Deck 10: Analyzing Performance

Question 1

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.

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

Answer 1

D

Question 2

$\begin{array}{|l|l|l|} \hline& 2015 & 2016 \\\hline \text { Current assets } & \$ 860 & \$ 896 \\\hline \text { Current liabilities } & 710 & 818 \\\hline \text { Debt in current liabilities } & 1 & 39 \\\hline \text { Lurkg-term debt } & 506 & 408 \\\hline \text { Total assets } & 2,293 & 2,307 \\\hline \text { Capilal experuditures } & 111 & 117 \\\hline \text { Change in deferred taxes } & 29 & -20 \\\hline \text { Sales } & 4,100 & 4,192 \\\hline \text { Operating expenses } & 3,307 & 3,260 \\\hline \text { Rental expense } & 0 & 248 \\\hline \text { Gerieral expenses } & 562 & 528 \\\hline \text { Depreciation } & 139 & 136 \\\hline \text { Iriterest experise } & 39 & 30 \\\hline \text { Incuere taxes } & 5 & 8 \\\hline\end{array}$

-Using the preceding table,if receivables,inventories,and other current assets are $520 in 2015,then what is the number of days in cash?

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

Answer 2

30 days.

Question 3

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

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

Answer 3

13.2 percent.

Question 4

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

Question 5

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?

A)2.1×
B)2.0×
C)1.5×
D)0.5×

Question 6

Assuming that both the acquiring and target firms have fiscal years ending on December 31,if the target is acquired on December 1,2015,which of the following is the most accurate?

A)Revenues of the target would be consolidated from 2016 onward.
B)Revenues of the target would be consolidated 100 percent for 2015.
C)Revenues of the target would be consolidated post-acquisition-that is,one month of revenues of the target for 2015.
D)No consolidation of revenues will happen.

Question 7

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?

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

Question 8

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.

Question 9

You are an equity analyst and have computed the following figures for two cement companies.The first,CementCo,has NOPLAT of $1,550 million,invested capital without goodwill of $15,000 million,and goodwill of $1,950 million.The second,CementExports,has NOPLAT of $1,750 million,invested capital without goodwill of $16,000 million,and no goodwill.If the cost of capital for both firms is 10 percent,what is the ROIC for each company? Which company is creating value in this year?

A)ROIC excluding goodwill is 10.3 percent for CementCo and 10.9 percent for CementExports;both companies are creating value.
B)ROIC including goodwill is 9.1 percent for CementCo and 10.9 percent for CementExports;both companies are creating value.
C)ROIC including goodwill is 9.1 percent for CementCo and 10.9 percent for CementExports;only CementExports is creating value.
D)ROIC including goodwill is 9.1 percent for CementCo and 10.9 percent for CementExports;neither of the companies is creating value.

Question 10

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

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 11

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.

Question 12

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?

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

Question 13

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

Question 14

Leverage measures the company's ability to meet obligations over the long term.

Question 15

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.

Question 16

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?

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.

Question 17

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

Question 18

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?

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

Question 19

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.

Question 20

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.

Question 21

Use the following data to answer the question: What are the three interest coverage ratios based on pretax income and interest expense? $\begin{array}{|l|l|l|} \hline& 2015 & 2016 \\\hline \text { Current assets } & \$ 860 & \$ 896 \\\hline \text { Current liabilities } & 710 & 818 \\\hline \text { Debt in current liabilities } & 1 & 39 \\\hline \text { Lurkg-term debt } & 506 & 408 \\\hline \text { Total assets } & 2,293 & 2,307 \\\hline \text { Capilal experuditures } & 111 & 117 \\\hline \text { Change in deferred taxes } & 29 & -20 \\\hline \text { Sales } & 4,100 & 4,192 \\\hline \text { Operating expenses } & 3,307 & 3,260 \\\hline \text { Rental expense } & 0 & 248 \\\hline \text { Gerieral expenses } & 562 & 528 \\\hline \text { Depreciation } & 139 & 136 \\\hline \text { Iriterest experise } & 39 & 30 \\\hline \text { Incuere taxes } & 5 & 8 \\\hline\end{array}$

A)For 2016,interest coverage ratios based on EBIT,EBITDA,and EBITDAR are 5.47,5.47,and 1.48,respectively.
B)For 2016,interest coverage ratios based on EBIT,EBITDA,and EBITDAR are 2.36,5.92,and 13.73,respectively.
C)For 2016,interest coverage ratios based on EBIT,EBITDA,and EBITDAR are 0.93,5.47,and 1.48,respectively.
D)For 2016,interest coverage ratios based on EBIT,EBITDA,and EBITDAR are 0.93,5.47,and 13.73,respectively.

Question 22

Given that ROIC,the interest rate on debt,and the debt-to-equity ratio are constant,how will increasing the tax rate affect ROE?

A)Decrease it.
B)Not affect it.
C)Increase it.
D)There is no set relationship.

Question 23

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

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 24

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)?

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

Question 25

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