Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
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 inventory deduction.
a) I and II only.
b) I, III, and IV only.
c) II, III, and IV only.
d) III and IV only.
2. Which of the following are included in operating current assets?
I. Inventory.
II. Prepaid expenses.
III. Marketable securities.
IV. Accounts receivable.
a) I, II, and III only.
b) I, II, and IV only.
c) II, III, and IV only.
d) I, II, III, and IV.
3. Which of the following are operating liabilities?
I. Accounts payable.
II. Accrued salaries.
III. Deferred revenue.
IV. Income taxes payable.
a) I and II only.
McKinsey/Valuation
52
b) II and III only.
c) I, III, and IV only.
d) I, II, III, and IV.
4. For a given leased asset using an operating lease, the rental expense will be $2,000 in the
next period. The pretax cost of debt is 7.2 percent, and the asset has an expected life of six
years. What is the estimated asset value in the current period?
a) $8,380
b) $8,640
c) $16,667
d) $21,127
5. To measure a company’s ability to create value after paying acquisition premiums, which of
the following adjustments should be made?
I. Adjust reported goodwill upward to recapture historical amortization and impairments.
II. Adjust acquired intangibles upward to recapture historical amortization and impairments.
III. Add the hypothetical accrued interest of the notional goodwill principle.
a) I and II only.
b) II and III only.
c) I and III only.
d) I, II, and III only.
6. With respect to goodwill and acquired intangibles, which of the following is most accurate
concerning their treatment in computing ROIC when measuring the competiveness of the
underlying business of a company?
a) Remove goodwill but not acquired intangibles from the computation.
McKinsey/Valuation
53
b) Remove acquired intangibles but not goodwill from the computation.
c) Do not rRemove neither goodwill nor acquired intangibles from the computation.
d) Remove both goodwill and acquired intangibles from the computation.
7. How will an increase in invested capital (IC) in a given year affect free cash flow (FCF) and
ROIC if all other things are kept equal?
a) It will decrease both FCF and ROIC.
b) It will increase both FCF and ROIC.
c) It will increase FCF but decrease ROIC.
d) It will decrease FCF but increase ROIC.
8. Which of the following are sources of financing?
I. Equity equivalents.
II. Debt equivalents.
III. Hybrid securities.
IV. Noncontrolling interest.
a) I and II only.
b) I, II, and III only.
c) III and IV only.
d) I, II, III, and IV.
9. In calculating free cash flows, which of the following is/are not NOT an investment that
should be subtracted from gross cash flows?
a) Change in operating working capital.
b) Change in debt outstanding.
c) Net capital expenditures.
d) Investment in goodwill and acquired intangibles.
McKinsey/Valuation
54
Ans [b]
Response: [ ]
True/False
10. In order to adjust for currency fluctuations, one should conduct a line-by-line removal of the
currency effects.
11. Nonconsolidated subsidiaries and equity investments should be measured and valued
separately from invested capital.
12. Pension assets are considered an operating asset and part of invested capital.
13. In computing free cash flow, include investments in capitalized operating leases in gross
investment.
14. In computing return on invested capital, operating liabilities should be subtracted from
operating assets to determine invested capital.
15. If the company wants to capitalize R&D, they it will deduct that period’s expense from their
revenue in order to get to NOPLAT.
16. List the three components into which an analyst should reorganize financial statements to
better assess economic performance and three common traps that the analyst wants to avoid
in the assessment.
Balance sheet
Inventory
125
100
150
Property, plant, and equipment
400
400
365
Equity investments
0
50
0
Total assets
525
550
515
Accounts payable
50
50
50
Debt
0
0
190
Equity
475
500
275
Liabilities and equity
525
550
515
Multiple Choice
17. Based on the above preceding table, what are the returns on assets (ROAs) for Companiesy
A, B, and C, respectively?
a) 17 percent, 14 percent, 19 percent.
b) 15 percent, 14 percent, 18 percent.
c) 11 percent, 10 percent, 20 percent.
d) 16 percent, 13 percent, 18 percent.
18. Based on the above same table, what are the returns on equity (ROEs) for Companiesy A, B,
and C, respectively?
a) 15 percent, 14 percent, 31 percent.
b) 19 percent, 15 percent, 36 percent.
c) 17 percent, 15 percent, 35 percent.
d) 21 percent, 9 percent, 45 percent.
19. Based on the above same table, what are the ROICs for Companiesy A, B, and C,
respectively?
a) 18 percent, 12 percent, 19 percent.
b) 19 percent, 17 percent, 21 percent.
c) 18 percent, 16 percent, 20 percent.
d) 19 percent, 17 percent, 24 percent.
20. Which metric is the best indicator of a company’s operating performance?
a) ROE
b) ROA
c) ROIC
d) EPS
McKinsey/Valuation
58
Please Rrefer to the above preceding income statement and balances sheet for Dolphin, Inc. to
answer the following questions. Dolphin is a $600 million event promotion company that
operates with a 30 percent operating tax rate.
21. What is the average invested capital (IC) for Dolphin for the current year?
a) $609
b) $600
c) $667
d) $527
22. What are Dolphin’s NOPLAT and ROIC for the current year, using average invested capital?
a) $82, 13.6 percent.
b) $108.9, 18.1 percent.
c) $92, 15.4 percent.
d) $85, 14.1 percent.
