Ch4 The Alchemy Of Stock Market Performance Full Test Bank - Valuation Measuring and Managing the Value of Companies 6th Edition Exam Pack by The book title does not provide the names of the authors.. DOCX document preview.
Chapter: Chapter 04: The Alchemy of Stock Market Performance
Multiple Choice
1. Which of the following represents the minimum horizon where the focus of managers on improving total returns to shareholders (TRS) to win performance bonuses will align their interests and the interests of their shareholders?
a) 3–5 years.
b) 6–9 years.
c) 10–15 years.
d) 16–20 years.
Response: []
True/False
2. Total returns to shareholders (TRS) equal dividends plus share repurchases.
Response: [Total returns to shareholders (TRS) represent the return earned by shareholders from distributions (dividends and share repurchases) and increases in share price.]
Multiple Choice
3. Which of the following are potential reasons why TRS over short periods of time may not reflect the actual performance of a company and its management?
I. A well-performing company may not deliver a high TRS if the expectations include knowledge of the performance.
II. When TRS is analyzed in its traditional way, it does not show the degree to which improvements in operations produced or increased the TRS.
III. Outside factors such as changing interest rates can affect TRS and be unrelated to the firm’s operations.
IV. TRS is difficult to calculate for short periods of time.
a) II and IV.
b) I and II.
c) II and III.
d) I, II, and III.
Response: []
4. Which of the following are frequently observed detrimental activities of managers on the “expectations treadmill”?
I. Increasing leverage.
II. Decreasing the weighted average cost of capital (WACC).
III. Pursuing risky major acquisitions.
IV. Pursuing unrealistic earnings growth.
a) I and II only.
b) I, III, and IV only.
c) II and IV only.
d) II, III, and IV only.
Response: []
True/False
5. The expectations treadmill is the dynamic behind the adage that a good company and a good investment may not be the same.
Response: []
6. The expectations treadmill refers to the fact that recent growth builds expectations of future growth.
Response: []
7. The expectations treadmill can be detrimental to total returns to shareholders (TRS) if the managers grow the company without keeping the ROIC above the cost of capital or if they make unnecessary acquisitions that do not create value.
Response: []
Multiple Choice
8. Which of the following is NOT one of the three components in the traditional approach’s three-component breakdown of total returns to shareholders?
a) Percent change in cash flow.
b) Percent change in earnings.
c) Percent change in P/E.
d) Percent change in dividend yield.
Response: []
9. Which of the following are problems with expressing total returns to shareholders (TRS) in the traditional three-component format?
I. It does not distinguish the source of earnings growth.
II. It excludes return from moves in the overall market.
III. It does not account for the impact of financial leverage.
IV. It does not recognize that dividend yield can affect future earnings.
a) I and II only.
b) I, III, and IV only.
c) II, III, and IV only.
d) III and IV only.
Response: []
True/False
10. The traditional approach to analyzing TRS treats the key components as if they were independent of each other, and this does not link TRS to the true underlying sources of value creation.
Response: []
Short Answer
11. List and describe the four-part decomposition of TRS that gives a clearer insight into how much of the measure derives from changes in operational performance.
2. What TRS would have been without any of the growth measured in the first component, which reflects the company’s stock market valuation at the beginning of the measurement period.
3. Changes in shareholders’ expectations about the company’s performance as measured by the change in its P/E or other earnings multiple.
4. The impact of financial leverage on TRS.]
True/False
12. Company Y can outperform Company Z on all key value drivers (e.g., growth and ROIC) but still deliver lower total returns to shareholders (TRS).
Response: [Company Z can have higher TRS than Company Y despite lower performance on key value drivers if the expectations were low enough for Company Z at the start of the period. For instance, suppose investors expect ROICs of 15 percent and 12 percent for Companies Y and Z, respectively. If Y achieves an ROIC of 15 percent and Z achieves an ROIC of 15 percent, then Company Z’s stock price will likely rise, while Company Y’s will likely stay the same.]
Multiple Choice
13. Given that TRS is not a clear measure of management performance, which of the following metrics should be used to gauge a company’s performance?
a) ROIC and growth.
b) ROIC, growth, and TRS performance relative to peers.
c) EPS and TRS.
d) None of the above.
Response: []
Use the following financials for the next question.
14. The enhanced TRS from performance is closest to:
a) –4.4 percent.
b) 3.1 percent.
c) 4.4 percent.
d) 8.4 percent.
Response: [
]
Use the following financials to answer the next question.
15. Total returns to shareholders is closest to:
a) 8.0 percent.
b) 9.5 percent.
c) 11.1 percent.
d) 15.5 percent.
Response: [TRS = (5.1/5.0 – 1) + (10.4/10.0 – 1) + (2.55/50 – 1) = 11.1%]
Use the following financials to answer Questions 16 through 19.
$ million | Base year | 1 year later |
|---|---|---|
Invested capital | $200.0 | $214.0 |
Earnings | $25.0 | $26.8 |
P/E | 10 | 10.3 |
Equity value | $250.0 | $275.0 |
Dividends | $10.0 | $11.0 |
16. What is the TRS from performance?
a) –2.0 percent.
b) 0.0 percent.
c) 1.4 percent.
d) 7.0 percent.
Response: [TRS from performance = (26.8/25.0 – 1) – {(0.07/0.125) * (25.0/250.0)} = 0.014]
17. What is the dividend yield?
a) 2.0 percent.
b) 4.4 percent.
c) 5.0 percent.
d) 7.0 percent.
Response: [Dividend yield = 11.0/250.0 = 0.044]
18. What is the zero-growth return?
a) 10.0 percent.
b) 14.4 percent.
c) 3.0 percent.
d) 7.0 percent.
Response: [Zero-growth return = 25.0/250.0 = 0.10]
19. What is the TRS?
a) 7.0 percent.
b) 3.0 percent.
c) 4.4 percent.
d) 14.4 percent.
Response: [TRS = 7.0% + 3.0% + 4.4% = 14.4% or TRS = 1.4% + 10.0% + 3.0% = 14.4%]
Use this information to answer the following three questions.
Suppose that on January 1, 2014, you bought 100 shares of M.Co for $100 per share with the expectation of receiving a perpetual dividend of $10 per share. On January 1, 2015, M.Co announces that it will increase its annual dividend to $20 per share. Upon announcement, the stock price rises to $200.
20. What was the expected return on the investment as on January 1, 2014?
a) 110 percent.
b) 10 percent.
c) 20 percent.
Response: []
21. If you sold the shares on January 1, 2015, what would be your return?
a) 110 percent.
b) 10 percent.
c) 20 percent.
Ans. [a]
Response: []
22. If an investor bought 100 shares of M. Co on January 1, 2015, what will be the expected return?
a) 110 percent.
b) 10 percent.
c) 20 percent.
Ans. [b]
Response: []
True/False
23. An effective compensation system of a company should focus on period to period changes in TRS performance rather than TRS relative to peers in the industry.
Response: [Instead of focusing primarily on a company’s TRS over a given period, effective compensation systems should focus on growth, ROIC, and TRS performance relative to peers.]
Document Information
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Valuation Measuring and Managing the Value of Companies 6th Edition Exam Pack
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