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Exam 12: Estimating Continuing Value

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Question 1

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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.

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Question 2

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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.

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Question 3

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

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

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

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

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?

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

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

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.

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

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

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

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

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.

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

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

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: