Question 1

What is o ne of the reasons why Shareholder Value Analysis (SVA) is based upon Net Present Value (NPV) Analysis?

Accepted Answer

A)  NPV considers expected return for level of risk in its calculation. 
B)  NPV can be modified to accommodate changes in accounting procedures. 
C)  NPV uses only actual, current, measurable data in its calculation. 
D)  NPV is easy to calculate and to interpret and is widely used.. 
E)  NPV considers the size of the business in its calculation. 
A)  NPV considers expected return for level of risk in its calculation. 
B)  NPV can be modified to accommodate changes in accounting procedures. 
C)  NPV uses only actual, current, measurable data in its calculation. 
D)  NPV is easy to calculate and to interpret and is widely used.. 
E)  NPV considers the size of the business in its calculation.

Question 2

For the year just ending, Elena Electronics Inc. had sales revenue equal to $950,000, cost of goods sold $399,000, selling expenses $191,000, distribution expenses of $70,000, administration expenses of $62,000, depreciation expense $18,000, interest charges $44,000 and taxes at $57,000. During that year there was an increase in accounts receivable of $10,000 and no capital asset were purchased. What was the free cash flow generated for the year?

Accepted Answer

A)  $117,000 
B)  $161,000 
C)  $171,000 
D)  $321,000 
E)  $557,000 
A)  $117,000 
B)  $161,000 
C)  $171,000 
D)  $321,000 
E)  $557,000

Question 3

What is the best way to measure changes in shareholder value?

Accepted Answer

A)  Consider the changes in the company's balance sheet measured at fair value. 
B)  Consider the changes in the company's share price, dividend policy, and fair value of its bonds. 
C)  Consider long term cash flows taking into account risk and the cost of sharehoders' equity. 
D)  Consider the problem that accounting policies may vary from company to company. 
E)  Consider the problem that ratios based on profit do not take in to account all the costs of capital invested by the business. 
A)  Consider the changes in the company's balance sheet measured at fair value. 
B)  Consider the changes in the company's share price, dividend policy, and fair value of its bonds. 
C)  Consider long term cash flows taking into account risk and the cost of sharehoders' equity. 
D)  Consider the problem that accounting policies may vary from company to company. 
E)  Consider the problem that ratios based on profit do not take in to account all the costs of capital invested by the business.

Question 4

Air Ltd. has operating costs equal to 40% of sales. Air Ltd. is forecasting two scenarios. Scenario 1 is that operating costs will rise 10% but taxes will decrease 10%. Scenario 2 is that operating costs will decrease by 10% and taxes will increase 10%. Which scenario would have the biggest impact on free cash flow?

Accepted Answer

A)  Scenario 1, which will increase cash flows by 2.1%. 
B)  Scenario 2, which will increase cash flows by 2.7%. 
C)  Scenario 1, which will decrease cash flows by 2.1%. 
D)  Scenario 2, which will decrease cash flows by 2.7%. 
E)  Both scenarios will impact free cash flows equally. 
A)  Scenario 1, which will increase cash flows by 2.1%. 
B)  Scenario 2, which will increase cash flows by 2.7%. 
C)  Scenario 1, which will decrease cash flows by 2.1%. 
D)  Scenario 2, which will decrease cash flows by 2.7%. 
E)  Both scenarios will impact free cash flows equally.

Question 5

What will EVA and MVA be if a business generates returns equal to the firm's cost of capital?

Accepted Answer

A)  Both will be zero. 
B)  EVA will exceed MVA. 
C)  MVA will exceed EVA. 
D)  EVA will be positive. 
E)  MVA will be positive. 
A)  Both will be zero. 
B)  EVA will exceed MVA. 
C)  MVA will exceed EVA. 
D)  EVA will be positive. 
E)  MVA will be positive.

Question 6

Cardomaine Seaway Inc. is looking to make a share bid for Laker Transportation's 20 million common shares. Laker is struggling to turn the company around and carry a debt at a market value of $30 million. Laker's cost of capital is 9%. Sales revenue for this year is expected to be $50 million and Cardomaine believes Laker will be increasing it by 5% annually for the next four. Operating expenses are 75% of sales revenue with depreciation expenses equalling investment in replacement assets. Income taxes can be estimated at 24% of operating income. The company has published plans of additional asset investment at $5 million this year, $5 million next year and $7 million in each of the following three years. Working capital is 30% of sales revenue and the company expects to drop this by $3.2 million this year with additional declines of $3.2 in each of the following four years. What price per share would Cardomaine offer Laker's shareholders that would leave them as well off as before?

