N1591 Sample Mid-Term Test 2019 Questions

Candidate Number
N1591
THE UNIVERSITY OF SUSSEX
BSc SAMPLE MID-TERM TEST
VALUATION OF COMPANIES
AND CASH FLOW GENERATING ASSETS
Assessment Period:
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 ONE (1) question 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: 1.0 hours
1
N1591 Valuation of Companies and Cash Flow Generating Assets
List of acronyms used throughout this exam paper
APV: Adjusted Present Value
CAPM: Capital Asset Pricing Model
DCF: Discounted Cash Flow
FCF: Free Cash Flow
NOPLAT: Net Operating Income Less Adjusted Taxes
ROIC: Return On Invested Capital
RONIC: Return On New Invested Capital
WACC: Weighted Average Cost of Capital
2
Part A: Multiple-choice questions Attempt all 10 questions

There are 3 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. Why is it more relevant to use cash flows rather than profits for valuation
purposes? Which statement is correct:
A. Cash flows are higher thus give higher valuations.

B. Profits are not influenced by accounting policies.
C. Cash flows more accurately reflect the amount of cash available to investors at
specific points in time.
D. Profits more accurately reflect the amount of cash available to investors at
specific points in time.
2. Which of the following explains the reasons that growth-rate rankings change
among industries so much over time?
I. The business cycle.

II. Changing regulations.
III. Fluctuating exchange rates.
IV. Product life cycles.
A. I and II only.
B. I and IV only.
C. II and III only.
D. III and IV only.
3. In the Adjusted Present Value approach, the value of a firm is given by the sum of:
A. Enterprise value of the firm and the present value of tax shields, all discounted at
WACC.
B. Enterprise value of the firm and the continuing value of free cash flows.
C. Enterprise value as if the firm were all equity financed and the present value of tax
shields.
D. Enterprise value as if the firm were all equity financed and the continuing value of
free cash flows.
3
4. If the growth of a company is 5% and the ROIC is 20%, what is the investment rate?
A. 40%
B. 20%
C. 4%
D. 25%
5. What is an important benefit of suing the using the Discounted Economic Profit
approach?
A. It highlights when a company creates value.

B. It highlights where and when a company cerates value.
C. It highlights how and where a company creates value.
D. It highlights how and when a company creates value.
6. To compute Equity Value from Enterprise Value you should:
A. Add non-operating assets.

B. Add non-equity financial claims.
C. Subtract non-operating assets.
D. Subtract non-equity financial claims.
7. Given the following information, compute the estimated value per share.
Present value of cash flow $ 40m

Investments $ 2m
Other non-operating assets $ 5m
Value of debt $ 10m
Number of shares outstanding 10m
A. $ 3.6
B. $ 3.7
C. $ 3.8
D. $ 3.9
4
8. During a given fiscal year, Company ABC has seen the following changes in some
its balance sheet items:
Inventories: Increase by $ 100.

Trade debtors: Decrease by $ 50.
Trade creditors: Increase by $ 25.
What is the impact on ABC’s Invested Capital and on its cash flow, respectively?
A. Decrease by $ 50/Increase by $ 50.

B. Increase by 50/Increase by $ 25.
C. Increase by $ 75/Decrease by $ 75.
D. Increase by $ 25/Decrease by $ 25.
9. Given that a company charges $ 4 per unit, has a cost per unit of $ 2 and a tax rate
of 20%, and requires $ 10 of invested capital per unit, what is the ROIC?
A. 4%
B. 8%
C. 16%
D. 32%
10. Under what conditions does growth always create value:
A. When growth is higher than ROIC.

B. When growth is higher than WACC
C. When ROIC is higher than growth.
D. When ROIC is higher than WACC.
5
Part B: Calculation questions.

You should attempt all questions Each question carries 10 marks.
This section carries 30 marks.
11. Please consider the following balance sheet.
Balance Sheet (mGBP) 2018

Cash 75
Short-Term Investments 25
Accounts Receivable 150
Inventory 200
Current Assets 450
Property, Plant and Equipment 400

Equity Investments 150
Total Assets 1,000
Accounts Payable 200

Short-Term Debt 100
Current Liabilities 300
Long-Term Debt 400
Equity 300
Total Liabilities and Equity 1,000
If 2018 revenues were GBP 500m, compute Invested Capital.
6
Use the following data to address Questions 12 and 13:
(mGBP) Actual Year 1 Year 2 Year 3

Revenues 480 510 570 590
NOPLAT 28 30 48 27
Invested Capital 259.7 286.6 330.6 376.8
WACC is 9%.
The column Actual shows the latest figures of your company, whilst the columns
Year 1 to Year 3 show your projections.
12. Do you expect value to be created in all off Year 1, Year 2 and Year 3?
13. Explain your findings from Question 12.
7
Section C: Questions requiring written answers.

Answer 1 questions from 2. Each question carries 40 marks.
This section carries 40 marks.
14. How do you estimate Enterprise Value? Describe the various estimations steps
and explain how you obtain Equity Value from Enterprise Value.
15. Discuss Discounted Cash Flow and Adjusted Present Value valuations. What are
the differences, when would you use one instead of the other, and what assumptions
do you make?
END OF PAPER

N1591 Sample Mid-Term Test 2019 Questions

Uploaded by

Copyright:

Available Formats

N1591 Sample Mid-Term Test 2019 Questions

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

N1591 Sample Mid-Term Test 2019 Questions

Uploaded by

Copyright:

Available Formats

Candidate Number

DO NOT TURN OVER UNTIL INSTRUCTED

Duration: 1.0 hours

List of acronyms used throughout this exam paper

APV: Adjusted Present Value

CAPM: Capital Asset Pricing Model

DCF: Discounted Cash Flow

FCF: Free Cash Flow

NOPLAT: Net Operating Income Less Adjusted Taxes

ROIC: Return On Invested Capital

RONIC: Return On New Invested Capital

WACC: Weighted Average Cost of Capital

Part A: Multiple-choice questions Attempt all 10 questions

Indicate your answers on the machine-marked answer sheet.

A. Cash flows are higher thus give higher valuations.

I. The business cycle.

A. It highlights when a company creates value.

6. To compute Equity Value from Enterprise Value you should:

A. Add non-operating assets.

Present value of cash flow $ 40m

Inventories: Increase by $ 100.

A. Decrease by $ 50/Increase by $ 50.

10. Under what conditions does growth always create value:

A. When growth is higher than ROIC.

Part B: Calculation questions.

11. Please consider the following balance sheet.

Balance Sheet (mGBP) 2018

Property, Plant and Equipment 400

Total Assets 1,000

Accounts Payable 200

Long-Term Debt 400

Total Liabilities and Equity 1,000

If 2018 revenues were GBP 500m, compute Invested Capital.

Use the following data to address Questions 12 and 13:

(mGBP) Actual Year 1 Year 2 Year 3

13. Explain your findings from Question 12.

Section C: Questions requiring written answers.

You might also like