Deck 12: Estimating Continuing Value

Question 1

Increasing competition is likely to lower the return on new invested capital below the return on total invested capital.

Answer 1

True

Question 2

Describe the best estimate to use for a company's growth rate in the steady state and why it is the best.

Answer 2

Response: [The best estimate is probably the expected long-term rate of consumption growth for the industry's products, plus inflation. This is because few companies can be expected to grow faster than the economy for long periods.]

Question 3

In the continuing-value formula for a company,NOPLAT should reflect an average level associated with the midpoint of the business cycle.

Answer 3

True

Question 4

Which of the following is NOT one of the ways whereby the value of a firm can be broken down into two or more subparts?

A)(1 )Nonoperating assets and (2 )operating assets plus the present value of the depreciation tax shield.
B)(1 )New product line and (2 )base business.
C)(1 )The present value of continuing-value cash flow and (2 )the present value of the cash flow from the explicit forecast period.
D)(1 )The present value of economic profit from continuing value,(2 )the present value of economic profit of the explicit forecast period,and (3 )invested capital.

Question 5

Which of the following typically have a positive relationship with economic profit?
I.Growth.
II.RONIC.
III.WACC.
IV.NOPLAT.
A.I and II only.
B.I,II,and IV only.
C.I,III,and IV only.
D.II,III,and IV only.

Question 6

As a firm begins to grow and faces increasing competition as it expands,which of the following are the most likely relationships among ROIC on base capital,RONIC,and ROIC on total capital?

A)ROIC on base capital < RONIC < ROIC on total capital.
B)ROIC on base capital > RONIC > ROIC on total capital.
C)ROIC on base capital > ROIC on total capital > RONIC.
D)ROIC on base capital < ROIC on total capital < RONIC.

Question 7

In making forecasts to estimate the value of a company,at the point where competition has eliminated abnormal returns,then it is appropriate to set RONIC equal to WACC.

Question 8

In the continuing-value formula for a company,the growth rate g should be based on long-term real interest rates.

Question 9

If NOPLATt?? = $200,g = 4%,RONIC = 10%,WACC = 8%,then continuing value in year t is closest to:

A)$667
B)$1,333
C)$3,000
D)$5,000

Question 10

Given the following inputs,compute the continuing value (CV )at time t in the economic-profit model.At time t invested capital equals $2,000 and ROIC equals 12 percent.The forecast for NOPLATt?? is $240.The growth rate equals 2 percent,RONIC is 10 percent,and the WACC is 7 percent.The continuing value at time t is closest to:

A)$1,840.0
B)$1,428.6
C)$822.8
D)$411.4

Question 11

The alternative continuing-value measure CVt = (NOPLATt₊₁)/WACC depends on the assumption that:

A)Excess profits will be competed away.
B)WACC is greater than the inflation rate.
C)NOPLATt₊₁ represents a value from the peak of the business cycle.
D)NOPLATt₊₁ represents a value from the trough of the business cycle.

Question 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.

Question 13

The estimate of continuing value after the explicit forecast period cannot be higher than the total value of the firm.

Question 14

Using today's P/E multiples to estimate continuing value is recommended.

Question 15

The liquidation values approach should be used only if liquidation is likely to happen at the end of the period.

Question 16

The value of a company's operations equals the sum of all of the following EXCEPT:

A)Invested capital.
B)The market value of nonoperating assets.
C)The present value of economic profit from continuing value.
D)The present value of economic profit of the explicit forecast period.

Question 17

As a good general rule,analysts should make the competitive advantage period the explicit forecast period.

Question 18

Which of the following are common pitfalls or mistakes in estimating continuing value?
I.Naive base-year extrapolation.
II.Naive overconservatism.
III.Purposeful overconservatism.
IV.Liquidation value overconservatism.

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