Question 1

What are the two parts that make up investment in plant, vehicles, buildings, etc?

Accepted Answer

A)  Investment that adds to the stock of assets 
B)  Annual investment to replace worn out equipment 
C)  Capitalisation, calculated as a fixed proportion of depreciation over the equipment's lifetime 
D)  The sum of the cash flows on equipment within the planning horizon 
A)  Investment that adds to the stock of assets 
B)  Annual investment to replace worn out equipment 
C)  Capitalisation, calculated as a fixed proportion of depreciation over the equipment's lifetime 
D)  The sum of the cash flows on equipment within the planning horizon A, B

Question 2

An approach for assessing risk that uses a number of possible return estimates to obtain a sense of the variability among outcomes is called sensitivity analysis.

Accepted Answer

A) True 
 B)False  True

Question 3

When calculating economic profit using the 'profit less capital charge' method, the capital charge is subtracted from the operating profit to give the economic profit. Which of the following describes the type of operating profit that must be used?

Accepted Answer

A)  The operating profit after interest deduction and before tax deduction 
B)  The operating profit before both interest deduction and tax deduction 
C)  The operating profit after both interest deduction and tax deduction 
D)  The operating profit before interest deduction and after tax deduction 
A)  The operating profit after interest deduction and before tax deduction 
B)  The operating profit before both interest deduction and tax deduction 
C)  The operating profit after both interest deduction and tax deduction 
D)  The operating profit before interest deduction and after tax deduction D

Question 4

Which three of the following are among Rappaport's seven value drivers for shareholder value analysis?

Accepted Answer

A)  Interest charge 
B)  Tax rate 
C)  Operating profit margin 
D)  The planning horizon 
A)  Interest charge 
B)  Tax rate 
C)  Operating profit margin 
D)  The planning horizon

Question 5

Which of the following best defines the term 'economic profit'?

Accepted Answer

A)  The amount earned by a business after deducting all operating expenses and a charge for the opportunity cost of the capital employed 
B)  The amount earned by a business over a number of years: it is equal to the cumulative profit less interest plus depreciation 
C)  The rate of return earned by a business on sales over a period 
D)  The amount earned by a business as shown in the profit and loss account but with depreciation and any increase in working capital added back 
A)  The amount earned by a business after deducting all operating expenses and a charge for the opportunity cost of the capital employed 
B)  The amount earned by a business over a number of years: it is equal to the cumulative profit less interest plus depreciation 
C)  The rate of return earned by a business on sales over a period 
D)  The amount earned by a business as shown in the profit and loss account but with depreciation and any increase in working capital added back

Question 6

Which value- creation metric involves calculating future annual free cash flows attributable to both shareholders and debt holders, and then discounting these cash flows at the weighted average cost of capital?

Accepted Answer

A)  Discounted cash flow 
B)  Total shareholder return 
C)  Economic profit 
D)  Shareholder value analysis 
A)  Discounted cash flow 
B)  Total shareholder return 
C)  Economic profit 
D)  Shareholder value analysis

Question 7

A behavioral approach that evaluates the impact on the firm's return of simultaneous changes in a number of project variables is called

Accepted Answer

A)  sensitivity analysis. 
B)  simulation analysis. 
C)  none of the above. 
D)  scenario analysis. 
A)  sensitivity analysis. 
B)  simulation analysis. 
C)  none of the above. 
D)  scenario analysis.

Question 8

Which two terms are added together to calculate corporate value?

Accepted Answer

A)  Amount of capital invested 
B)  The present value of free cash flows from operations within the planning horizon 
C)  The present value of free cash flows from operations after the planning horizon 
D)  Actual return 
A)  Amount of capital invested 
B)  The present value of free cash flows from operations within the planning horizon 
C)  The present value of free cash flows from operations after the planning horizon 
D)  Actual return

Question 9

What metric is found by subtracting the debt from the present value of free cash flows from operations?

Accepted Answer

A)  Economic profit 
B)  Corporate value 
C)  Total shareholder value 
D)  Shareholder value from operations 
A)  Economic profit 
B)  Corporate value 
C)  Total shareholder value 
D)  Shareholder value from operations

Question 10

Economic value added is the difference between an investment's net operating profit after taxes and the cost of funds used to finance the investment, which is found by multiplying the euro amount of the funds used to finance the investment by the firm's weighted average cost of capital.

Accepted Answer

A) True 
 B)False

Question 11

How is shareholder value from operations calculated?

Accepted Answer

A)  By subtracting debt from present value of free cash flows from operations 
B)  By adding debt and the discounted value of taxable cash flows from operations 
C)  By adding debt and the present value of free cash flows from operations 
D)  By subtracting debt from discounted value of taxable cash flows from operations 
A)  By subtracting debt from present value of free cash flows from operations 
B)  By adding debt and the discounted value of taxable cash flows from operations 
C)  By adding debt and the present value of free cash flows from operations 
D)  By subtracting debt from discounted value of taxable cash flows from operations

Question 12

The weighted average cost of capital for a company is 12 per cent and the firm achieved an operating profit before interest and tax of £1.5m in the latest year. The company started the year with £20m of invested capital. What was the economic profit?

Accepted Answer

A)  - £900,000 
B)  £900,000 
C)  £3.7m 
D)  £2.4m 
A)  - £900,000 
B)  £900,000 
C)  £3.7m 
D)  £2.4m

Question 13

Two approaches for dealing with project risk to capture the variability of cash inflows and NPVs are

Accepted Answer

A)  sensitivity analysis and simulation. 
B)  scenario analysis and simulation. 
C)  none of the above. 
D)  sensitivity analysis and scenario analysis. 
A)  sensitivity analysis and simulation. 
B)  scenario analysis and simulation. 
C)  none of the above. 
D)  sensitivity analysis and scenario analysis.

