Question 1

Compute ROIC given the following information: EBITA = $800,revenues = $2,200,invested capital = $4,000,operating cash tax rate = 34%.

Accepted Answer

A) 6.8 percent. 
B) 13.2 percent. 
C) 24.0 percent. 
D) 36.3 percent. 
A) 6.8 percent. 
B) 13.2 percent. 
C) 24.0 percent. 
D) 36.3 percent. B

Question 2

Use the following table, which provides historical data for SnacksCo, a manufacturer of snack foods, to answer the next question. Assume an operating tax rate of 30 percent and a cost of capital of 9 percent.
$\begin{array}{lcc}
\text { Income statement } & \text { Year 1 } & \text { Year 2 } \
\hline \text { Revenues } & 540.0 & 555.0 \
\text { Cost of sales } & (350.0) & (360.5)\
\begin{array} { l  } 
 \text { Selling, general, and}\ \text {administrative }\
\end{array}&(50.0)&(50.5)\
\text { Depreciation } & (10.0) & (10.5) \
 \text { EBIT } & 130.0 & 133.5 \
\text { Interest expense } & (7.5) & (7.5)\
\text { Gain/(loss) on sale of assets } & - & (30.0) \
\text{ Earnings before taxes } & 122.5 & 96.0 \
\text { Taxes } & (24.8) & (21.5) \
\hline \text { Net income } & 97.7 & 74.5\
\end{array}$
$\begin{array}{lcc}
\text { Balance sheet } & \text { Year 1 } & \text { Year 2 } \
\hline\text { Operating cash } &10.6 & 15.0 \
 \begin{array}{l}
\text { Excess cash and marketable } \
\text { securities }
\end{array} & 102.8 & 100.0 \
\text { Accounts receivable } & 90.0 & 94.5 \
\text { Inventory } & 150.0 & 157.5 \
\text  { Current assets } & 353.4 & 367.0\
\text { Property, plant, and equipment } & 206.7 & 219.8 \
\text { Equity investments } & 180.0 & 180.0 \
\hline \text { Total assets } & 740.1 & 766.8\
\text { Accounts payable } & 116.6 & 119.6 \
\text { Short term dobt } & 45.0 & 45.0 \
\text { Accrued expenses } & 90.1 & 89.0 \
\text { Current liabilities } & 251.7 & 253.7 \
& & \
\text { Long-term debt } & 68.4 & 80.6 \
\text { Camman stack } & 120.0 & 120.0\
\text { Retained earnings } & 300.0 & 312.5 \
 \text { Total llabilities and equity } & 740.1 & 766.8
\end{array}$
-What is SnackCo's ROIC in year 2?

Accepted Answer

A) 20.3 percent. 
B) 24.8 percent. 
C) 33.6 percent. 
D) 35.4 percent. 
A) 20.3 percent. 
B) 24.8 percent. 
C) 33.6 percent. 
D) 35.4 percent. D

Question 3

An analysis of a company's historical financial performance should go back a maximum of five years.

Accepted Answer

A) True 
 B)False  False

Question 4

Use the following table, which provides historical data for SnacksCo, a manufacturer of snack foods, to answer the next question. Assume an operating tax rate of 30 percent and a cost of capital of 9 percent.
$\begin{array}{lcc}
\text { Income statement } & \text { Year 1 } & \text { Year 2 } \
\hline \text { Revenues } & 540.0 & 555.0 \
\text { Cost of sales } & (350.0) & (360.5)\
\begin{array} { l  } 
 \text { Selling, general, and}\ \text {administrative }\
\end{array}&(50.0)&(50.5)\
\text { Depreciation } & (10.0) & (10.5) \
 \text { EBIT } & 130.0 & 133.5 \
\text { Interest expense } & (7.5) & (7.5)\
\text { Gain/(loss) on sale of assets } & - & (30.0) \
\text{ Earnings before taxes } & 122.5 & 96.0 \
\text { Taxes } & (24.8) & (21.5) \
\hline \text { Net income } & 97.7 & 74.5\
\end{array}$
$\begin{array}{lcc}
\text { Balance sheet } & \text { Year 1 } & \text { Year 2 } \
\hline\text { Operating cash } &10.6 & 15.0 \
 \begin{array}{l}
\text { Excess cash and marketable } \
\text { securities }
\end{array} & 102.8 & 100.0 \
\text { Accounts receivable } & 90.0 & 94.5 \
\text { Inventory } & 150.0 & 157.5 \
\text  { Current assets } & 353.4 & 367.0\
\text { Property, plant, and equipment } & 206.7 & 219.8 \
\text { Equity investments } & 180.0 & 180.0 \
\hline \text { Total assets } & 740.1 & 766.8\
\text { Accounts payable } & 116.6 & 119.6 \
\text { Short term dobt } & 45.0 & 45.0 \
\text { Accrued expenses } & 90.1 & 89.0 \
\text { Current liabilities } & 251.7 & 253.7 \
& & \
\text { Long-term debt } & 68.4 & 80.6 \
\text { Camman stack } & 120.0 & 120.0\
\text { Retained earnings } & 300.0 & 312.5 \
 \text { Total llabilities and equity } & 740.1 & 766.8
\end{array}$
-What is SnackCo's capital turnover in year 2 using average invested capital?

