Deck 19: Valuation and Financial Modeling: a Case Study

Question 1

Ideko's Accounts Receivable Days is closest to:

A) 84 days
B) 95 days
C) 90 days
D) 75 days

Answer 1

90 days

Question 2

According to the Canadian Institute of Chartered Accountants (CICA)handbook,a firm's goodwill is not necessarily amortized but it is subject to ________ at least once a year.

A) an impairment test
B) an impairment charge
C) an asset valuation
D) a capital asset valuation

Answer 2

an impairment test

Question 3

Use the tables for the question(s) below.
Estimated 2005 Income Statement and Balance Sheet Data for Ideko Corporation The following are financial ratios for three comparable companies:
What range for the market value of equity for Ideko is implied by the range of P/E multiples for the comparable firms?

Answer 3

Low P/E (Nike)= 18.2
Low Price = earnings × P/E = 6.939 × 18.2 = $126.29 million
High P/E (Luxottica Group)= 28.0
High Price = earnings × P/E = 6.939 × 28.0 = $194.29 million

Question 4

Use the tables for the question(s) below.
Estimated 2005 Income Statement and Balance Sheet Data for Ideko Corporation The following are financial ratios for three comparable companies:
What range for the market value of equity for Ideko is implied by the range of EV/Sales multiples for the comparable firms if Ideko holds $6.5 million of cash in excess of its working capital needs?

Question 5

Use the table for the question(s) below.
Ideko Sales and Operating Cost Assumptions
Based upon Ideko's Sales and Operating Cost Assumptions,what production capacity will Ideko require in 2008?

A) 1,702 units
B) 1,323 units
C) 1,505 units
D) 1,914 units
E) 1,115 units

Question 6

Which of the following statements is correct?

A) A firm's enterprise value is the total value of equity plus net debt, where net debt is debt less cash and investments in marketable securities.
B) A firm's book value is the total value of equity plus net debt, where net debt is debt less cash and investments in marketable securities.
C) A firm's market value is the total value of equity plus net debt, where net debt is debt less cash and investments in marketable securities.
D) A firm's nominal value is the total value of equity plus net debt, where net debt is debt less cash and investments in marketable securities.

Question 7

To assess whether an acquisition is attractive requires a careful analysis both of ________ aspects of the firm and of the ________ the deal is expected to generate and the return that should be required.

A) the operational; ultimate revenues
B) the operational; ultimate cash flows
C) the marketing; ultimate cash flows
D) the marketing; ultimate revenues

Question 8

As an intangible asset,goodwill is ________ over time as its value ________.

A) amortized; grows
B) not amortized; declines
C) amortized; declines
D) not amortized; grows

Question 9

Use the table for the question(s) below.
Ideko Sales and Operating Cost Assumptions
Based upon Ideko's Sales and Operating Cost Assumptions,what production capacity will Ideko require in 2009?

A) 1,505 units
B) 1,115 units
C) 1,323 units
D) 1,702 units
E) 1,914 units

Question 10

Use the tables for the question(s) below.
Estimated 2005 Income Statement and Balance Sheet Data for Ideko Corporation The following are financial ratios for three comparable companies:
Based upon the average EV/Sales ratio of the comparable firms,Ideko's target economic value is closest to:

A) $191 million
B) $155 million
C) $165 million
D) $157 million
E) $193 million

Question 11

Use the tables for the question(s) below.
Estimated 2005 Income Statement and Balance Sheet Data for Ideko Corporation The following are financial ratios for three comparable companies:
Based upon the average EV/Sales ratio of the comparable firms,if Ideko holds $6.5 million of cash in excess of its working capital needs,then Ideko's target market value of equity is closest to:

A) $165 million
B) $157 million
C) $193 million
D) $191 million
E) $155 million

Question 12

Use the table for the question(s) below.
Ideko Sales and Operating Cost Assumptions
Based upon Ideko's Sales and Operating Cost Assumptions,what production capacity will Ideko require in 2007?

