Chapter 17 Valuation By Parts Exam Questions - 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 17: Valuation by Parts
Multiple Choice
1. Which of the following are issues in the creation of the financial statements for business units?
I. Allocating corporate overhead costs.
II. Dealing with intercompany transactions.
III. Estimating unit betas.
IV. Dealing with incomplete information when using public information.
a) I and II only.
b) II and IV only.
c) I, II, and IV only.
d) II, III, and IV only.
Response: []
2. For multibusiness units, consolidated corporate results:
a) Must eliminate internal revenues, costs, and profits.
b) Are not possible.
c) Are computed by summing the inputs for each accounting entry across units.
d) Are computed by top-down algorithms that give estimated values based on the economic profit or cost of each entry.
Response: []
3. Which of the following correctly describes how to determine the beta for a business unit within a multiple-business corporation?
a) Use the average of the equity betas for the industry.
b) Use the beta of the multi-unit enterprise.
c) Relever the unlevered sector median beta using the capital structure of the unit.
d) Relever the unlevered sector median beta using the capital structure of the entire multiple-business corporation.
Response: []
4. Which of the following are steps in valuing a multibusiness company by parts?
I. Building financial statements by business unit, based on incomplete information if necessary.
II. Allocating CEO salaries to business units.
III. Estimating the weighted average cost of capital (WACC) by business unit.
IV. Testing the value based on multiples of peers.
a) I and II only.
b) I and III only.
c) I, III, and IV only.
d) I, II, III, and IV.
Response: []
5. Which of the following are issues an analyst typically encounters when creating financial statements for business units?
I. Allocating corporate overhead costs.
II. Dealing with intercompany transactions.
III. Understanding financial subsidiaries.
IV. Processing overwhelming amounts of public information.
a) I and II only.
b) II and III only.
c) I, II, and III only.
d) I, II, III, and IV.
Response: []
6. Which of these are best practices for testing valuation by parts based on multiples of peers?
I. Eliminating outliers.
II. Using means of all peers.
III. Using medians of close peers.
IV. Using NOPLAT instead of EBITA.
a) I and II only.
b) I and III only.
c) III and IV only.
d) I, III, and IV only.
Response: []
True/False
7. CEO salaries should be allocated to business units based on the number of employees in the units.
Response: []
8. Human resources costs should be allocated to business units based on the number of employees in the units.
Response: []
9. Financing subsidiaries should be valued separately from other business units.
Response: []
10. There is undisputed evidence that conglomerate firms trade at a discount relative to a portfolio of pure-play firms.
Response: []
11. If an analyst estimates the NOPLAT for each of the divisions in a three-division firm at $50 million, $30 million, and $20 million, respectively, it’s safe to assume that the divisions contribute 50, 30, and 20 percent, respectively, to overall firm value.
Response: [This is not an appropriate technique to use unless the ROIC and growth projections for the three divisions are all the same, which is quite unlikely.]
12. As CFO, you are trying to allocate investment funds across your three-division firm. You observe the revenues last year for Divisions A, B, and C as $1.0 billion, $4.0 billion, and $5.0 billion, respectively. You should therefore allocate investment budgets of 10, 40, and 50 percent, respectively, of the overall firm’s investment budget to Divisions A, B, and C.
Response: [This is not an appropriate technique to use unless the ROIC and growth projections for the three divisions are all the same, which is quite unlikely. Funds should be allocated based on the ROIC and growth projections.]
13. Eliminating outliers is a best practice for testing the sum-of-the-parts valuation based on multiples of peers.
Response: []
14. Using EBITA instead of NOPLAT is a best practice for testing the sum-of-the-parts valuation based on multiples of peers.
Response: [NOPLAT-based multiples are preferred over EBITA-based multiples, as the latter can be distorted by tax differences across companies.]
15. Since many firms’ valuations by a sum-of-the-parts multiples methodology are greater than the current market valuation of these firms, one can conclude that a breakup of these firms would add value for shareholders.
Response: [One needs to be careful in jumping to the conclusion in the statement. First, oftentimes the valuation done using the sum-of-the-parts methodology is done incorrectly. It's quite common for analysts to value divisions based on top-peer multiples rather than multiples for close peers. Second, the academic evidence on whether a conglomerate firm trades at a discount relative to the sum of the parts is mixed.]
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Valuation Measuring and Managing the Value of Companies 6th Edition Exam Pack
By The book title does not provide the names of the authors.