Question 1

The expectations treadmill is the dynamic behind the adage that a good company and a good investment may not be the same.

Accepted Answer

A) True 
 B)False  True

Question 2

What is the zero-growth return?

Accepted Answer

A) 10.0 percent. 
B) 14.4 percent. 
C) 3.0 percent. 
D) 7.0 percent. 
A) 10.0 percent. 
B) 14.4 percent. 
C) 3.0 percent. 
D) 7.0 percent. A

Question 3

Which of the following are potential reasons why TRS over short periods of time may not reflect the actual performance of a company and its management?
I.A well-performing company may not deliver a high TRS if the expectations include knowledge of the performance.
II.When TRS is analyzed in its traditional way,it does not show the degree to which improvements in operations produced or increased the TRS.
III.Outside factors such as changing interest rates can affect TRS and be unrelated to the firm's operations.
IV.TRS is difficult to calculate for short periods of time.

Accepted Answer

A) II and IV. 
B) I and II. 
C) II and III. 
D) I,II,and III. 
A) II and IV. 
B) I and II. 
C) II and III. 
D) I,II,and III. D

Question 4

List and describe the four-part decomposition of TRS that gives a clearer insight into how much of the measure derives from changes in operational performance.

Accepted Answer

1.The value generated from revenue growt

Question 5

What is the TRS from performance?

Accepted Answer

A) -2.0 percent. 
B) 0.0 percent. 
C) 1.4 percent. 
D) 7.0 percent. 
A) -2.0 percent. 
B) 0.0 percent. 
C) 1.4 percent. 
D) 7.0 percent.

Question 6

What is the TRS?

Accepted Answer

A) 7.0 percent. 
B) 3.0 percent. 
C) 4.4 percent. 
D) 14.4 percent. 
A) 7.0 percent. 
B) 3.0 percent. 
C) 4.4 percent. 
D) 14.4 percent.

Question 7

Which of the following are frequently observed detrimental activities of managers on the "expectations treadmill"?
I.Increasing leverage.
II.Decreasing the weighted average cost of capital (WACC).
III.Pursuing risky major acquisitions.
IV.Pursuing unrealistic earnings growth.?

Accepted Answer

A) I and II only. 
B) I,III,and IV only. 
C) II and IV only. 
D) II,III,and IV only. 
A) I and II only. 
B) I,III,and IV only. 
C) II and IV only. 
D) II,III,and IV only.

Question 8

Suppose that on January 1, 2014, you bought 100 shares of M.Co for $100 per share with the expectation of receiving a perpetual dividend of $10 per share. On January 1, 2015, M.Co announces that it will increase its annual dividend to $20 per share. Upon announcement, the stock price rises to $200. 
-If an investor bought 100 shares of M.Co on January 1,2015,what will be the expected return?

Accepted Answer

A) 110 percent. 
B) 10 percent. 
C) 20 percent. 
A) 110 percent. 
B) 10 percent. 
C) 20 percent.

Question 9

Suppose that on January 1, 2014, you bought 100 shares of M.Co for $100 per share with the expectation of receiving a perpetual dividend of $10 per share. On January 1, 2015, M.Co announces that it will increase its annual dividend to $20 per share. Upon announcement, the stock price rises to $200. 
-What was the expected return on the investment as on January 1,2014?

Accepted Answer

A) 110 percent. 
B) 10 percent. 
C) 20 percent. 
A) 110 percent. 
B) 10 percent. 
C) 20 percent.

Question 10

The expectations treadmill refers to the fact that recent growth builds expectations of future growth.

Accepted Answer

A) True 
 B)False

Question 11

Use the following financials for the next question.
$\begin{array} { | l | r | r | } 
\hline \text { \$ mi llion } & \text { Base Year } & \text { 1 year L ater } \
\hline \begin{array} { l } 
\text { Invested } \
\text { capital }
\end{array} & \$ 100 & \$ 104 \
\hline \text { Earnings } & 8 & 9 \
\hline \text { P/E } & 12 & 12.6 \
\hline \text { Dividends } & 4 & 4.1 \
\hline \text { Equity Value } & 96 & 113.4 \
\hline
\end{array}$
-The enhanced TRS from performance is closest to:

Accepted Answer

A) -4.4 percent. 
B) 3.1 percent. 
C) 4.4 percent. 
D) 8.4 percent. 
A) -4.4 percent. 
B) 3.1 percent. 
C) 4.4 percent. 
D) 8.4 percent.

Question 12

Company Y can outperform Company Z on all key value drivers (e.g. ,growth and ROIC )but still deliver lower total returns to shareholders (TRS).

Accepted Answer

A) True 
 B)False

Question 13

The traditional approach to analyzing TRS treats the key components as if they were independent of each other,and this does not link TRS to the true underlying sources of value creation.

Accepted Answer

A) True 
 B)False

Question 14

Use the following financials to answer the next question.
$$\begin{array} { | l | r | r | } 
\hline \text { \$ mi llion } & \text { Base Year } & \text { 1 year Later } \
\hline \begin{array} { l } 
\text { Invested } \
\text { capital }
\end{array} & \text { \$50 } & \$ 54 \
\hline \text { Earnings } & 5.0 & 5.1 \
\hline \text { P/E } & 10.0 & 10.4 \
\hline \text { Dividends } & 2.5 & 2.55 \
\hline \text { Equity Value } & 96 & 113.4 \
\hline
\end{array}$$
-Total returns to shareholders is closest to:

Accepted Answer

A) 8.0 percent. 
B) 9.5 percent. 
C) 11.1 percent. 
D) 15.5 percent. 
A) 8.0 percent. 
B) 9.5 percent. 
C) 11.1 percent. 
D) 15.5 percent.