A) 1,505 units
B) 1,323 units
C) 1,914 units
D) 1,115 units
E) 1,702 units

Question 13

Use the tables for the question(s) below.
Estimated 2005 Income Statement and Balance Sheet Data for Ideko Corporation The following are financial ratios for three comparable companies:
Based upon the average EV/EBITDA ratio of the comparable firms,if Ideko holds $6.5 million of cash in excess of its working capital needs,then Ideko's target market value of equity is closest to:

A) $155 million
B) $157 million
C) $165 million
D) $191 million
E) $193 million

Question 14

Use the tables for the question(s) below.
Estimated 2005 Income Statement and Balance Sheet Data for Ideko Corporation The following are financial ratios for three comparable companies:
What range for the market value of equity for Ideko is implied by the range of EV/EBITDA multiples for the comparable firms if Ideko holds $6.5 million of cash in excess of its working capital needs?

Question 15

Capital Cost Allowance (CCA)reduces firm's ________ but increases firm's ________.

A) revenue; cash flows
B) net income; cash flows
C) net income; total costs
D) revenue; total costs

Question 16

Use the tables for the question(s) below.
Estimated 2005 Income Statement and Balance Sheet Data for Ideko Corporation The following are financial ratios for three comparable companies:
Based upon the average P/E ratio of the comparable firms,Ideko's target market value of equity is closest to:

A) $157 million
B) $155 million
C) $193 million
D) $165 million
E) $191 million

Question 17

The amortization expense may be used for ________ but for ________,the Canada Revenue Agency (CRA)requires companies to use Capital Cost Allowance (CCA)as tax version of amortization.

A) assets valuation; financial reporting purposes
B) tax purposes; financial reporting purposes
C) financial reporting purposes; tax purposes
D) income statement; balance sheet

Question 18

Goodwill is created only when a business is acquired and the amount paid for the business is ________ the value of the assets purchased.

A) greater than
B) smaller than
C) equal to
D) none of the above.

Question 19

Use the tables for the question(s) below.
Estimated 2005 Income Statement and Balance Sheet Data for Ideko Corporation The following are financial ratios for three comparable companies:
Based upon the average EV/EBITDA ratio of the comparable firms,Ideko's target economic value is closest to:

A) $191 million
B) $155 million
C) $157 million
D) $193 million
E) $165 million

Question 20

Since Capital Cost Allowance (CCA)is a non-cash expense,the effect is to increase a company's ________.

A) cash flows
B) revenues
C) book value of assets
D) capital assets

Question 21

Use the table for the question(s) below.
Capital Structure and Unlevered Beta Estimates for Comparable Firms
If the risk-free rate of interest is 6% and the market risk premium has historically averaged 5%,then the cost of capital for Luxottica is closest to:

A) 10.2%
B) 13.5%
C) 9.1%
D) 14.7%

Question 22

Use the table for the question(s) below.
Pro Forma Income Statement for Ideko, 2005-2010
The amount of the increase in net working capital for Ideko in 2008 is closest to:

A) $4,685
B) $3,665
C) $4,090
D) $5,230

Question 23

Use the table for the question(s) below.
Pro Forma Income Statement for Ideko, 2005-2010
Using the income statement above and the following information: Calculate Ideko's Free Cash Flow to the Firm and Free Cash Flow to Equity in 2007.

Question 24

Use the table for the question(s) below.
Capital Structure and Unlevered Beta Estimates for Comparable Firms
The unlevered beta for Oakley is closest to:

A) 0.70
B) 1.50
C) 1.00
D) 0.60

Question 25

Use the table for the question(s) below.
Pro Forma Income Statement for Ideko, 2005-2010
Using the income statement above and the following information: Calculate Ideko's Free Cash Flow to the Firm and Free Cash Flow to Equity in 2009.

Question 26

Since 1960,the average annual return of the value-weighted market portfolio of U.S.stocks has exceeded that of one-year Treasuries by approximately 5%.In Canada,this number has been about ________.