Accepted Answer

A) 2.1× 
B) 2.0× 
C) 1.5× 
D) 0.5× 
A) 2.1× 
B) 2.0× 
C) 1.5× 
D) 0.5×

Question 5

$\begin{array}{|l|l|l|} 
\hline& 2015 & 2016 \
\hline \text { Current assets } & \$ 860 & \$ 896 \
\hline \text { Current liabilities } & 710 & 818 \
\hline \text { Debt in current liabilities } & 1 & 39 \
\hline \text { Lurkg-term debt } & 506 & 408 \
\hline \text { Total assets } & 2,293 & 2,307 \
\hline \text { Capilal experuditures } & 111 & 117 \
\hline \text { Change in deferred taxes } & 29 & -20 \
\hline \text { Sales } & 4,100 & 4,192 \\hline \text { Operating expenses } & 3,307 & 3,260 \
\hline \text { Rental expense } & 0 & 248 \
\hline \text { Gerieral expenses } & 562 & 528 \
\hline \text { Depreciation } & 139 & 136 \
\hline \text { Iriterest experise } & 39 & 30 \
\hline \text { Incuere taxes } & 5 & 8 \
\hline
\end{array}$
-Using the preceding table,if receivables,inventories,and other current assets are $520 in 2015,then what is the number of days in cash?

Accepted Answer

A) 28 days. 
B) 29 days. 
C) 30 days. 
D) 31 days. 
A) 28 days. 
B) 29 days. 
C) 30 days. 
D) 31 days.

Question 6

An analyst would include goodwill in invested capital when measuring aggregate value creation for a company's shareholders.

Accepted Answer

A) True 
 B)False

Question 7

To evaluate leverage in the recent low-interest-rate environment,many analysts are now evaluating debt multiples such as debt to EBITDA or debt to EBITA.

Accepted Answer

A) True 
 B)False

Question 8

A company's ROIC is driven by its ability to maximize profitability (EBITA divided by revenues or the operating margin),optimize capital turnover (measured by revenues over invested capital),or minimize operating taxes.

Accepted Answer

A) True 
 B)False

Question 9

Use the following table, which provides historical data for SnacksCo, a manufacturer of snack foods, to answer the next question. Assume an operating tax rate of 30 percent and a cost of capital of 9 percent.
$\begin{array}{lcc}
\text { Income statement } & \text { Year 1 } & \text { Year 2 } \
\hline \text { Revenues } & 540.0 & 555.0 \
\text { Cost of sales } & (350.0) & (360.5)\
\begin{array} { l  } 
 \text { Selling, general, and}\ \text {administrative }\
\end{array}&(50.0)&(50.5)\
\text { Depreciation } & (10.0) & (10.5) \
 \text { EBIT } & 130.0 & 133.5 \
\text { Interest expense } & (7.5) & (7.5)\
\text { Gain/(loss) on sale of assets } & - & (30.0) \
\text{ Earnings before taxes } & 122.5 & 96.0 \
\text { Taxes } & (24.8) & (21.5) \
\hline \text { Net income } & 97.7 & 74.5\
\end{array}$
$\begin{array}{lcc}
\text { Balance sheet } & \text { Year 1 } & \text { Year 2 } \
\hline\text { Operating cash } &10.6 & 15.0 \
 \begin{array}{l}
\text { Excess cash and marketable } \
\text { securities }
\end{array} & 102.8 & 100.0 \
\text { Accounts receivable } & 90.0 & 94.5 \
\text { Inventory } & 150.0 & 157.5 \
\text  { Current assets } & 353.4 & 367.0\
\text { Property, plant, and equipment } & 206.7 & 219.8 \
\text { Equity investments } & 180.0 & 180.0 \
\hline \text { Total assets } & 740.1 & 766.8\
\text { Accounts payable } & 116.6 & 119.6 \
\text { Short term dobt } & 45.0 & 45.0 \
\text { Accrued expenses } & 90.1 & 89.0 \
\text { Current liabilities } & 251.7 & 253.7 \
& & \
\text { Long-term debt } & 68.4 & 80.6 \
\text { Camman stack } & 120.0 & 120.0\
\text { Retained earnings } & 300.0 & 312.5 \
 \text { Total llabilities and equity } & 740.1 & 766.8
\end{array}$
-SnackCo is creating value in year 2.

