Question 1

For which of the following is a nominal modeling application preferred to a real modeling application?

Accepted Answer

A) EBITDA. 
B) Financial statements. 
C) Investments in working capital. 
D) Capital expenditures. 
A) EBITDA. 
B) Financial statements. 
C) Investments in working capital. 
D) Capital expenditures. B

Question 2

What are the two indirect cash flow effects of inflation that depress value?

Accepted Answer

1.Companies suffer a loss on their depreciation tax shields if depreciation charges cannot be inflation-adjusted for tax purposes.2.Most companies cannot pass on to their customers the whole of any cost increases arising from inflation without losing sales volume.As a result,they fail to maintain profitability in real terms.

Question 3

Given the following information,compute free cash flow (FCF )in real terms: real growth is 3 percent,real ROIC is 12 percent,real NOPLAT is $5,000,real net working capital from the previous year is $2,000,the inflation index last year was 164,and the inflation index this year is 192.

Accepted Answer

A) $770.83 
B) $2,958.33 
C) $2,229.17 
D) $3,458.33 
A) $770.83 
B) $2,958.33 
C) $2,229.17 
D) $3,458.33 D

Question 4

Inflation is often persistent and difficult to fix,stretching out over several years as in the 1970s and 1980s,because suppressing it requires strict and unpopular government measures.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following are true about inflation?
I.It depresses market valuations.
II.Investors tend to correctly perceive inflation.
III.It does not affect the cost of capital in real terms.
IV.It can affect the real-terms cash flows generated by companies.

Accepted Answer

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

Question 6

With respect to growth and operating margins,which is/are likely to be overstated in times of high inflation?

Accepted Answer

A) Growth only. 
B) Operating margins only. 
C) Both growth and operating margins. 
D) Neither growth nor operating margins. 
A) Growth only. 
B) Operating margins only. 
C) Both growth and operating margins. 
D) Neither growth nor operating margins.

Question 7

Historical data shows that inflation leads to lower value creation in companies,because it erodes real-terms free cash flow (FCF )and increases the cost of capital.

Accepted Answer

A) True 
 B)False

Question 8

If the nominal weighted average cost of capital (WACC )is 24 percent and inflation is 16 percent,then the real WACC is closest to:

Accepted Answer

A) 7 percent. 
B) 8 percent. 
C) 13 percent. 
D) 15 percent. 
A) 7 percent. 
B) 8 percent. 
C) 13 percent. 
D) 15 percent.

Question 9

Which of the following is NOT one of the steps in the five-step approach managers should employ to combine nominal and real forecasts?

Accepted Answer

A) Build financial statements in real terms. 
B) Build financial statements in nominal terms. 
C) Forecast operating performance in nominal terms. 
D) Forecast the future free cash flows in real and nominal terms from the projected income statements and balance sheets. 
A) Build financial statements in real terms. 
B) Build financial statements in nominal terms. 
C) Forecast operating performance in nominal terms. 
D) Forecast the future free cash flows in real and nominal terms from the projected income statements and balance sheets.

Question 10

A firm begins with nominal net working capital NWCᴺt-₁ = 200 and then increases it to NWCᴺt = 250.The price index increases from IXt-₁ = 144 to IXt = 166.Based on this information,what is the real investment in NWC in year t?

Accepted Answer

A) 9.51 
B) 10.84 
C) 30.12 
D) 49.73 
A) 9.51 
B) 10.84 
C) 30.12 
D) 49.73

Question 11

An analyst should make financial projections of income statements and balance sheets for a valuation in a high-inflation environment by simply projecting all items on a nominal basis.

Accepted Answer

A) True 
 B)False

Exam 22: Inflation

For which of the following is a nominal modeling application preferred to a real modeling application?

What are the two indirect cash flow effects of inflation that depress value?

Given the following information,compute free cash flow (FCF )in real terms: real growth is 3 percent,real ROIC is 12 percent,real NOPLAT is $5,000,real net working capital from the previous year is $2,000,the inflation index last year was 164,and the inflation index this year is 192.

Inflation is often persistent and difficult to fix,stretching out over several years as in the 1970s and 1980s,because suppressing it requires strict and unpopular government measures.

Which of the following are true about inflation? I.It depresses market valuations. II.Investors tend to correctly perceive inflation. III.It does not affect the cost of capital in real terms. IV.It can affect the real-terms cash flows generated by companies.

With respect to growth and operating margins,which is/are likely to be overstated in times of high inflation?

Historical data shows that inflation leads to lower value creation in companies,because it erodes real-terms free cash flow (FCF )and increases the cost of capital.

If the nominal weighted average cost of capital (WACC )is 24 percent and inflation is 16 percent,then the real WACC is closest to:

Which of the following is NOT one of the steps in the five-step approach managers should employ to combine nominal and real forecasts?

A firm begins with nominal net working capital NWCᴺt-₁ = 200 and then increases it to NWCᴺt = 250.The price index increases from IXt-₁ = 144 to IXt = 166.Based on this information,what is the real investment in NWC in year t?

An analyst should make financial projections of income statements and balance sheets for a valuation in a high-inflation environment by simply projecting all items on a nominal basis.

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

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

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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