Accepted Answer

A)  $2.76 
B)  $3.28 
C)  $4.13 
D)  $5.41 
E)  $6.35 
A)  $2.76 
B)  $3.28 
C)  $4.13 
D)  $5.41 
E)  $6.35

Question 7

Business 1 has a total market value of $500 million and total capital invested of $350 million. Business 2 has a total market value of $850 million and total capital invested of $570 million. Business 3 has a total market value of $700 million and total capital invested of $420 million. Business 4 has a total market value of $680 and total capital invested of $460. Business 5 has a total market value of $500 million and total capital invested of $220. Use MVA and any other calculation necessary to find which business provides the highest wealth creation.

Accepted Answer

A)  Business 1 
B)  Business 2 
C)  Business 3 
D)  Business 4 
E)  Business 5 
A)  Business 1 
B)  Business 2 
C)  Business 3 
D)  Business 4 
E)  Business 5

Question 8

What is a reason why supporters of SVA believe that EPS is not a valid measure of shareholder value?

Accepted Answer

A)  EPS does not include consideration of the interest earnings of lenders. 
B)  EPS includes estimated future profits that are, as yet, unearned. 
C)  EPS is based on market values rather than the more conservative book values. 
D)  EPS does not consider the future value of the shares. 
E)  EPS relies on share price rather than solely on quantifiable internal measures. 
A)  EPS does not include consideration of the interest earnings of lenders. 
B)  EPS includes estimated future profits that are, as yet, unearned. 
C)  EPS is based on market values rather than the more conservative book values. 
D)  EPS does not consider the future value of the shares. 
E)  EPS relies on share price rather than solely on quantifiable internal measures.

Question 9

Social Games Ltd. has a business value of $50 million, capital invested of $32 million, and annually generates returns that exceed investors required returns by $4 million. What is the percentage required return demanded by investors?

Accepted Answer

A)  8.0% 
B)  12.5% 
C)  18.0% 
D)  22.2% 
E)  64.0% 
A)  8.0% 
B)  12.5% 
C)  18.0% 
D)  22.2% 
E)  64.0%

Question 10

What is a value driver that a Human Resources manager could impact directly?

Accepted Answer

A)  Working Capital 
B)  Taxes 
C)  Operating Costs 
D)  Fixed Capital 
E)  Sales. 
A)  Working Capital 
B)  Taxes 
C)  Operating Costs 
D)  Fixed Capital 
E)  Sales.

Question 11

What do Discounted Free Cash Flows represent?

Accepted Answer

A)  Income available for distribution to shareholders. 
B)  Opportunity cost to shareholders of another corporation of equal risk. 
C)  Cash available for distribution to shareholders and lenders. 
D)  Economic value of the business. 
E)  The equivalent of the total market value of the assets of the business. 
A)  Income available for distribution to shareholders. 
B)  Opportunity cost to shareholders of another corporation of equal risk. 
C)  Cash available for distribution to shareholders and lenders. 
D)  Economic value of the business. 
E)  The equivalent of the total market value of the assets of the business.

Question 12

Jericho Paper Distributors has a stable share of a saturated regional market. If the company's EVA is expected to continue at $7.2 million indefinitely, its capital invested is $3.1 million, and its cost of capital is 8%, what is the total business value?

Accepted Answer

A)  $144.2 million 
B)  $93.1 million 
C)  $41.5 million 
D)  $10.3 million 
E)  $9.8 million 
A)  $144.2 million 
B)  $93.1 million 
C)  $41.5 million 
D)  $10.3 million 
E)  $9.8 million

Question 13

What is a common adjustment made to calculate EVA from a company's audited financial statements?

Accepted Answer

A)  The addition of goodwill to total assets. 
B)  The addition of restructuring costs to operating expenses. 
C)  The subtraction of marketable securities' income from operating expenses. 
D)  The inclusion of advertising costs in total assets and its depreciation. 
E)  The addition of an allowance for doubtful accounts to invested capital. 
A)  The addition of goodwill to total assets. 
B)  The addition of restructuring costs to operating expenses. 
C)  The subtraction of marketable securities' income from operating expenses. 
D)  The inclusion of advertising costs in total assets and its depreciation. 
E)  The addition of an allowance for doubtful accounts to invested capital.

Question 14

What is one of the main reasons why managers are making shareholder interests paramount?

