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Chapter 8 Question 1 NOPLAT, $ million Today Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Free cash flow, $ million Today Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Revenues 3,777.1 […]

McKinsey/Valuation 1 Chapter: Chapter 01: Why Value Value? Multiple Choice 1. Which one of the following actions would help a company create long-term value? a) Focus on keeping costs at a minimum. b) Find the optimal debt-to-equity ratio. c) Seek […]

McKinsey/Valuation 59 Chapter: Chapter 10: Analyzing Performance True/False 1. Since profit is measured over an entire year, whereas capital is measured at only one point in time, it is recommended that return on invested capital (ROIC) use the average of […]

McKinsey/Valuation 70 Chapter: Chapter 11: Forecasting Performance Multiple Choice 1. The explicit forecast period must be long enough for the company to reach a steady state. Which of the following is NOT a desirable property of that steady state? a) […]

McKinsey/Valuation 79 Chapter: Chapter 12: Estimating Continuing Value Multiple Choice 1. Given the following inputs, compute the continuing value (CV) at time t in the economic- profit model. At time t invested capital equals $2,000 and ROIC equals 12 percent. […]

McKinsey/Valuation 85 Chapter: Chapter 13: Estimating the Cost of Capital Multiple Choice 1. A firm has a target debt-to-equity ratio of 1. Its cost of equity equals 12 percent, the cost of debt is 8 percent, and the tax rate […]

McKinsey/Valuation 96 Chapter: Chapter 14: Moving from Enterprise Value to Value per Share Multiple Choice 1. In estimating value per share of common stock of a company, for which of the following is book value a reasonable approximation for evaluating […]

McKinsey/Valuation 102 Chapter: Chapter 15: Analyzing the Results Short Answer 1. List the criteria for assessing whether a model is technically robust with respect to the following three perspectives: unadjusted financial statements, rearranged financial statements, and statement of cash flows. […]

McKinsey/Valuation 109 Chapter: Chapter 16: Using Multiples Multiple Choice 1. Assuming the tax rate remains constant, what will be the effect on the value–to-EBITA ratio of doubling the following inputs: growth, ROIC, and WACC? a) The value-to-EBITA ratio will fall, […]

McKinsey/Valuation 114 Chapter: Chapter 17: Valuation by Parts Multiple Choice 1. Which of the following are issues in the creation of the financial statements for business units? I. Allocating corporate overhead costs. II. Dealing with intercompany transactions. III. Estimating unit […]

McKinsey/Valuation 119 Chapter: Chapter 18: Taxes Multiple Choice 1. Which of the following concerning operating taxes are true? I. With full information, operating taxes can be computed without error. II. The effects of research and development (R&D) should be removed […]

McKinsey/Valuation 124 Chapter: Chapter 19: Nonoperating Items, Provisions, and Reserves Multiple Choice 1. Which of the following are typical nonoperating expenses? I. Amortization expense. II. Restructuring charges. III. Litigation expenses. IV. Purchased research and development (R&D). a) I and II […]

McKinsey/Valuation 6 Chapter: Chapter 02: Fundamental Principles of Value Creation True/False 1. Since value is based on discounted cash flows, a company or an investor need not analyze growth and return on invested capital (ROIC). 2. Return on invested capital […]

McKinsey/Valuation 129 Chapter: Chapter 20: Leases and Retirement Obligations True/False 1. The most common forms of off-balance-sheet debt are operating leases, securitized receivables, and unfunded retirement obligations. 2. A profitable company has chosen to lease its assets. With respect to […]

McKinsey/Valuation 138 Chapter: Chapter 21: Alternative Ways to Measure Return on Capital Multiple Choice 1. 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. […]

McKinsey/Valuation 143 Chapter: Chapter 22: Inflation Multiple Choice 1. Given the following information, compute free cash flow (FCF) in real terms: real growth is 3 percent, real ROIC is 12 percent, real NOPLAT is $5,000, real net working capital from […]

McKinsey/Valuation 148 Chapter: Chapter 23: Cross-Border Valuation 1. An analyst is using U.S. Generally Accepted Accounting Principles (GAAP) to estimate the value of a subsidiary of a U.S. firm, and the country of the subsidiary is experiencing hyperinflation. In this […]

McKinsey/Valuation 154 Chapter: Chapter 24: Case Study: Heineken Multiple Choice 1. Which of the following are NOT recommended in the treatment of depreciation, amortization, and impairments in the calculation of NOPLAT? a) Separate any impairments from income on nonconsolidated investments. […]