A) 20% lower
B) 10% higher
C) 20% higher
D) 10% lower

Question 27

Use the table for the question(s) below.
Pro Forma Income Statement for Ideko, 2005-2010
The amount of net working capital for Ideko in 2008 is closest to:

A) $35,195
B) $26,420
C) $22,170
D) $30,510

Question 28

Use the table for the question(s) below.
Capital Structure and Unlevered Beta Estimates for Comparable Firms
If the risk-free rate of interest is 6% and the market risk premium has historically averaged 5%,then the cost of capital for Nike is closest to:

A) 14.7%
B) 10.2%
C) 9.1%
D) 13.5%

Question 29

Use the table for the question(s) below.
Capital Structure and Unlevered Beta Estimates for Comparable Firms
The unlevered beta for Nike is closest to:

A) 0.70
B) 1.00
C) 1.50
D) 0.60

Question 30

Use the table for the question(s) below.
Capital Structure and Unlevered Beta Estimates for Comparable Firms
If the risk-free rate of interest is 6% and the market risk premium has historically averaged 5%,then the cost of capital for Oakley is closest to:

A) 9.1%
B) 10.2%
C) 13.5%
D) 14.7%

Question 31

Use the table for the question(s) below.
Pro Forma Income Statement for Ideko, 2005-2010
The amount of the increase in net working capital for Ideko in 2007 is closest to:

A) $4,090
B) $4,685
C) $3,665
D) $5,230

Question 32

While ________ method is the most reliable method when evaluating an acquisition investment,real-world practitioners often use ________ and ________ as alternative valuation metrics.

A) the NPV; the IRR; the cash multiple (or multiple of money)
B) the IRR; the NPV; the cash multiple (or multiple of money)
C) the NPV; the cash multiple (or multiple of money); the IRR
D) the IRR; the cash multiple (or multiple of money); the NPV

Question 33

Use the table for the question(s) below.
Capital Structure and Unlevered Beta Estimates for Comparable Firms
The unlevered beta for Luxottica is closest to:

A) 1.00
B) 0.60
C) 0.70
D) 1.50

Question 34

Use the table for the question(s) below.
Pro Forma Income Statement for Ideko, 2005-2010
With the proper changes it is believed that Ideko's credit policies will allow for an account receivables days of 60.The forecasted accounts receivable for Ideko in 2006 is closest to:

A) $19,690
B) $16,970
C) 22,710
D) $14,525

Question 35

We can use one-year Canadian Treasury Bill rate as ________ interest rate when we convert a unlevered beta to a cost of capital for an acquired firm.

A) a risk-free
B) a nominal
C) a real
D) an effective

Question 36

Use the table for the question(s) below.
Pro Forma Income Statement for Ideko, 2005-2010
With the proper changes it is believed that Ideko's credit policies will allow for an account receivables days of 60.The forecasted accounts receivable for Ideko in 2007 is closest to:

A) $14,525
B) $16,970
C) 22,710
D) $19,690

Question 37

Use the table for the question(s) below.
Pro Forma Income Statement for Ideko, 2005-2010
The amount of net working capital for Ideko in 2006 is closest to:

A) $22,750
B) $35,195
C) $30,510
D) $26,420

Question 38

Use the table for the question(s) below.
Pro Forma Income Statement for Ideko, 2005-2010
The amount of net working capital for Ideko in 2007 is closest to:

A) $30,510
B) $26,420
C) $22,170
D) $35,195

Question 39

Use the table for the question(s) below.
Pro Forma Income Statement for Ideko, 2005-2010
With the proper changes it is believed that Ideko's credit policies will allow for an account receivables days of 60.The forecasted accounts receivable for Ideko in 2008 is closest to:

A) $14,525
B) $19,690
C) 22,710
D) $16,970

Question 40

Use the table for the question(s) below.
Capital Structure and Unlevered Beta Estimates for Comparable Firms
Describe the major approach in estimating the cost of capital when attempting to valuate an acquisition of a private firm.