Accepted Answer

A)  To conform to changes in securities legislation. 
B)  To attract shareholder funds in a highly competitive environment. 
C)  Because of pressures from non-governmental regulatory agencies such as the Canadian Securities Commission. 
D)  Because of activism from pressure groups composed of large numbers of small individual investors. 
E)  Because managers' interests almost always coincide with those of shareholders. 
A)  To conform to changes in securities legislation. 
B)  To attract shareholder funds in a highly competitive environment. 
C)  Because of pressures from non-governmental regulatory agencies such as the Canadian Securities Commission. 
D)  Because of activism from pressure groups composed of large numbers of small individual investors. 
E)  Because managers' interests almost always coincide with those of shareholders.

Question 15

What is the total shareholder return (TSR) if Calico Clothing's share price over the past year increased from $25.40 to $28.50 and the company paid out dividends of $1.65 per share?

Accepted Answer

A)  18.7% 
B)  16.7% 
C)  5.7% 
D)  -5.1% 
E)  -5.7% 
A)  18.7% 
B)  16.7% 
C)  5.7% 
D)  -5.1% 
E)  -5.7%

Question 16

Harry Hermes Delivery Service's has been restructured to stem losses. The company's EVA for the year just ending was ($300,000). In its medium range plan Harry Hermes has projected EVA for the following three years to be ($150,000), $25,000, and $500,000, respectively. If the company's weighted average cost of capital is 10%, what is the gain or loss in shareholder value over the period?

Accepted Answer

A)  ($36,408) 
B)  ($40,055) 
C)  $23,622 
D)  $75,000 
E)  $185,168 
A)  ($36,408) 
B)  ($40,055) 
C)  $23,622 
D)  $75,000 
E)  $185,168

Question 17

Simithy Medical Disposal is a new and expanding entry in the bio-waste/bio-hazard industrial sector. As of year-end it had $50 million in invested capital of which $40 million is long-term debt. Simithy Medical's 2 million shares trade for $45 each. The company has an EVA of $8.3 million and a cost of capital of capital of 12%. Assuming book value of debt equals market value, what is Simithy's Future Growth Value (FGV)?

Accepted Answer

A)  $10.8 million 
B)  $20.8 million 
C)  $69.2 million 
D)  $249.2 million 
E)  $350.1 million 
A)  $10.8 million 
B)  $20.8 million 
C)  $69.2 million 
D)  $249.2 million 
E)  $350.1 million

Question 18

A company has a business value of $2,075,000, a weighted average cost of capital of 14%, and invested capital of $1,250,000. The company's EVA for its most recent period is $47,200. What proportion of the company's business value is contributed to by growth?

Accepted Answer

A)  8.4% 
B)  9.7% 
C)  16.2% 
D)  20.1% 
E)  23.5% 
A)  8.4% 
B)  9.7% 
C)  16.2% 
D)  20.1% 
E)  23.5%

Question 19

Why is the treatment of a loan in the SVA model is consistent with the long-term horizon of SVA?

Accepted Answer

A)  The book value of long-term liabilities is consistently used. 
B)  Present value of planned future debt financing and a terminal value for estimates outside the planning range are used. 
C)  The market value of debt used is consistent with the market value of the earnings represented by the discounted FCFs. 
D)  Loans are assumed to be rolled over in perpetuity. 
E)  The treatment of loan capital is a weakness as it is not consistent with the long-term horizon of SVA. 
A)  The book value of long-term liabilities is consistently used. 
B)  Present value of planned future debt financing and a terminal value for estimates outside the planning range are used. 
C)  The market value of debt used is consistent with the market value of the earnings represented by the discounted FCFs. 
D)  Loans are assumed to be rolled over in perpetuity. 
E)  The treatment of loan capital is a weakness as it is not consistent with the long-term horizon of SVA.

Question 20

Which of the following companies is most committed to the shareholder value approach?

Accepted Answer

A)  Company A, when it decides to expand from a microchip manufacturer to an on-line internet company. 
B)  Company B, a bank that acts on opportunities to buy other distressed banks cheaply in order to grow its deposit base. 
C)  Company C, an auto company that focuses on cost cutbacks and pension rollback to improve the bottom line. 
D)  Company D, a software company that introduces to its mission statement shareholder values initiatives such as salary freezes. 
E)  Company E, a shipping company that makes short term investments of free cash flows in oil and gas companies. 
A)  Company A, when it decides to expand from a microchip manufacturer to an on-line internet company. 
B)  Company B, a bank that acts on opportunities to buy other distressed banks cheaply in order to grow its deposit base. 
C)  Company C, an auto company that focuses on cost cutbacks and pension rollback to improve the bottom line. 
D)  Company D, a software company that introduces to its mission statement shareholder values initiatives such as salary freezes. 
E)  Company E, a shipping company that makes short term investments of free cash flows in oil and gas companies.

