Deck 17: Valuing Shares

Question 1

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

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

Answer 1

D

Question 2

A common approach of estimating the variability of returns involving forecasting the pessimistic, most likely, and optimistic returns associated with the asset is called

A) sensitivity analysis.
B) break- even analysis.
C) financial statement analysis.
D) marginal analysis.

Answer 2

A

Question 3

How is total shareholder value calculated?

A) By adding the value of cash flows from profitable operations and the value of operating assets
B) By subtracting the shareholder value of free cash flows from operations from the value of non- operating assets
C) By adding the shareholder value of free cash flows from operations and the value of non- operating assets
D) By subtracting the value of non- operating assets from the shareholder value of free cash flows from operations

Answer 3

C

Question 4

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

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

Question 5

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

Question 6

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

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

Question 7

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

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 8

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?

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

Question 9

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

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

Question 10

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

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

Question 11

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

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

Question 12

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

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 13

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

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

Question 14

How is shareholder value from operations calculated?

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 15

A behavioral approach for dealing with project risk that uses several possible values for a given variable such as cash inflows to assess that variable's impact on NPV is called

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

Question 16

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?

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

Question 17

Which two terms are added together to calculate corporate value?

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 18

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

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 19

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

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

Question 20

Calculate a firm's free cash flow if it has net operating profit after taxes of £60,000, depreciation expense of £10,000, net fixed asset investment requirement of £40,000, a net current asset requirement of £30,000 and a tax rate of 30%.

A) £30,000
B) £0
C) £(30,000)
D) none of the above.

Question 21

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

Question 22

What term is used for the amount that is available to be paid out to the firm's investors?

A) Free cash flow
B) Free funds
C) Gross cash flow
D) Available assets

Question 23

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.

Question 24

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.

Question 25

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.