Exam
Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1)
What are the two parts that make up investment in plant, vehicles, buildings, etc?
1)
A)
Investment that adds to the stock of assets
B)
Annual investment to replace worn out equipment
C)
Capitalisation, calculated as a fixed proportion of depreciation over the equipment’s lifetime
D)
The sum of the cash flows on equipment within the planning horizon
2)
What metric is found by subtracting the debt from the present value of free cash flows from
operations?
2)
A)
Economic profit
B)
Corporate value
C)
Total shareholder value
D)
Shareholder value from operations
D
3)
What is the key advantage of economic profit, compared with using shareholder value analysis?
3)
A)
It presents results as percentages.
B)
It reduces risk.
C)
It uses existing accounting and reporting systems.
D)
It maximises the probability of finding profitable projects.
C
4)
Two approaches for dealing with project risk to capture the variability of cash inflows and NPVs
are
4)
A)
sensitivity analysis and simulation.
B)
scenario analysis and simulation.
C)
none of the above.
D)
sensitivity analysis and scenario analysis.
D
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5)
When calculating economic profit using the ‘profit less capital charge’ method, the capital charge is
subtracted from the operating profit to give the economic profit. Which of the following describes
the type of operating profit that must be used?
5)
A)
The operating profit after interest deduction and before tax deduction
B)
The operating profit before both interest deduction and tax deduction
C)
The operating profit after both interest deduction and tax deduction
D)
The operating profit before interest deduction and after tax deduction
6)
Which three of the following are disadvantages to the use of shareholder value analysis?
6)
A)
It cannot set both short–term and long–term targets.
B)
Constant percentage increases in value drivers lack realism in some circumstances.
C)
It can be misused in target setting.
D)
Many firms’ accounting systems are not equipped to provide the necessary input data.
7)
Which value–creation metric involves calculating future annual free cash flows attributable to both
shareholders and debt holders, and then discounting these cash flows at the weighted average cost
of capital?
7)
A)
Discounted cash flow
B)
Total shareholder return
C)
Economic profit
D)
Shareholder value analysis
A
8)
A behavioral approach that evaluates the impact on the firm’s return of simultaneous changes in a
number of project variables is called
8)
A)
sensitivity analysis.
B)
simulation analysis.
C)
none of the above.
D)
scenario analysis.
D
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D
9)
Which three of the following are among Rappaport’s seven value drivers for shareholder value
analysis?
9)
A)
Sales growth rate
B)
Supplies growth rate
C)
Fixed capital investment
D)
Working capital investment
10)
Calculate a firm’s free cash flow if it has net operating profit after taxes of £60,000, depreciation
expense of £10,000, net fixed asset investment requirement of £40,000, a net current asset
requirement of £30,000 and a tax rate of 30%.
10)
A)
£30,000
B)
£0
C)
£(30,000)
D)
none of the above.
B
11)
What term is used for the sum of the present value of free cash flows from operations plus the
value of non–operating assets?
11)
A)
Economic profit
B)
Shareholder value from operations
C)
Corporate value
D)
Total shareholder value
C
12)
Which three of the following are among Rappaport’s seven value drivers for shareholder value
analysis?
12)
A)
Interest charge
B)
Tax rate
C)
Operating profit margin
D)
The planning horizon
13)
A behavioral approach for dealing with project risk that uses several possible values for a given
variable such as cash inflows to assess that variable’s impact on NPV is called
13)
A)
none of the above.
B)
simulation analysis.
C)
sensitivity analysis.
D)
scenario analysis.
C
3
14)
How is total shareholder value calculated?
14)
A)
By adding the value of cash flows from profitable operations and the value of operating assets
B)
By subtracting the shareholder value of free cash flows from operations from the value of
non–operating assets
C)
By adding the shareholder value of free cash flows from operations and the value of
non–operating assets
D)
By subtracting the value of non–operating assets from the shareholder value of free cash
flows from operations
15)
A common approach of estimating the variability of returns involving forecasting the pessimistic,
most likely, and optimistic returns associated with the asset is called
15)
A)
sensitivity analysis.
B)
break–even analysis.
C)
financial statement analysis.
D)
marginal analysis.
A
16)
How is shareholder value from operations calculated?
16)
A)
By subtracting debt from present value of free cash flows from operations
B)
By adding debt and the discounted value of taxable cash flows from operations
C)
By adding debt and the present value of free cash flows from operations
D)
By subtracting debt from discounted value of taxable cash flows from operations
A
17)
Which of the following is the value–creation metric that simplifies discounted cash flow analysis by
employing (Rappaport’s) seven value drivers?
17)
A)
Discounted cash flow
B)
Total shareholder return
C)
Shareholder value analysis
D)
Economic profit
C
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C
18)
Which of the following best defines the term ‘economic profit‘?
18)
A)
The amount earned by a business after deducting all operating expenses and a charge for the
opportunity cost of the capital employed
B)
The amount earned by a business over a number of years: it is equal to the cumulative profit
less interest plus depreciation
C)
The rate of return earned by a business on sales over a period
D)
The amount earned by a business as shown in the profit and loss account but with
depreciation and any increase in working capital added back
19)
Which two terms are added together to calculate corporate value?
19)
A)
Amount of capital invested
B)
The present value of free cash flows from operations within the planning horizon
C)
The present value of free cash flows from operations after the planning horizon
D)
Actual return
20)
The weighted average cost of capital for a company is 12 per cent and the firm achieved an
operating profit before interest and tax of £1.5m in the latest year. The company started the year
with £20m of invested capital. What was the economic profit?
20)
A)
–£900,000
B)
£900,000
C)
£3.7m
D)
£2.4m
21)
What term is used for the amount that is available to be paid out to the firm’s investors?
21)
A)
Free cash flow
B)
Free funds
C)
Gross cash flow
D)
Available assets
TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.
22)
The firm’s free cash flow (FCF) represents the amount of cash flow available to investors
(shareholders and bondholders) after the firm has met all operating needs and after having paid for
net fixed asset investments and net current asset investments.
22)
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23)
Behavioral approaches for dealing with risk include sensitivity analysis, scenario analysis, and
simulation.
23)
24)
Economic value added is the difference between an investment‘s net operating profit after taxes
and the cost of funds used to finance the investment, which is found by multiplying the euro
amount of the funds used to finance the investment by the firm’s weighted average cost of capital.
24)
25)
An approach for assessing risk that uses a number of possible return estimates to obtain a sense of
the variability among outcomes is called sensitivity analysis.
25)
6
Answer Key
Testname: C17
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