Question 1

Which of the following descriptions of Residual Operating Income (ROPI) is incorrect?

Accepted Answer

A)  The estimations of value per share of companies are the same when employing the ROPI and DCF model if the firm is growing at a constant rate. 
B)  ROPI = NOPAT- (WACC × NO
A) , and WACC × NOA is the dollar amount of return that lenders and shareholders expect the company to earn on their investment. 
C)  If a company utilizes overly conservative/aggressive accounting practices, its book value is understated/ overstated and will affect the estimate of the stock price using the ROPI model. 
D)  ROPI model uses information from both the income statement and balance sheet. 
E)  None of the above

Question 2

McMahon Company manufactures SIM cards for cell phones.
 Based on the following information, what are the company's free cash flows to the firm (FCFF) for the year ended December 31, 2017?

Accepted Answer

A)  $ 630 
B)  $2,640 
C)  $3,750 
D)  $3,640 
E)  None of the above

Question 3

Following is information from Pinto Corporation for 2017.
 Projected 2018 total revenue would be:

Accepted Answer

A)  $1,043,623 
B)  $1,074,622 
C)  $1,088,054 
D)  $1,085,368 
E)  None of the above

Question 4

Following is the balance sheet for Goldsmith Inc. 
  The company has pretax interest expense of $2,214 and a statutory tax rate of 37%. Your online investigation reveals that the company has a beta of 0.9. Assume that the risk free rate in 2017 is 3.5% and an appropriate "spread" of equities over the risk-free rate is 5%.
Calculate the company's weighted average cost of capital.

Accepted Answer

The answer of Following is the balance sheet for Goldsmith...

Question 5

Valuation models are typically based on payments investors expect to receive in the future.

Accepted Answer

A) True 
 B)False

Question 6

Following are financial statement numbers and select ratios for Target Corp. for fiscal year 2016 (dollars in millions). 
  Use the information to determine the free cash flow to the firm in 2017.

Accepted Answer

The answer of Following are financial statement numbers and select...

Question 7

Which of the following statements is true:

Accepted Answer

A)  ROPI = NOPAT+ (rw × NO
A)  
B)  ROPI = NOPAT - (rw × NO
A)  
C)  ROPI = NOPAT - [(rw - g) × Net operating assets] 
D)  ROPI = NOPAT - [NOAt - NOAt-1] 
E)  None of the above

Question 8

Following is information from Intel Corporation for 2016 ($ in millions).
 Projected net operating profit after tax (NOPAT) for 2017 is:

Accepted Answer

A)  $10,788 million 
B)  $ 3,118 million 
C)  $10,274 million 
D)  $ 2,969 million 
E)  None of the above

Question 9

Following are the income statements and balance sheets for Darden Restaurants, Inc. for the fiscal year ending May 28, 2017.
  Continued next page
  Required: 
a. Calculate the following metrics for 2017:
$\bullet$Net operating profit after tax (NOPAT)-assume the statutory tax rate is 37%
$\bullet$Net operating assets (NOA)
$\bullet$Net operating profit margin (NOPM)
$\bullet$Net operating asset turnover (NOAT)
$\bullet$Net nonoperating obligations (NNO)
b. Use the discounted free cash flow (DCF) model to estimate the per share value of Darden Restaurant's equity, at May 26, 2017. The company's weighted average cost of capital is 6%. Assume a sales growth rate of 5% for 2018-2021 with a terminal growth rate of 2%.
c. Darden Restaurant's shares closed at $85.83 per share on July 26, 2017, the date the 10-K was filed with the SEC. How does your valuation compare with this closing price?

Accepted Answer

The answer of Following are the income statements and balance...

Question 10

The following are forecasted residual operating income (ROPI) for Reed Corporation for 2017:
 Assume a discount rate of 6%, an expected terminal growth rate of 2% and 2017 NNO of $17,314. What is the firm's equity value using the ROPI valuation model?

Accepted Answer

A)  $71,130 
B)  $53,816 
C)  $67,988 
D)  $17,314 
E)  None of the above

Question 11

How do expectations about future profitability and required return factor into the pricing of common stocks?

Accepted Answer

The answer of How do expectations about future profitability and...

Question 12

Heller Enterprises reports the following information. What is the company's residual operating income (ROPI) for 2017?

Accepted Answer

A)  $9,072 
B)  $6,200 
C)  $9,312 
D)  $9,960 
E)  None of the above

Question 13

Two public companies (Jensen and Jackson) operate in the same industry, will generate exactly the same operating profit, and have identical net operating assets. 
What is the weighted average cost of capital for each company? Which company will have a lower stock price?

Accepted Answer

The answer of Two public companies (Jensen and Jackson) operate...

Question 14

A company can increase free cash flows to the firm (FCFF) by doing which of the following?

Accepted Answer

A)  Increasing investments in receivables, inventories, and plant assets 
B)  Decreasing investments in receivables, inventories, and plant assets 
C)  Maintaining a steady level of net operating profit after tax 
D)  Decreasing the level of net operating profit after tax. 
E)  None of the above

Question 15

Following are financial statement numbers and select ratios for Darden Restaurants Inc. for the year ended May 28, 2017 (dollars in millions). Use the information to determine the residual operating income (ROPI) in 2018.

Accepted Answer

The answer of Following are financial statement numbers and select...

Question 16

Which of the following items is an advantage of the discounted cash flow (DCF) model, compared with the residual operating income (ROPI) model?

Accepted Answer

A)  It forecasts residual operating income which is easier than forecasting cash flow. 
B)  It utilizes information from both the balance sheet and income statement for valuation model. 
C)  It is well known and widely accepted model 
D)  It focuses on value drivers such as margins and turnovers 
E)  All of the above

Question 17

What is "Weighted Average Cost of Capital" and how is it used in equity valuation?

Accepted Answer

The answer of What is "Weighted Average Cost of Capital"...

Question 18

Suppose you are an officer for Innovative Components, Inc. and are presented with the following information regarding your two operating divisions:
  Required: 
a. Compute the residual operating income (ROPI) for each division.
b. Compare the residual operating income (ROPI) for each division. Which division is performing better?
c. What would you recommend to each division's top manager to improve its performance?

Accepted Answer

The answer of Suppose you are an officer for Innovative...

Question 19

The higher the expected growth rate of the terminal free cash flow to the firm, the lower the present value of the terminal value becomes.

Accepted Answer

A) True 
 B)False

Question 20

Consider a management team that has its incentive compensation package tied to residual operating income (ROPI). Discuss how the team can improve ROPI by 1) driving improvements in operating margin, and/or 2) reducing the company's operating asset base.

Accepted Answer

The answer of Consider a management team that has its...

Exam 13: Using Financial Statements for Valuation

Which of the following descriptions of Residual Operating Income (ROPI) is incorrect?

McMahon Company manufactures SIM cards for cell phones. Based on the following information, what are the company's free cash flows to the firm (FCFF) for the year ended December 31, 2017?

Following is information from Pinto Corporation for 2017. Projected 2018 total revenue would be: