Valuation: Measuring and Managing the Value of Companies 6th Edition

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 4,041.5 4,304.2 4,583.9 4,859.0 5,126.2 5,382.5 NOPLAT 314.4 356.5 379.6 404.3 428.6 452.1

Chapter 9 Questions 13 Question 1 Ratio Company A Company B Company C Return on assets 14.3% 13.0% 11.4% Return on equity 15.8% 14.3% 21.8% Return on invested capital 15.8% 15.8% 15.8% Return on invested capital best measures operating performance, and by that measure, all three companies have the same operating performance. Question 2 Company B's ROA is lower

Chapter 10 Questions 12 ShipCo: Reorganized financial statements ShipCo: Ratio analysis $ million NOPLAT Year 1 Year 2 Year 3 Year 4 Year 5 Total funds invested Year 1 Year 2 Year 3 Year 4 Year 5 Ratio Year 1 Year 2 Year 3 Year 4 Year 5 Revenues 530 557 601 661 674 Working

Chapter 11 Question 1 Accrued and other liabilitiescurrent $ million Year 1 Marketing and promotion 2,833.0 Compensation expenses 1,846.0 From Footnote 4 Accrued ShaveCo exit costs 456.0 Taxes payable 922.0 ShaveCo severance costs are a restructuring charge and therefore should be Other 102.0 treated as a debt equivalent. Debt equivalents should not be forecast Total 6,159.0 within free cash flow

Chapter 12 Question 1 $ million Continuing Today Year 1 Year 2 Year 3 Year 4 Year 5 value Continuing value Revenues 250.0 265.0 280.9 297.8 315.6 334.6 354.6 NOPLAT, $ million 26.6 Operating costs (225.0) (238.5) (252.8) (268.0) (284.1) (301.1) (319.2) Growth 6.0% Operating margin 25.0 26.5 28.1 29.8 31.6 33.5 35.5 Return on new

Chapter 13 Questions 1 & 2 Question 1 Market value, Cost of Tax After-tax Weighted Source of capital rupees, million capital, % rate, %cost, %cost, % Debt 100 7.50% 30.00% 5.25% 0.88% Equity 500 10.50% 10.50% 8.75% Firm Value 600 Weighted average cost of capital 9.63% Key inputs Market capitalization Risk-free rate, % 7.00% Share price, rupees 25 Market risk premium, % 5.00%

Chapter 14 Question 1 $ billion Initial estimate Overseas tax estimate Revenues 50 50 Cash on balance sheet 60 60 Cash from overseas 40 40 Tax due - (12) After-tax amount 60 48 Cash needed for operations 1 1 Excess-cash estimate 59 47 Overseas profit tax rate, % 30.00% Comment: Initially, one might assume that the

Chapter 15 Question 1 Current Forecast Current Forecast year year year year Revenues 120.0 100.0 Cost of sales (90.0) (75.0) 75% 75% Depreciation (18.0) (15.0) 15% 15% Operating profit 12.0 10.0 10% 10% Working capital 36.0 30.0 30% 30% Property and equipment 120.0 100.0 100% 100% Invested capital 156.0 130.0 130% 130% 1. Cost of sales will drop only if all

Chapter 16 Question 1 This is not an appropriate approach, as DiversCo should be valued using a sum-of-the-parts methodology. One should create a comparable group of firms operating in the retail apparel sector and another comparable group operating in the energy sector. Multiples should then be constructed for each peer group and applied to

Chapter 17 Question 1 $ million Branded cereals Generic cereals Healthy breakfast Market data Revenuet+1 2,000 1,500 500 NOPLATt+1 600 150 200 Long-term revenue growth, % 4% 5% 7% Long-term return on invested capital, % 20% 11% 25% Long-term cost of capital, % 9% 10% 9% DCF value, using key value driver formula 9,600 1,636 7,200 Present value of

Chapter 18 Question 1 Tax reconciliation table, $ million Tax reconciliation table, % Year 1 Year 2 Year 3 Year 1 Year 2 Year 3 Statutory income tax rate 161.8 154.4 185.4 35.0 35.0 35.0 State and local income taxes, net 5.1 4.4 3.7 1.1 1.0 0.7 Repatriation of foreign earnings 15.4 3.5 Liabilities settleable in

Chapter 19 Question 1 The three steps are: (1) Separate operating from nonoperating items, treating items that grow in line with revenues and are related to the core business as operating. (2) Search the footnotes for embedded one-time items. (3) Analyze each nonoperating item to assess how it affects the future operations of the

Chapter 20 Questions 1 & 2 PV of leased assets Correct Misestimated Rental expenses, $ million 25.0 25.0 Cost of debt, % 7.0% 7.0% Average life, years 7.0 10.0 PV of leased assets, $ million 117.4 147.1 Valuation error, % 25.2% Question 2 $ million NOPLAT, direct from financial statements Operating Operating profit 25.0 tax rate, % Operating taxes (7.5) 30.0% NOPLAT 17.5 NOPLAT,

Chapter 21 Question 1 CFROI is more appropriate in businesses where investments are very lumpy, such as for chemical companies. This is due to large upfront investments that likely generate relatively stable cash flow with little future investment needed. ROIC is more appropriate for businesses where investments occur in a more regular pattern

1 Valuation: Measuring and Managing the Value of Companies, Sixth Edition Chapter 1 Why Value Value? Solutions 1. One benefit for companies that have a long-term perspective on value creation is that it leads them to engage only in activities that create value and not waste effort on activities

