Chat with AIExam 13: Using Financial Statements for Valuation
Exam 1: Financial Accounting for MBAS71 Questions
Exam 2: Introducing Financial Statements90 Questions
Exam 3: Transactions, Adjustments, and Financial Statements61 Questions
Exam 4: Analyzing and Interpreting Financial Statements66 Questions
Exam 5: Revenues, Receivables, and Operating Expenses60 Questions
Exam 6: Inventory, Accounts Payable, and Long-Term Assets58 Questions
Exam 7: Current Liabilities and Long-Term Liabilities65 Questions
Exam 8: Stock Transactions, Dividends, and EPS75 Questions
Exam 9: Intercorporate Investments75 Questions
Exam 10: Leases, Pensions, and Income Taxes68 Questions
Exam 11: Cash Flows64 Questions
Exam 12: Forecasting Financial Statements70 Questions
Exam 13: Using Financial Statements for Valuation83 Questions
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Alton Enterprises has an after-tax cost of debt of 3.85%. Your online investigation reveals that the company has a beta of 0.90. Assume that the risk free rate in 2017 is 3.0% and an appropriate "spread" of equities over the risk-free rate is 3.5%. The company has 60% of its capitalization from equity.
Calculate the company's weighted average cost of capital for 2017.
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(37) Correct Answer:
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VerifiedWACC = (Cost of debt × debt % capitalization) + (Cost of equity × equity % capitalization).
Cost of debt after tax = 3.85%. Cost of equity = 3.0% + (0.90 × 3.5%) = 6.15%.
WACC = (3.85% × 40%) + (6.15% × 60%) = 5.23%.
Explain the concept behind the Residual Operating Income (ROPI) model.
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VerifiedThe ROPI model is the idea that owners and non-owners (e.g. bondholders) each expect a certain amount of return in exchange for the money that they give to the firm. For the firm, this return amounts to a cost. This cost, calculated as WACC × Net Operating Assets, is often referred to as expected net operating profits after tax (Expected NOPAT).
Anything the firm earns over and above the Expected NOPAT is money that creates value for the firm. The difference between the firm's actual NOPAT and the Expected NOPAT is called Residual Operating Income (ROPI). Hence, firms that can produce substantial Residual Operating Income should be valued higher, while companies that have low, or negative, Residual Operating Income, should be valued lower.
Calculate the per share value of Cornwell Company if the cumulative present value of horizon period ROPI is $15,700, the present value of terminal ROPI is $20,500, the net operating assets (NOA) are $85,600, and net nonoperating obligations (NNO) are $16,300. The company has 2,500 shares outstanding.
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Following are financial statement numbers and select ratios for Target Corp. for the fiscal year 2016 (dollars in millions). Use the information to determine the residual operating income (ROPI) in 2017.
(Short Answer)
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(44) Which of the following descriptions of the residual operating income (ROPI) model is inaccurate?
(Multiple Choice)
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(35) Net operating profit after tax (NOPAT) is equal to net income less interest expense incurred during the year.
(True/False)
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(40) Which is the better model for valuation when earnings quality is a major concern, DCF or ROPI? Explain.
(Short Answer)
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(35) Which of the following descriptions of the free cash flow to the firm (FCFF) model is inaccurate?
(Multiple Choice)
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(41) In its 2017 fiscal year report, a company reported the following information:
At what weighted average cost of capital would the company report residual operating income (ROPI) of $0 in 2017?
At what weighted average cost of capital would the company report residual operating income (ROPI) of $0 in 2017? (Short Answer)
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(40) Alpine Corporation reported the following information for fiscal 2017 and 2016.
What are the company's free cash flows to the firm (FCFF) for 2017?
What are the company's free cash flows to the firm (FCFF) for 2017? (Multiple Choice)
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(33) The residual operating income (ROPI) model estimates firm value as the current book value of net operating assets plus the present value of expected residual operating income.
(True/False)
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(33) Which of the following is incorrect (rw is the weighted average cost of capital)?
(Multiple Choice)
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(33) Assume the following free cash flows for Aiello Inc. for 2016 and forecasted FCFF for 2017 onward (in millions):
The DCF value of the firm using the FCFF information above, a discount rate of 6%, and an expected terminal growth rate of 2%, is:
The DCF value of the firm using the FCFF information above, a discount rate of 6%, and an expected terminal growth rate of 2%, is: (Multiple Choice)
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(39) Following is financial information for Washington Corporation for 2017 year-end.
What are the company's free cash flows to the firm (FCFF) for 2017?
What are the company's free cash flows to the firm (FCFF) for 2017? (Short Answer)
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(33) All of the following are attributes of the ROPI model except:
(Multiple Choice)
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(39) Given the following information, calculate the ROPI for the latest fiscal year. At what WACC will the company report zero ROPI?
(Short Answer)
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(42) Discuss why NOPAT is used in calculating the value of a company instead of net income in the ROPI equity valuation model.
(Short Answer)
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(42) Konerko Corporation has a forecasted free cash flow to the firm (FCFF) of $13,800 per year in the terminal period, which begins in year 5. What is the present value of the terminal period FCFF assuming a weighted average cost of capital (WACC) of 7% and terminal growth rate of 2%?
(Short Answer)
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(32) The power of the residual operating income (ROPI) model is that it allows managers to focus on either the income statement or balance sheet to increase firm value.
(True/False)
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