Question 14

Behavioral approaches for dealing with risk include sensitivity analysis, scenario analysis, and simulation.

Accepted Answer

A) True 
 B)False

Question 15

What term is used for the sum of the present value of free cash flows from operations plus the value of non- operating assets?

Accepted Answer

A)  Economic profit 
B)  Shareholder value from operations 
C)  Corporate value 
D)  Total shareholder value 
A)  Economic profit 
B)  Shareholder value from operations 
C)  Corporate value 
D)  Total shareholder value

Question 16

What is the key advantage of economic profit, compared with using shareholder value analysis?

Accepted Answer

A)  It presents results as percentages. 
B)  It reduces risk. 
C)  It uses existing accounting and reporting systems. 
D)  It maximises the probability of finding profitable projects. 
A)  It presents results as percentages. 
B)  It reduces risk. 
C)  It uses existing accounting and reporting systems. 
D)  It maximises the probability of finding profitable projects.

Question 17

Which three of the following are among Rappaport's seven value drivers for shareholder value analysis?

Accepted Answer

A)  Sales growth rate 
B)  Supplies growth rate 
C)  Fixed capital investment 
D)  Working capital investment 
A)  Sales growth rate 
B)  Supplies growth rate 
C)  Fixed capital investment 
D)  Working capital investment

Question 18

The firm's free cash flow (FCF) represents the amount of cash flow available to investors (shareholders and bondholders) after the firm has met all operating needs and after having paid for net fixed asset investments and net current asset investments.

Accepted Answer

A) True 
 B)False

Question 19

Which three of the following are disadvantages to the use of shareholder value analysis?

Accepted Answer

A)  It cannot set both short- term and long- term targets. 
B)  Constant percentage increases in value drivers lack realism in some circumstances. 
C)  It can be misused in target setting. 
D)  Many firms' accounting systems are not equipped to provide the necessary input data. 
A)  It cannot set both short- term and long- term targets. 
B)  Constant percentage increases in value drivers lack realism in some circumstances. 
C)  It can be misused in target setting. 
D)  Many firms' accounting systems are not equipped to provide the necessary input data.

Question 20

Which of the following is the value- creation metric that simplifies discounted cash flow analysis by employing (Rappaport's) seven value drivers?

Accepted Answer

A)  Discounted cash flow 
B)  Total shareholder return 
C)  Shareholder value analysis 
D)  Economic profit 
A)  Discounted cash flow 
B)  Total shareholder return 
C)  Shareholder value analysis 
D)  Economic profit

Exam 17: Valuing Shares

What are the two parts that make up investment in plant, vehicles, buildings, etc?

An approach for assessing risk that uses a number of possible return estimates to obtain a sense of the variability among outcomes is called sensitivity analysis.

When calculating economic profit using the 'profit less capital charge' method, the capital charge is subtracted from the operating profit to give the economic profit. Which of the following describes the type of operating profit that must be used?

Which three of the following are among Rappaport's seven value drivers for shareholder value analysis?

Which of the following best defines the term 'economic profit'?

Which value- creation metric involves calculating future annual free cash flows attributable to both shareholders and debt holders, and then discounting these cash flows at the weighted average cost of capital?

A behavioral approach that evaluates the impact on the firm's return of simultaneous changes in a number of project variables is called

Which two terms are added together to calculate corporate value?

What metric is found by subtracting the debt from the present value of free cash flows from operations?

Economic value added is the difference between an investment's net operating profit after taxes and the cost of funds used to finance the investment, which is found by multiplying the euro amount of the funds used to finance the investment by the firm's weighted average cost of capital.

How is shareholder value from operations calculated?

The weighted average cost of capital for a company is 12 per cent and the firm achieved an operating profit before interest and tax of £1.5m in the latest year. The company started the year with £20m of invested capital. What was the economic profit?

Two approaches for dealing with project risk to capture the variability of cash inflows and NPVs are

Behavioral approaches for dealing with risk include sensitivity analysis, scenario analysis, and simulation.

What term is used for the sum of the present value of free cash flows from operations plus the value of non- operating assets?

What is the key advantage of economic profit, compared with using shareholder value analysis?

Which three of the following are among Rappaport's seven value drivers for shareholder value analysis?

The firm's free cash flow (FCF) represents the amount of cash flow available to investors (shareholders and bondholders) after the firm has met all operating needs and after having paid for net fixed asset investments and net current asset investments.

Which three of the following are disadvantages to the use of shareholder value analysis?

Which of the following is the value- creation metric that simplifies discounted cash flow analysis by employing (Rappaport's) seven value drivers?

The Financial World

Project Appraisal: Net Present Value and Internal Rate of Return

Project Appraisal: Cash Flow and Applications

The Decision-Making Process for Investment Appraisal

Project Appraisal: Capital Rationing, Taxation and Inflation

Risk and Project Appraisal

Portfolio Theory

The Capital Asset Pricing Model and Multi-Factor Models

Stock Markets

Raising Equity Capital

Long-Term Debt Finance

Short-Term and Medium-Term Finance

Stock Market Efficiency

Value-Based Management

Value-Creation Metrics

The Cost of Capital

Capital Structure

Dividend Policy

Mergers

Derivatives

Managing Exchange-Rate Risk

Future Value of 1 at Compound Interest

Present Value of 1 at Compound Interest

Present Value of an Annuity of 1 at Compound Interest

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