk premium equal to the un-leveraged beta for the industry

c)
It must incorporate a sustainable capital structure and an estimate of business risk that is consistent with the industry

d)
That the beta value is consistent with industry risk

Answer 23

c)
It must incorporate a sustainable capital structure and an estimate of business risk that is consistent with the industry

Question 24

What is important to take into consideration regarding NOPAT, when calculating the continuing value?

a)
NOPAT should be based normalized revenue and the last estimated operating margin

b)
NOPAT should be based on the most recent estimates

c)
NOPAT should be based normalized revenue and the last estimated operating margin and investments in percentage of PPE

d)
NOPAT should be based normalized factors

Answer 24

d)

NOPAT should be based normalized factors

Question 25

What is important to take into consideration when the RONIC is included in the calculation of continuing value?

a)
For companies in growth industries, set RONIC equal to WACC

b)
For companies in competitive industries, set RONIC equal to WACC

c)
For companies in growth industries, set RONIC equal to WACC, including an extra riskpremium in WACC.

d)
For companies in competitive industries, set RONIC higher than WACC

Answer 25

b)

For companies in competitive industries, set RONIC equal to WACC

Question 26

In some cases the replacement cost approach are used for calculating the continuing value. What is the problem with this approach?

a)
The intangible assets are replaceable but difficult to find the current price on. The organizational capital can be valued only by the cash flow it generates.

b)
Not all assets are replaceable. For example the research and development expenses might be difficult to replace, because it is difficult to find the research cost for similar technique.

c)
All assets are replaceable, but it is difficult to find the current value on.

d)
Not all assets are replaceable. The organizational capital can be valued only by the cash flow it generates.

Answer 26

d)

Not all assets are replaceable. The organizational capital can be valued only by the cash flow it generates.

Question 27

The cost of equity is determined by two factors, which?

a)
The central bank rate and the riskpremium of equity

b)
The government bond rate and the beta value

c)
The inflation rate and the real interest rate

d)
Estimated market return adjusted for risk

Answer 27

d)

Estimated market return adjusted for risk

Question 28

What is the recommended timeframe for calculating Beta in a raw regression based on monthly data?

a)
One year monthly returns

b)
Four years monthly returns

c)
Ten years monthly returns

d)
Five years monthly returns

Answer 28

D) 5 years

Question 29

What is the reason the calculation of WACC should rely on target weights rather than the current weights?

a)
The DCF-valuation is based on a debt free company. Consequently there is no capital structure to rely on.

b)
The company’s current capital structure may not reflect the level expected to prevail over the life of the business.

c)
Long-term, the company cannot deviate from the capital structure of the industry.

d)
The capital structure will revert to the mean of the industry

Answer 29

b)

The company’s current capital structure may not reflect the level expected to prevail over the life of the business.

Question 30

In a study of US companies between 1962 and 2018 the inflation adjusted market return of equity was calculated. How high was it?

a)
2 percent

b)
17 percent

c)
9 percent

d)
7 percent

Answer 30

D) 7 percent

Question 31

What model and what factor in that model is used to estimate the company specific risk?

a)
The dividend discounting model and long-term inflation

b)
The Black & Scholes model an volatility

c)
The capital asset pricing model and beta values

d)
The free cash flow model and ten year government bond

Answer 31

C) CAPM

Question 32

Up until the financial crises 2007-2009, how was the risk-free rate measured?

a)
It was based on the inflation rate plus a real interest rate premium

b)
It was based on the treasury yield

c)
It was based on the interest rate for corporate bonds with at least a BBB grading.

d)
It was based on the policy rate of the central bank

Answer 32

B)

Question 33

If a company has a debt to value ratio that differs from the target weight, in a simple scenario, how can you adjust your valuation?

a)
Do step vise rebalancing, for constant five year periods. Keep the WACC steady over that period.

b)
Use the balance sheet structure the company have and disregard the target structure.

c)
Rebalance over several years and use a new capital structure each year until the target is reached.

d)
Rebalance immediately and keep the new capital structure whenn calculating WACC for all future years.

Answer 33

D) Rebalance immediately and keep the new capital structure when calculating WACC for all future years.

