Candidate Number

N1591
THE UNIVERSITY OF SUSSEX
BSc SAMPLE EXAM

VALUATION OF COMPANIES AND

CASH FLOW GENERATING ASSETS

Assessment Period: January 20XX (A1)

DO NOT TURN OVER UNTIL INSTRUCTED

TO BY THE CHIEF INVIGILATOR
Candidates should attempt ALL questions from Section A, ALL questions from
Section B, and TWO (2) questions from Section C

At the end of the examination the question paper and/or answer book, used or
unused, will be collected from you before you leave the examination room

Duration: 2.0 hours

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 N1591 Valuation of Companies and Cash Flow Generating Assets
Sample Exam

Part A: Multiple-choice questions Attempt all 20 questions

There are 1.5 marks for each correct answer (there are no penalty marks).
There are 30 marks in total for this section.

Indicate your answers on the machine-marked answer sheet.

1. When a company has an ROIC greater than its cost of capital, faster growth
increases value, but when it has an ROIC less than its cost of capital, what is the
effect on value?

A. Faster growth creates value.

B. Faster growth destroys value.
C. Growth doesn’t impact value creation.
D. None of the above are true.

2. If the growth rate of a company is 2.1% and the ROIC is 9%, what is the
investment rate?

A. 23.3%
B. 30.4%
C. 45.5%
D. 69.6%

3. For a given incremental increase in revenue from each of the following sources of
growth, which source would generally create the most shareholder value?

A. Reducing costs.
B. Acquiring businesses.
C. Expanding an existing market.
D. Introducing new products to market.

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 N1591 Valuation of Companies and Cash Flow Generating Assets
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4. A company with an ROIC of 45% and a cost of capital of 8% is considering an

investment opportunity of similar risk to its existing investments. If the new
opportunity would generate a 30% ROIC, what should the company do?

A. The company should invest in this project, as 30% is pretty close to the 45% that
the company currently achieves.
B. The company should not invest in the project, since the return is lower than its
current return of 45%.
C. The company should invest in the project, as its return is greater than the cost of
capital.
D. The company should not invest in the project, since it already enjoys a high ROIC
and the new investment will dilute the overall returns.

5. Given that a company charges $ 10 per unit, has a cost per unit of $9.10 and a tax
rate of 28 percent, and requires $ 4.50 of invested capital per unit, what is the ROIC?

A. 3.82%
B. 5.18%
C. 9.44%
D. 14.40%

6. Which are the five sources of price premiums?

A. Innovative products, quality, low price, brands, customer lock-in.

B. Quality, innovative products, brands, rational price discipline, fluid customer base.
C. Innovative products, quality, brands, customer lock-in, rational price discipline.
D. Brands, quality, customer lock-in, rational price discipline, normal products.

7. Which of the following are types of organic revenue growth?

I. Mergers.
II. Acquisitions.
III. Portfolio momentum.
IV. Market share performance.

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

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 N1591 Valuation of Companies and Cash Flow Generating Assets
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8. Use the following information below to answer the question.

NOPLATt+1 = $72.2m
NOPLAT growth rate = 3%
Return On New Invested Capital = 11.2%
Weighted Average Cost of Capital = 7.4%

Which of the following is closest to the continuing value in year t?

A. $ 1,005m
B. $ 1,201m
C. $ 4,485m
D. $ 6,126m

9. Compute ROIC given the following information: EBITA = $ 800, Revenues =

$ 2,200, Invested Capital = $ 4,000, Operating Cash Tax Rate = 34%.

A. 6.8%
B. 13.2%
C. 24.0%
D. 36.3%

10. In order to get a more accurate forecast of revenue growth, an analyst should
remove the effects of which of the following?

I. Taxes.
II. Changes in currency values.
III. Mergers and acquisitions.
IV. Changes in accounting policies.

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

11. Which of the following is the best estimate of retained earnings in year t?

A. Retained Earningst+1 + Net Incomet-1 – Dividendst-1

B. Retained Earningst + Net Incomet+1 – Dividendst-1
C. Retained Earningst-1 + Net Incomet – Dividendst
D. Retained Earningst + Net Incomet – Dividendst

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 N1591 Valuation of Companies and Cash Flow Generating Assets
Sample Exam

12. In estimating continuing value, how does assuming that RONIC = WACC as
opposed to assuming RONIC ≠ WACC affect the importance of assumptions
concerning growth?

A. Assumptions concerning growth do not change in importance.

B. Assumptions concerning growth become unimportant when RONIC = WACC.
C. Assumptions concerning growth become more important when RONIC = WACC.
D. Assumptions concerning growth become less important when RONIC = WACC
but are still important.

13. A firm has 4,000,000 shares of stock outstanding with a price per share equal to
$ 22. There are 200,000 bonds outstanding each priced at $ 995 each (face value
$ 1,000). The cost of equity is 14%, the cost of debt is 8%, and the corporate tax rate
is 34%. What is the WACC?

A. 10.3%
B. 9.8%
C. 8.0%
D. 8.8%

14. An analyst gathers the following information for Firm A and Firm B. Using the
information to compute the industry unlevered beta, what is the appropriate beta for
each company for use in the WACC? (Assume that the debt beta for each firm
equals zero.)