Accepted Answer

A) True 
 B)False

Question 10

With regard to the interest coverage ratio,which of the following is the most accurate?

Accepted Answer

A) If near-term bankruptcy is an issue,EBITDA can be used to measure survival only over the short term. 
B) EBITDA should be used to measure survival over both the short and the long term. 
C) EBITA should be used to measure survival only in the short term (vs.long term). 
D) None of the above are true. 
A) If near-term bankruptcy is an issue,EBITDA can be used to measure survival only over the short term. 
B) EBITDA should be used to measure survival over both the short and the long term. 
C) EBITA should be used to measure survival only in the short term (vs.long term). 
D) None of the above are true.

Question 11

Which of the following is the best method of determining whether the financial performance between competitors is sustainable?

Accepted Answer

A) Linking operating drivers directly to return on capital. 
B) Comparing the respective ROE and ROA measures. 
C) Breaking ROE down into ROIC,tax,interest rate,and leverage effects. 
D) Distinguishing between pretax ROIC and the operating-cash tax rate. 
A) Linking operating drivers directly to return on capital. 
B) Comparing the respective ROE and ROA measures. 
C) Breaking ROE down into ROIC,tax,interest rate,and leverage effects. 
D) Distinguishing between pretax ROIC and the operating-cash tax rate.

Question 12

For a given company,the return on invested capital (ROIC )is 13.5 percent,the tax rate is 34 percent,and the pretax cost of debt is 8.8 percent.If its debt-to-equity ratio is equal to 2.0,what is the return on equity (ROE)?

Accepted Answer

A) 16.30 percent. 
B) 17.80 percent. 
C) 28.88 percent. 
D) 25.30 percent. 
A) 16.30 percent. 
B) 17.80 percent. 
C) 28.88 percent. 
D) 25.30 percent.

Question 13

The company's ability to meet short-term obligations is measured with ratios that incorporate three measures of earnings.Which of the following is NOT one of those measures of earnings?

Accepted Answer

A) Earnings before interest,taxes,and amortization (EBIT
A) . 
B) Earnings before interest,taxes,depreciation,and amortization (EBITD
A) . 
C) Earnings before interest,taxes,amortization,and preferred dividends (EBITA
D) . 
D) Earnings before interest,taxes,depreciation,amortization,and rental expense (EBITDAR). 
A) Earnings before interest,taxes,and amortization (EBIT
A) . 
B) Earnings before interest,taxes,depreciation,and amortization (EBITD
A) . 
C) Earnings before interest,taxes,amortization,and preferred dividends (EBITA
D) . 
D) Earnings before interest,taxes,depreciation,amortization,and rental expense (EBITDAR).

Question 14

ROIC excluding goodwill is useful when measuring underlying operating performance of the company and its businesses,and it is useful for comparing performance against peers and to analyze trends.

Accepted Answer

A) True 
 B)False

Question 15

Use the following table, which provides historical data for SnacksCo, a manufacturer of snack foods, to answer the next question. Assume an operating tax rate of 30 percent and a cost of capital of 9 percent.
$\begin{array}{lcc}
\text { Income statement } & \text { Year 1 } & \text { Year 2 } \
\hline \text { Revenues } & 540.0 & 555.0 \
\text { Cost of sales } & (350.0) & (360.5)\
\begin{array} { l  } 
 \text { Selling, general, and}\ \text {administrative }\
\end{array}&(50.0)&(50.5)\
\text { Depreciation } & (10.0) & (10.5) \
 \text { EBIT } & 130.0 & 133.5 \
\text { Interest expense } & (7.5) & (7.5)\
\text { Gain/(loss) on sale of assets } & - & (30.0) \
\text{ Earnings before taxes } & 122.5 & 96.0 \
\text { Taxes } & (24.8) & (21.5) \
\hline \text { Net income } & 97.7 & 74.5\
\end{array}$
$\begin{array}{lcc}
\text { Balance sheet } & \text { Year 1 } & \text { Year 2 } \
\hline\text { Operating cash } &10.6 & 15.0 \
 \begin{array}{l}
\text { Excess cash and marketable } \
\text { securities }
\end{array} & 102.8 & 100.0 \
\text { Accounts receivable } & 90.0 & 94.5 \
\text { Inventory } & 150.0 & 157.5 \
\text  { Current assets } & 353.4 & 367.0\
\text { Property, plant, and equipment } & 206.7 & 219.8 \
\text { Equity investments } & 180.0 & 180.0 \
\hline \text { Total assets } & 740.1 & 766.8\
\text { Accounts payable } & 116.6 & 119.6 \
\text { Short term dobt } & 45.0 & 45.0 \
\text { Accrued expenses } & 90.1 & 89.0 \
\text { Current liabilities } & 251.7 & 253.7 \
& & \
\text { Long-term debt } & 68.4 & 80.6 \
\text { Camman stack } & 120.0 & 120.0\
\text { Retained earnings } & 300.0 & 312.5 \
 \text { Total llabilities and equity } & 740.1 & 766.8
\end{array}$
-What is SnackCo's operating margin in year 2?

