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    Seminar 5 N1591 - MCK Chaps 11 & 12 Questions

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    Mandeep S
    This document provides questions for a seminar on valuation of companies and cash flow generating assets. It includes questions on forecasting performance and estimating continuing value for PartsCo, a machine parts supplier. Students are asked to forecast PartsCo's income statements and balance sheets for the next three years based on given methodologies. It also includes multiple choice questions related to concepts like explicit forecast periods, common pitfalls in estimating continuing value, and relationships between return on invested capital, weighted average cost of capital, and growth assumptions.

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    Seminar 5 N1591 - MCK Chaps 11 & 12 Questions

    Uploaded by

    Mandeep S
    27 views4 pages
    This document provides questions for a seminar on valuation of companies and cash flow generating assets. It includes questions on forecasting performance and estimating continuing value for PartsCo, a machine parts supplier. Students are asked to forecast PartsCo's income statements and balance sheets for the next three years based on given methodologies. It also includes multiple choice questions related to concepts like explicit forecast periods, common pitfalls in estimating continuing value, and relationships between return on invested capital, weighted average cost of capital, and growth assumptions.

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    Seminar 5 N1591 - McK Chaps 11 & 12 Questions

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    This document provides questions for a seminar on valuation of companies and cash flow generating assets. It includes questions on forecasting performance and estimating continuing value for PartsCo, a machine parts supplier. Students are asked to forecast PartsCo's income statements and balance sheets for the next three years based on given methodologies. It also includes multiple choice questions related to concepts like explicit forecast periods, common pitfalls in estimating continuing value, and relationships between return on invested capital, weighted average cost of capital, and growth assumptions.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    27 views4 pages

    Seminar 5 N1591 - MCK Chaps 11 & 12 Questions

    Uploaded by

    Mandeep S
    This document provides questions for a seminar on valuation of companies and cash flow generating assets. It includes questions on forecasting performance and estimating continuing value for PartsCo, a machine parts supplier. Students are asked to forecast PartsCo's income statements and balance sheets for the next three years based on given methodologies. It also includes multiple choice questions related to concepts like explicit forecast periods, common pitfalls in estimating continuing value, and relationships between return on invested capital, weighted average cost of capital, and growth assumptions.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 4

    Seminar 5 N1591

    Valuation of Companies and Cash Flow Generating Assets (N1591)


    Autumn Term 2019/20

    Seminar 5: Forecasting Performance (McK Chap 11) and


    Estimating Continuing Value (McK Chap 12)

    Essay and Calculation Questions

    1. We previously analysed the accounts of Microsoft Corp. On Canvas, you will find the
    accounts of Ensoft Ltd. Using the accounts and any other information source you may find
    relevant, address the following questions.

    1.1 Is Ensoft an SME, and what are the implications?

    1.2 What does Ensoft do? What is their website and how does it compare to, e.g., Microsoft’s
    for our valuation purposes?

    1.3 Where can Ensoft’s accounts and other information be found? How do these compare to
    Microsoft’s?

    1.4 Are there any corporate governance issues at Ensoft, and would that affect your analysis?

    1.5 What is Ensoft’s NOPLAT, ROIC and FCF?

    2. (McK Q2) Exhibit 11.16 presents the income statement and balance sheet for PartsCo, a
    supplier of machine parts.

    The company is expected to increase revenues by 8% annually for the next three years. Using
    the methodology outlined in Exhibit 11.4, forecast the next three years of income statements.

    Assume that the next three years’ forecast ratios are identical to this year’s ratios. Forecast
    depreciation as a percentage of the prior year’s PP&E, and interest as percentage of the prior
    year’s total debt.

    3. (McK Q3) Using the methodology outlined in Exhibit 11.11, forecast the operating items for
    the next three years of the balance sheets of PartsCo.

    Forecast each operating item as function of revenue, except inventory and accounts payable,
    which should be forecast as function of COGS. (You do not need to make the conversion into
    days.)

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    Seminar 5 N1591

    4. (McK Q4) Using the methodology outlined in Exhibits 11.12 and 11.13, forecast the financing
    items and remaining non-operating items on the balance sheets of PartsCo.

    Assume that excess cash remains at $ 377.6m, equity investments at $ 320m, short-term debt
    at $ 90m, long-term debt at $ 210m, no equity is raised and the firm maintains the same pay-
    out ratio as the current year.

    Use either Balancing Cash or Debt as plug to balance the balance sheet.

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    Seminar 5 N1591

    Multiple Choice Questions

    5. The explicit forecast period must be long enough for the company to reach a steady state.
    Which of the following is NOT a desirable property of that steady state?

    A. The growth rate rises above the required return on capital.


    B. The company earns a constant rate of return on existing capital.
    C. The company earns a constant rate of return on new capital invested.
    D. The company reinvests a constant proportion of its operating profits into the business each
    year.

    6. Which of the following are common pitfalls or mistakes in estimating continuing value?

    I. Naive base-year extrapolation.


    II. Naive over-conservatism.
    III. Purposeful over-conservatism.
    IV. Liquidation value over-conservatism.

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

    7. 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.

    B: When RONIC = WACC, the continuing-value formula is: CV = NOPLATt+1/WACC.

    8. If NOPLATt+1 = $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

    9. 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.

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    Seminar 5 N1591

    10. An analyst makes a five-year explicit forecast of revenues of a firm. During those five years,
    the firm is expected to grow between 10% and 12% per year. After that, the growth rate is
    expected to level off at 8%. Should the analyst use a naïve base-year extrapolation for the
    continuing value estimation? Why or why not?

    A. No, because it will likely underestimate FCF.


    B. No, because it will likely overestimate FCF.
    C. Yes, because it is the most proven method under the given circumstances.
    D. Yes, because it is the most proven method in all circumstances.

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