Firm A: CAPM Beta = 0.8; Debt-to-Equity ratio = 0.6

Firm B: CAPM Beta = 1.2; Debt-to-Equity ratio = 3

A. 0.73; 1.76
B. 0.64; 1.60
C. 0.82; 0.52
D. 1.12; 1.85

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 N1591 Valuation of Companies and Cash Flow Generating Assets
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15. For a given company, next year’s NOPLAT is $ 1,000. For the foreseeable
future, the growth rate will be 5%, the ROIC will be 10%, and the WACC will be 15%.
Using the Key Driver Formula, calculate the value of the company.

A $ 4,000
B. $ 5,000
C. $ 5,500
D. $ 5,750

16. A firm has $ 1,000 market value of equity and $ 500 market value of debt. The
firm also has $100 in nonconsolidated subsidiaries and $ 50 in excess cash. If the
firm’s expected EBITA is $ 200, what is the Value-to-EBITA ratio?

A. 6.75x
B. 9.5x
C. 13.75x
D. 6.94x

17. Given the following information, compute the estimated value per share.

Present value of cash flow $ 30m

Value of investments $ 4m
Value of debt $ 7m
Value of capitalised operating leases $ 2.5m
Number of shares outstanding 8m

A. $ 3.06
B. $ 4.26
C. $ 5.35
D. $ 9.22

18. The option to defer investment, such as the ability of a leaseholder of an

undeveloped oil reserve to defer development and investment until oil prices have
elevated the value of the reserves above their development costs, is most similar to:

A. A swap contract.
B. A put option on a stock.
C. A call option on a stock.
D. A futures contract on a bond.

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 N1591 Valuation of Companies and Cash Flow Generating Assets
Sample Exam

19. A firm has a target debt-to-equity ratio of 1. Its cost of equity equals 15%, the cost
of debt is 10%, and the tax rate is 25%. What is the weighted average cost of capital
(WACC)?
A. 10.32%
B. 11.85
C. 11.25%
D. 10.25%

20. Which of the following usually result in above-average value creation?

I. Make large acquisitions.

II. Drop prices.
III. Convince existing customers to buy more of a product.
IV. Make bolt-on acquisitions to accelerate product growth.

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

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 N1591 Valuation of Companies and Cash Flow Generating Assets
Sample Exam

Part B: Calculation questions.

You should attempt all 3 questions Each question carries 10 marks.
This section carries 30 marks.

21. Consider the Income Statement and Balance Sheet below. Reorganise the
statements and compute Free Cash Flow FCF. Assume an operating tax rate of 20%.
All amounts are in million USD.

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 N1591 Valuation of Companies and Cash Flow Generating Assets
Sample Exam

22. You have forecast the following Free Cash Flow stream for the company in the
previous question.

Year 1 2 3 4 5
FCF 26 24 27 28 29

Years 1 to 5 is the Explicit Forecast Period.

Additionally, you have determined the following:

• The weighted average price of the company’s total debt is 1.02 and the cost of
debt is 6%.
• The company’s market capitalisation is USD 600m. The cost of equity is 11%.
• The tax rate remains 20%.
• Perpetual growth after Year 5 is 2%.

Using this information and the accounts from the previous question, what is the Net
Enterprise Value/EBITA multiple in 2016?

23. Consider the Income Statement and Balance Sheet below. Reorganise the
statements and compute Return On Invested Capital (ROIC). Assume an operating
tax rate of 30%. All amounts are in million USD.

Income Statement 2018

Revenues 674.3
Cost of sales (451.8)
Selling, general, and administrative (107.9)
Depreciation (20.2)
EBIT 94.4
Interest expense (7.5)
Gain/(loss) on sale of assets 0.0
Earnings before taxes 86.9
Taxes (26.1)
Net income 60.8

Dividends 18.3

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N1591 Valuation of Companies and Cash Flow Generating Assets
Sample Exam

Balance Sheet 2018

Cash 153.3
Accounts receivable 97.8
Inventory 242.8
Current assets 493.8

Property, plant, and equipment 276.5

Equity investments 180.0

Total assets 950.3

Accounts payable 134.9

Short-term debt 45.0
Accrued expenses 97.8
Current liabilities 277.6

Long-term debt 105.0

Common stock 100.0
Retained earnings 467.6

Total liabilities and equity 950.3

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 N1591 Valuation of Companies and Cash Flow Generating Assets
Sample Exam

Section C: Questions requiring written answers.

Answer 2 questions from 4. Each question carries 20 marks.
This section carries 40 marks.

Note: If you can illustrate your answers with examples, graphs, equations… to further
demonstrate your understanding.

24. Summarise the various steps in forecasting financial statements, ROIC and FCF.
Explain the balancing items (“The Plug”), how do they arise?

25. Why do we need to reorganise financial statements? Why do we discount Free

Cash Flow and not another type of cash flow?

26. How can a company achieve a superior ROIC?

27. What drives the cost of debt, and how do you estimate it for various types of
companies?

END OF PAPER

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