Accepted Answer

A) 13.4 percent. 
B) 16.8 percent. 
C) 24.0 percent. 
D) 35.3 percent. 
A) 13.4 percent. 
B) 16.8 percent. 
C) 24.0 percent. 
D) 35.3 percent.

Question 16

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 starting and ending invested capital.

Accepted Answer

A) True 
 B)False

Question 17

In order to get a more accurate forecast of revenue growth,an analyst should remove the effects of which of the following?
I.Deferred taxes.
II.Changes in currency values.
III.Mergers and acquisitions.
IV.Changes in accounting policies.

Accepted Answer

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

Question 18

Liquidity measures the company's ability to meet obligations over the short term.

Accepted Answer

A) True 
 B)False

Question 19

By using the debt-to-EBITDA ratio,one can build a more comprehensive picture of the risk of leverage.

Accepted Answer

A) True 
 B)False

Question 20

With respect to the performance measures return on invested capital (ROIC),return on equity (ROE),and return on assets (ROA),which of the following is most accurate concerning the relative superiority of the three as analytical tools for understanding a company's performance?

Accepted Answer

A) ROE is better than ROA,which is better than ROIC. 
B) ROA is better than ROIC,which is better than ROE. 
C) ROIC is better than ROA,which is better than ROE. 
D) ROE is better than ROIC,which is better than ROA. 
A) ROE is better than ROA,which is better than ROIC. 
B) ROA is better than ROIC,which is better than ROE. 
C) ROIC is better than ROA,which is better than ROE. 
D) ROE is better than ROIC,which is better than ROA.

Exam 10: Analyzing Performance

Compute ROIC given the following information: EBITA = $800,revenues = $2,200,invested capital = $4,000,operating cash tax rate = 34%.

An analysis of a company's historical financial performance should go back a maximum of five years.

An analyst would include goodwill in invested capital when measuring aggregate value creation for a company's shareholders.

To evaluate leverage in the recent low-interest-rate environment,many analysts are now evaluating debt multiples such as debt to EBITDA or debt to EBITA.

A company's ROIC is driven by its ability to maximize profitability (EBITA divided by revenues or the operating margin),optimize capital turnover (measured by revenues over invested capital),or minimize operating taxes.

With regard to the interest coverage ratio,which of the following is the most accurate?

Which of the following is the best method of determining whether the financial performance between competitors is sustainable?

For a given company,the return on invested capital (ROIC )is 13.5 percent,the tax rate is 34 percent,and the pretax cost of debt is 8.8 percent.If its debt-to-equity ratio is equal to 2.0,what is the return on equity (ROE)?

The company's ability to meet short-term obligations is measured with ratios that incorporate three measures of earnings.Which of the following is NOT one of those measures of earnings?

ROIC excluding goodwill is useful when measuring underlying operating performance of the company and its businesses,and it is useful for comparing performance against peers and to analyze trends.

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 starting and ending invested capital.

In order to get a more accurate forecast of revenue growth,an analyst should remove the effects of which of the following? I.Deferred taxes. II.Changes in currency values. III.Mergers and acquisitions. IV.Changes in accounting policies.

Liquidity measures the company's ability to meet obligations over the short term.

By using the debt-to-EBITDA ratio,one can build a more comprehensive picture of the risk of leverage.

With respect to the performance measures return on invested capital (ROIC),return on equity (ROE),and return on assets (ROA),which of the following is most accurate concerning the relative superiority of the three as analytical tools for understanding a company's performance?

Why Value Value

Fundamental Principles of Value Creation

Conservation of Value and the Role of Risk

The Alchemy of Stock Market Performance

The Stock Market Is Smarter Than You Think

Return on Invested Capital

Growth

Frameworks for Valuation

Reorganizing the Financial Statements

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

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