2 Valuation: Measuring and Managing the Value of Companies, Sixth Edition Chapter 2 ROIC and Growth Drive Value Solutions 1. Higher ROIC generally means higher free cash flow because it means that the firm need not reinvest as much to maintain its growth and operating cash flow. The relationship

2 Valuation: Measuring and Managing the Value of Companies, Sixth Edition Chapter 3 Conservation of Value and the Role of Risk Solutions 1. The conservation of value principle states that anything that does not increase cash flows does not increase value. An example is an Internet company that lures

4 Valuation: Measuring and Managing the Value of Companies, Sixth Edition Chapter 4 Solutions The Expectations Treadmill 1. Total returns to shareholders (TRS) represent the return earned by shareholders from distributions and increases in share price. This measure is important because when managers focus on it, their interests and the

4 Valuation: Measuring and Managing the Value of Companies, Sixth Edition Chapter 5 The Stock Market is Smarter than You Think Solutions 1. Assuming a constant growth rate in earnings and a constant return on capital, the returns to shareholders are composed of a cash yield plus the growth rate

5 Valuation: Measuring and Managing the Value of Companies, Sixth Edition Chapter 6 Return on Invested Capital Solutions 1. Since the primary sources of increased value tend to be expanding the market or increasing consumption by current customers, it is more important for a company to find the right markets

6 Valuation: Measuring and Managing the Value of Companies, Sixth Edition Chapter 7 Growth Solutions 1. The three sources of growth are (1) portfolio momentum (expanding the market), (2) market share performance, and (3) mergers and acquisitions. The Baghai, Smit, and Viguerie study implies that firms should not count on

1 Valuation: Measuring and Managing the Value of Companies, Sixth Edition Chapter 22 Inflation Solutions 1. Inflation typically destroys firm value because the firm cannot pass on inflation in full to its customers, and the cost of capital increases more than the free cash flow. One way to look at

1 Valuation: Measuring and Managing the Value of Companies, Sixth Edition Chapter 23 Cross-Border Valuation Solutions 1. The real risk-free rate will be the same in different countries. The nominal risk-free rate will differ based on expectations concerning inflation in each country. If cash flows are estimated in nominal terms,

1 Valuation: Measuring and Managing the Value of Companies, Sixth Edition Chapter 25 Corporate Portfolio Strategy Solutions 1. Different owners have different skills and goals. Thus, one owner may be able to innovate and to lead the company in a way to increase cash flows and growth. When a firm

1 Valuation: Measuring and Managing the Value of Companies, Sixth Edition Chapter 26 Performance Management Solutions 1. A granular perspective for performance measurement means analyzing performance not just at the division level or business unit level, but down to product segment levels. The key is to go down to where

1 1 1 Valuation: Measuring and Managing the Value of Companies, Sixth Edition Chapter 27 Mergers and Acquisitions Solutions 1. This could result when the acquiring firm pays a premium higher than the value created from the acquisition. The shareholders of the acquired firm would gain the premium, but the

1 Valuation: Measuring and Managing the Value of Companies, Sixth Edition Chapter 28 Divestitures Solutions 1. The main issue with respect to the dilution or accretion question is whether the return earned on the divested unit was greater than or less than that earned on the use of the funds

1 Valuation: Measuring and Managing the Value of Companies, Sixth Edition Chapter 29 Capital Structure, Dividends, and Share Repurchases Solutions 1. Optimal capital structure is that which maximizes the value of the firm. According to a widely used analysis, on a graph where the horizontal axis is leverage and the

1 Valuation: Measuring and Managing the Value of Companies, Sixth Edition Chapter 30 Investor Communications Solutions 1. The purpose of investor communications is to align the share price and intrinsic value of the firm. However, managers usually see investor communications as a means to try to increase the market value

1 Valuation: Measuring and Managing the Value of Companies, Sixth Edition Chapter 31 Emerging Markets Solutions 1. Purchasing power parity (PPP) means that the goods and services will sell for the same price in different countries, because the exchange rate will adjust to make the prices the same. PPP holds

1 Valuation: Measuring and Managing the Value of Companies, Sixth Edition Chapter 32 High-Growth Companies Solutions 1. The DCF method is preferred, and the basic inputs are the same for a high-growth company as for an established company. Multiples, such as price-to-earnings multiples, generate imprecise results when earnings are highly

1 Valuation: Measuring and Managing the Value of Companies, Sixth Edition Chapter 33 Cyclical Companies Solutions 1. The volatility of DCF is much lower than that of the profits. This difference arises because the DCF is a sum of values, which may be potentially infinite, and it will vary only

1 ( )( ) ( )( )TP Tax Rate Loans Opp Cost of Loans 1 Opp Cost DepositsLoans= Increasing the maturity spread will increase the opportunity cost of loans relative to the opportunity cost of deposits and increase the tax penalty, which will lower the after-tax economic spread. 5. The

1 Standard NPV $285 $636.36 $285 $351.361.1= = = The DTA NPV is higher, because the managers can liquidate at $300: ( ) ( )0.6 $1,000 0.4 $300DTA NPV $285 $369.551.1 + = = The ROV NPV is found by first computing the risk-neutral probabilities: ( )( )$1,000 1.571$636.36$250 0.393$636.361.05