Question 15

Given that TRS is not a clear measure of management performance,which of the following metrics should be used to gauge a company's performance?

Accepted Answer

A) ROIC and growth. 
B) ROIC,growth,and TRS performance relative to peers. 
C) EPS and TRS. 
D) None of the above. 
A) ROIC and growth. 
B) ROIC,growth,and TRS performance relative to peers. 
C) EPS and TRS. 
D) None of the above.

Question 16

The expectations treadmill can be detrimental to total returns to shareholders (TRS )if the managers grow the company without keeping the ROIC above the cost of capital or if they make unnecessary acquisitions that do not create value.

Accepted Answer

A) True 
 B)False

Question 17

Suppose that on January 1, 2014, you bought 100 shares of M.Co for $100 per share with the expectation of receiving a perpetual dividend of $10 per share. On January 1, 2015, M.Co announces that it will increase its annual dividend to $20 per share. Upon announcement, the stock price rises to $200. 
-If you sold the shares on January 1,2015,what would be your return?

Accepted Answer

A) 110 percent. 
B) 10 percent. 
C) 20 percent. 
A) 110 percent. 
B) 10 percent. 
C) 20 percent.

Question 18

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 their interests and the interests of their shareholders?

Accepted Answer

A) 3-5 years. 
B) 6-9 years. 
C) 10-15 years. 
D) 16-20 years. 
A) 3-5 years. 
B) 6-9 years. 
C) 10-15 years. 
D) 16-20 years.

Question 19

An effective compensation system of a company should focus on period to period changes in TRS performance rather than TRS relative to peers in the industry.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following is NOT one of the three components in the traditional approach's three-component breakdown of total returns to shareholders??

Accepted Answer

A) Percent change in cash flow. 
B) Percent change in earnings. 
C) Percent change in P/E. 
D) Percent change in dividend yield. 
A) Percent change in cash flow. 
B) Percent change in earnings. 
C) Percent change in P/E. 
D) Percent change in dividend yield.

Exam 4: The Alchemy of Stock Market Performance

The expectations treadmill is the dynamic behind the adage that a good company and a good investment may not be the same.

What is the zero-growth return?

List and describe the four-part decomposition of TRS that gives a clearer insight into how much of the measure derives from changes in operational performance.

What is the TRS from performance?

What is the TRS?

Which of the following are frequently observed detrimental activities of managers on the "expectations treadmill"? I.Increasing leverage. II.Decreasing the weighted average cost of capital (WACC). III.Pursuing risky major acquisitions. IV.Pursuing unrealistic earnings growth.?

The expectations treadmill refers to the fact that recent growth builds expectations of future growth.

Use the following financials for the next question. \ mi llion Base Year 1 year L ater Invested capital \ 100 \ 104 Earnings 8 9 P/E 12 12.6 Dividends 4 4.1 Equity Value 96 113.4 -The enhanced TRS from performance is closest to:

Company Y can outperform Company Z on all key value drivers (e.g. ,growth and ROIC )but still deliver lower total returns to shareholders (TRS).

The traditional approach to analyzing TRS treats the key components as if they were independent of each other,and this does not link TRS to the true underlying sources of value creation.

Use the following financials to answer the next question. \ mi llion Base Year 1 year Later Invested capital \5 0 \ 54 Earnings 5.0 5.1 P/E 10.0 10.4 Dividends 2.5 2.55 Equity Value 96 113.4 -Total returns to shareholders is closest to:

Given that TRS is not a clear measure of management performance,which of the following metrics should be used to gauge a company's performance?

The expectations treadmill can be detrimental to total returns to shareholders (TRS )if the managers grow the company without keeping the ROIC above the cost of capital or if they make unnecessary acquisitions that do not create value.

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 their interests and the interests of their shareholders?

An effective compensation system of a company should focus on period to period changes in TRS performance rather than TRS relative to peers in the industry.

Which of the following is NOT one of the three components in the traditional approach's three-component breakdown of total returns to shareholders??

Why Value Value

Fundamental Principles of Value Creation

Conservation of Value and the Role of Risk

The Stock Market Is Smarter Than You Think

Return on Invested Capital

Growth

Frameworks for Valuation

Reorganizing the Financial Statements

Analyzing Performance

Forecasting Performance

Estimating Continuing Value

Estimating the Cost of Capital

Moving From Enterprise Value to Value Per Share

Analyzing the Results

Using Multiples

Valuation by Parts

Taxes

Non-operating Items, Provisions, and Reserves

Leases and Retirement Obligations

Alternative Ways to Measure Return on Capital

Inflation

Cross-Border Valuation

Case Study: Heineken

Corporate Portfolio Strategy

Performance Management

Mergers and Acquisitions

Divestitures

Capital Structure, Dividends, and Share Repurchases

Investor Communications

Emerging Markets

Valuing High-Growth Companies

Cyclical Companies

Banks

Flexibility

Filters