Chapter: Chapter 25: Corporate Portfolio Strategy 1. Which of the following are valid reasons a given firm might be the best owner of a particular business? I. Unique links with other businesses (e.g., distribution lines). II. Distinctive skills such as […]

Chapter: Chapter 26: Performance Management Multiple Choice 1. Which of the following value drivers is a short-term driver as opposed to a medium-term driver? a) Asset health. b) Commercial health. c) Capital productivity. d) Cost structure health. 2. Which of […]

Chapter: Chapter 27: Mergers and Acquisitions Multiple Choice 1. The analysis of cost savings requires an industry-specific business system. Which of the following are requirements of an insightful industry-specific business system? I. It uses a top-down approach. II. It uses […]

Chapter: Chapter 28: Divestitures 1. Which of the following is the best name for a distribution of all shares in a subsidiary to existing shareholders of the parent company? a) Carve-out. b) Spin-off. c) Split-off. d) Tracking stock. Ans: [b] […]

Chapter: Chapter 29: Capital Structure, Dividends, and Share Repurchases Multiple Choice 1. For a given firm, which of the following is most likely to be the result of lower leverage? a) Corporate overinvestment. b) Increased investor conflicts. c) Tax savings […]

McKinsey/Valuation 10 Chapter: Chapter 03: Conservation of Value and the Role of Risk True/False 1. The conservation of value principle states that anything that does not increase cash flows does not increase value. Ans: [True] Response: [] 2. There are […]

Chapter: Chapter 30: Investor Communications Multiple Choice 1. In comparing growth versus value stocks, which of the following is NOT true? a) Most stocks labeled as growth stocks have higher ROICs. b) Most managers would like their firms to be […]

Chapter: Chapter 31: Emerging Markets Multiple Choice 1. For emerging markets, the recommended market input for computing beta is: a) A small-cap index. b) A median-cap index. c) A global market index. d) An index of non-investment-grade bonds. 2. For […]

Chapter: Chapter 32: Valuing High-Growth Companies Multiple Choice 1. When looking into the future, the analyst should define a point in the future where the company’s performance is likely to stabilize. The conditions at that point should be defined and […]

Chapter: Chapter 33: Cyclical Companies Multiple Choice 1. Which of the following are true concerning the properties of consensus earnings forecasts for cyclical companies? I. They account for the cyclical nature of the firm. II. Discounted cash flow (DCF) models […]

Chapter: Chapter 34: Banks Multiple Choice 1. For financial institutions, which of the following is NOT true concerning trading income? a) It has been on the decline over the past 30 years. b) It is typically fairly volatile from year […]

Chapter: Chapter 35: Flexibility True/False 1. Regardless of the level of uncertainty, it is possible to value assets or a project using a standard discounted cash flow (DCF) approach or a stochastic simulation. However, in cases when managers can decide […]

McKinsey/Valuation 16 Chapter: Chapter 04: The Alchemy of Stock Market Performance Multiple Choice 1. Which of the following represents the minimum horizon where the focus of managers on improving total returns to shareholders (TRS) to win performance bonuses will align […]

McKinsey/Valuation 24 Chapter: Chapter 05: The Stock Market Is Smarter Than You Think True/False 1. Changes in expectations will rarely have a larger impact on realized total returns to shareholders (TRS) than actual performance over periods longer than a year […]

McKinsey/Valuation 34 Chapter: Chapter 06: Return on Invested Capital Multiple Choice 1. Which of the following is NOT one of Michael Porter’s five forces? a) Threat of entry. b) Regulatory restrictions. c) Bargaining power of buyers. d) Bargaining power of […]

McKinsey/Valuation 39 Chapter: Chapter 07: Growth Multiple Choice 1. Which of the following is most accurate concerning corporate growth rates? a) High growth rates decay quickly, and large companies struggle to grow. b) High growth rates are sustainable for 10 […]

McKinsey/Valuation 45 Chapter: Chapter 08: Frameworks for Valuation Multiple Choice 1. The framework for valuation that compresses free cash flow and the interest tax shield into one number, making it difficult to compare operating performance among companies and over time, […]

McKinsey/Valuation 51 Chapter: Chapter 09: Reorganizing the Financial Statements Multiple Choice 1.Which of the following would result in a change in operating deferred-tax assets or liabilities? I. State income taxes. II. Changes in goodwill. III. Accrued self-insurance liabilities. IV. Accelerated […]