Question 41

Use the tables for the question(s) below.
Pro Forma Income Statement for Ideko, 2005-2010 Pro Forma Balance Sheet for Ideko, 2005-2010
Assuming that Ideko has a EBITDA multiple of 9.4,then the continuation unlevered P/E ratio of Ideko in 2010 is closest to:

A) 17.2
B) 16.4
C) 14.5
D) 19.4

Question 42

Use the tables for the question(s) below.
Pro Forma Income Statement for Ideko, 2005-2010 Pro Forma Balance Sheet for Ideko, 2005-2010
Assuming that Ideko has a EBITDA multiple of 9.4,then the continuation enterprise value of Ideko in 2010 is closest to:

A) $181.7 million
B) $152.8 million
C) $272.8 million
D) $301.7 million

Question 43

Use the tables for the question(s) below.
Pro Forma Income Statement for Ideko, 2005-2010 Pro Forma Balance Sheet for Ideko, 2005-2010
Assuming that Ideko has a EBITDA multiple of 9.4,then the continuation levered P/E ratio of Ideko in 2010 is closest to:

A) 17.2
B) 14.5
C) 19.0
D) 16.4

Question 44

Use the tables for the question(s) below.
Pro Forma Income Statement for Ideko, 2005-2010 Pro Forma Balance Sheet for Ideko, 2005-2010
Assuming that Ideko has a EBITDA multiple of 8.5,then the continuation enterprise value of Ideko in 2010 is closest to:

A) $152.8 million
B) $272.8 million
C) $301.7 million
D) $181.7 million

Question 45

The cash multiple does not depend on the amount of time it takes to receive the cash,nor does it account for the risk of the investment.It is therefore useful only for comparing deals

A) with different time horizons and different risk levels.
B) with similar time horizons and different risk levels.
C) with similar time horizons and similar risk levels.
D) with different time horizons and similar risk levels.

Question 46

Use the tables for the question(s) below.
Pro Forma Income Statement for Ideko, 2005-2010 Pro Forma Balance Sheet for Ideko, 2005-2010
Assuming that Ideko has a EBITDA multiple of 8.5,then the continuation levered P/E ratio of Ideko in 2010 is closest to:

A) 19.0
B) 17.2
C) 16.4
D) 14.5

Question 47

Use the tables for the question(s) below.
Pro Forma Income Statement for Ideko, 2005-2010 Pro Forma Balance Sheet for Ideko, 2005-2010
Assuming that Ideko has a EBITDA multiple of 8.5,then the continuation EV/Sales ratio of Ideko in 2010 is closest to:

A) 1.7
B) 1.9
C) 1.6
D) 1.8

Question 48

What is the purpose of the sensitivity analysis?

Question 49

Use the tables for the question(s) below.
Pro Forma Income Statement for Ideko, 2005-2010 Pro Forma Balance Sheet for Ideko, 2005-2010
Assuming that Ideko has a EBITDA multiple of 9.4,then the continuation equity value of Ideko in 2010 is closest to:

A) $152.8 million
B) $181.7 million
C) $301.7 million
D) $272.8 million

Question 50

Use the tables for the question(s) below.
Pro Forma Income Statement for Ideko, 2005-2010 Pro Forma Balance Sheet for Ideko, 2005-2010
Assuming that Ideko has a EBITDA multiple of 8.5,then the continuation unlevered P/E ratio of Ideko in 2010 is closest to:

A) 17.6
B) 16.4
C) 14.5
D) 19.0

Question 51

Use the tables for the question(s) below.
Pro Forma Income Statement for Ideko, 2005-2010 Pro Forma Balance Sheet for Ideko, 2005-2010
Assuming that Ideko has a EBITDA multiple of 8.5,then the continuation equity value of Ideko in 2010 is closest to:

A) $181.7 million
B) $272.8 million
C) $152.8 million
D) $301.7 million

Question 52

Use the tables for the question(s) below.
Pro Forma Income Statement for Ideko, 2005-2010 Pro Forma Balance Sheet for Ideko, 2005-2010
Assuming that Ideko has a EBITDA multiple of 9.4,then the continuation EV/Sales ratio of Ideko in 2010 is closest to:

A) 1.9
B) 1.7
C) 1.6
D) 1.8