Question 1

If managers were given freedom to choose which expenses to classify as investments,which of the following is most accurate?

Accepted Answer

A) Managers will have an incentive to classify all expenses as investments. 
B) Managers will have an incentive to classify no expenses as investments. 
C) Managers will not have an incentive either way with respect to classifying expenses as investments. 
D) Managers would most likely follow the rules established by GAAP,because they were formulated to be optimal for managers to follow. 
A) Managers will have an incentive to classify all expenses as investments. 
B) Managers will have an incentive to classify no expenses as investments. 
C) Managers will not have an incentive either way with respect to classifying expenses as investments. 
D) Managers would most likely follow the rules established by GAAP,because they were formulated to be optimal for managers to follow. A

Question 2

In early years,for a given company with a positive profit,ROIC with capitalized R&D will be higher than that with expensed R&D.

Accepted Answer

A) True 
 B)False  True

Question 3

Concerning the impact on ROIC of capitalizing R&D,will increasing the asset life and/or the percentage of revenues spent on R&D increase ROIC?

Accepted Answer

A) Increasing either the asset life or the percentage of revenues spent on R&D will increase ROIC. 
B) Neither increasing the asset life nor increasing the percentage of revenues spent on R&D will increase ROIC. 
C) Increasing the asset life will increase ROIC,but increasing the percentage of revenues spent on R&D will not. 
D) Increasing the asset life will not increase ROIC,but increasing the percentage of revenues spent on R&D will. 
A) Increasing either the asset life or the percentage of revenues spent on R&D will increase ROIC. 
B) Neither increasing the asset life nor increasing the percentage of revenues spent on R&D will increase ROIC. 
C) Increasing the asset life will increase ROIC,but increasing the percentage of revenues spent on R&D will not. 
D) Increasing the asset life will not increase ROIC,but increasing the percentage of revenues spent on R&D will. B

Question 4

Expensing items with long-term benefits will usually mean that the accounting statements will overstate the company's historical investment,which can artificially lower ROIC in later years,making a business appear less attractive than it really is.

Accepted Answer

A) True 
 B)False

Question 5

Will either measures of performance or valuation be affected by changing the accounting treatment of R&D?

Accepted Answer

A) Both measures of performance and valuation will be affected. 
B) Neither measures of performance nor valuation will be affected. 
C) Measures of performance will be affected,but valuation will not be affected. 
D) Measures of performance will not be affected,but valuation will be affected. 
A) Both measures of performance and valuation will be affected. 
B) Neither measures of performance nor valuation will be affected. 
C) Measures of performance will be affected,but valuation will not be affected. 
D) Measures of performance will not be affected,but valuation will be affected.

Question 6

A firm that capitalizes R&D has more opportunity to manipulate short-term earnings compared to a firm that expenses R&D.

Accepted Answer

A) True 
 B)False

Question 7

According to U.S.Generally Accepted Accounting Principles (GAAP),which of the following must be expensed?
I.A patent developed by the firm.
II.A building.
III.Equipment.
IV.A distribution network.

Accepted Answer

A) I and II only. 
B) I and IV only. 
C) II and III only. 
D) III and IV only. 
A) I and II only. 
B) I and IV only. 
C) II and III only. 
D) III and IV only.

Question 8

One benefit of capitalizing R&D is that reductions in current R&D will not affect current operating profits.

Accepted Answer

A) True 
 B)False

Question 9

If growth of a company is falling,expensing R&D will lead to an overestimation of the resulting drop in true performance.

Accepted Answer

A) True 
 B)False

Exam 21: Alternative Ways to Measure Return on Capital

If managers were given freedom to choose which expenses to classify as investments,which of the following is most accurate?

In early years,for a given company with a positive profit,ROIC with capitalized R&D will be higher than that with expensed R&D.

Concerning the impact on ROIC of capitalizing R&D,will increasing the asset life and/or the percentage of revenues spent on R&D increase ROIC?

Expensing items with long-term benefits will usually mean that the accounting statements will overstate the company's historical investment,which can artificially lower ROIC in later years,making a business appear less attractive than it really is.

Will either measures of performance or valuation be affected by changing the accounting treatment of R&D?

A firm that capitalizes R&D has more opportunity to manipulate short-term earnings compared to a firm that expenses R&D.

According to U.S.Generally Accepted Accounting Principles (GAAP),which of the following must be expensed? I.A patent developed by the firm. II.A building. III.Equipment. IV.A distribution network.

One benefit of capitalizing R&D is that reductions in current R&D will not affect current operating profits.

If growth of a company is falling,expensing R&D will lead to an overestimation of the resulting drop in true performance.

Why Value Value

Fundamental Principles of Value Creation

Conservation of Value and the Role of Risk

The Alchemy of Stock Market Performance

The Stock Market Is Smarter Than You Think

Return on Invested Capital

Growth

Frameworks for Valuation

Reorganizing the Financial Statements

Analyzing Performance

Forecasting Performance

Estimating Continuing Value

Estimating the Cost of Capital

Moving From Enterprise Value to Value Per Share

Analyzing the Results

Using Multiples

Valuation by Parts

Taxes

Non-operating Items, Provisions, and Reserves

Leases and Retirement Obligations

Inflation

Cross-Border Valuation

Case Study: Heineken

Corporate Portfolio Strategy

Performance Management

Mergers and Acquisitions

Divestitures

Capital Structure, Dividends, and Share Repurchases

Investor Communications

Emerging Markets

Valuing High-Growth Companies

Cyclical Companies

Banks

Flexibility

Filters