What is o ne of the reasons why Shareholder Value Analysis (SVA) is based upon Net Present Value (NPV) Analysis?

What is the best way to measure changes in shareholder value?

What will EVA and MVA be if a business generates returns equal to the firm's cost of capital?

What is a reason why supporters of SVA believe that EPS is not a valid measure of shareholder value?

Social Games Ltd. has a business value of $50 million, capital invested of $32 million, and annually generates returns that exceed investors required returns by $4 million. What is the percentage required return demanded by investors?

What is a value driver that a Human Resources manager could impact directly?

What do Discounted Free Cash Flows represent?

Jericho Paper Distributors has a stable share of a saturated regional market. If the company's EVA is expected to continue at $7.2 million indefinitely, its capital invested is $3.1 million, and its cost of capital is 8%, what is the total business value?

What is a common adjustment made to calculate EVA from a company's audited financial statements?

What is one of the main reasons why managers are making shareholder interests paramount?

What is the total shareholder return (TSR) if Calico Clothing's share price over the past year increased from $25.40 to $28.50 and the company paid out dividends of $1.65 per share?

A company has a business value of $2,075,000, a weighted average cost of capital of 14%, and invested capital of $1,250,000. The company's EVA for its most recent period is $47,200. What proportion of the company's business value is contributed to by growth?

Why is the treatment of a loan in the SVA model is consistent with the long-term horizon of SVA?

Which of the following companies is most committed to the shareholder value approach?

Introduction to Financial Management

Accounting - the Language of Business

Financial Planning and Pro Forma Financial Statements

Analyzing and Interpreting Financial Statements

The Time Value of Money

Making Capital Investment Decisions

Making Capital Investment Decisions: Further Issues

Financing a Business 1: Sources of Funds

Financing a Business 2: Raising Long-Term Funds

The Cost of Capital and the Capital Structure Decision

Developing a Dividend Policy

Managing Working Capital

Mergers, Acquisitions, and the Valuation of Shares

Filters

Exam 13: Measuring and Managing for Shareholder Value

What is o ne of the reasons why Shareholder Value Analysis (SVA) is based upon Net Present Value (NPV) Analysis?

What is the best way to measure changes in shareholder value?

What will EVA and MVA be if a business generates returns equal to the firm's cost of capital?

What is a reason why supporters of SVA believe that EPS is not a valid measure of shareholder value?

Social Games Ltd. has a business value of $50 million, capital invested of $32 million, and annually generates returns that exceed investors required returns by $4 million. What is the percentage required return demanded by investors?

What is a value driver that a Human Resources manager could impact directly?

What do Discounted Free Cash Flows represent?

Jericho Paper Distributors has a stable share of a saturated regional market. If the company's EVA is expected to continue at $7.2 million indefinitely, its capital invested is $3.1 million, and its cost of capital is 8%, what is the total business value?

What is a common adjustment made to calculate EVA from a company's audited financial statements?

What is one of the main reasons why managers are making shareholder interests paramount?

What is the total shareholder return (TSR) if Calico Clothing's share price over the past year increased from $25.40 to $28.50 and the company paid out dividends of $1.65 per share?

A company has a business value of $2,075,000, a weighted average cost of capital of 14%, and invested capital of $1,250,000. The company's EVA for its most recent period is $47,200. What proportion of the company's business value is contributed to by growth?

Why is the treatment of a loan in the SVA model is consistent with the long-term horizon of SVA?

Which of the following companies is most committed to the shareholder value approach?

Introduction to Financial Management

Accounting - the Language of Business

Financial Planning and Pro Forma Financial Statements

Analyzing and Interpreting Financial Statements

The Time Value of Money

Making Capital Investment Decisions

Making Capital Investment Decisions: Further Issues

Financing a Business 1: Sources of Funds

Financing a Business 2: Raising Long-Term Funds

The Cost of Capital and the Capital Structure Decision

Developing a Dividend Policy

Managing Working Capital

Mergers, Acquisitions, and the Valuation of Shares

Filters