Question 34

How is the synthetic risk-free rate calculated?

a)
It is the long-run real interest rate of 2 percent, plus an expected inflation of 1,7-2,3 percent

b)
It is the long-run ten year government bond rate of 1,7-2,3 percent

c)
It is the long-run corporate bond rate of 2 percent, plus an expected inflation of 1,7-2,3 percent

d)
It is the long-run government bond rate of 2 percent, plus an expected inflation of 1,7-2,3 percent

Återkoppling
Your answer is correct.
Rätta svaret är:
It is the long-run real interest rate of 2 percent, plus an expected inflation of 1,7-2,3 percent

Answer 34

A) It is the long-run real interest rate of 2 percent, plus an expected inflation of 1,7-2,3 percent

Question 35

There are four methods used to value convertible debt in the calculation of equity value, which of the following is NOT one of them?

a)
Black-Scholes value (if not traded)

b)
Nominal amount (if not traded)

c)
Fair value (if not traded)

d)
Market price (if traded)

Answer 35

B) Nominal

Question 36

How should you incorporate a discontinued business in the valuation?

a)
Because the discounted business is no longer part of the operations, the net assets presented on the balance sheet is ususally a reasonable approximation of the value.

b)
The discounted business is still part of the operations until it is finally sold and should be included in the DCF-valuation.

c)
Because the discounted business is no longer part of the operations, only the net earnings after tax from the business should be included in the FCF.

d)
The discounted business is still part of the operations until it is finally sold and should be included in the DCF-valuation, using the net earnings and the WACC to value the business.

Answer 36

a)
Because the discounted business is no longer part of the operations, the net assets presented on the balance sheet is ususally a reasonable approximation of the value.

Question 37

Explain how employee stock options affects free-cash-flow projections?

a)
Do nothing. The cost is included in the income statment.

b)
Exclude the cost for the options in the income statement and value the options as part of net debt

c)
Include the book value of the options in the net debt calculation

d)
Exclude the cost for the options in the income statment and include the difference in the market value between the ingoing and the outgoing value.

Answer 37

b)

Exclude the cost for the options in the income statement and value the options as part of net debt

Question 38

There are four classes of provisions - which of the following is NOT one of them?

a)
Warranties

b)
Restructuring charges

c)
Plant-decommissioning

d)
Trade creditors

Answer 38

d)

Trade creditors

Question 39

How is, in general, a non-operating asset defined in the DCF?

a)
Cash, shares in joint ventures, goodwill, deferred tax assets

b)
Any asset that you have not incorporated as free cash flow.

c)
Total assets less working capital and investments in PPE

d)
cash, shares in subsidiaries, deferred tax assets, financial receivables

Answer 39

b)

Any asset that you have not incorporated as free cash flow.

Question 40

Why is it necessary to treat a finance subsidiary, even 100 percent controlled, as a non-operating asset in the valuation?

a)
The finance subsidiary does not present “operating earnings” in the income statement

b)
The finance subsidiary has a very stable business and a lower risk, therefore a separate valuation must be performed using a lower risk premium.

c)
The finance subsidiary cannot distribute dividends to the parent shareholder because of legal restrictions

d)
The finance subsidiary differs greatly from manufacturing and service businesses.

Answer 40

d)

The finance subsidiary differs greatly from manufacturing and service businesses.

Question 41

If a non-consolidated subsidiary is privately held, how should you incorporate it in the valuation?

a)
Let the earnings in associated companies become a part of free cash flow

b)
Include it to book value as part of non-operating assets

c)
Perform a separate DCF valuation of the equity stake

d)
Include it to book value as an operating asset

Answer 41

c)

Perform a separate DCF valuation of the equity stake

Question 42

If a subsidiary with a minority interest is publicly traded, how can you adjust for the minority interest in the calculation of the equity value?

a)
Do not adjust, since it is not included in equity

b)
Deduct the market value of the minority interest from the value of operations

c)
Adjust for the book value in the balance sheet.

d)
Multiply the book value with a ratio to get closer to the fair value and deduct it.

Answer 42

b)

Deduct the market value of the minority interest from the value of operations

Question 43

How can you value tax losses carried forward and incorporate them in the enterprise value?

a)
Since tax savings will increase future cash flows, include the book value of the losses and include in value of operations.

b)
Since tax savings will increase future cash flows, estimate the value by discounting the future cash flow and add it to the value of operations.

c)
Do not adjust for tax losses carryforwards, since they will be included in the estimations of future FCF, as a higher tax cost.

d)
Do not adjust for tax losses carryforwards, since they will be included in the estimations of future FCF, as a lower tax cost

Answer 43

b)
Since tax savings will increase future cash flows, estimate the value by discounting the future cash flow and add it to the value of operations.