Question

1. Describe an action that may look impressive but does not create value?

2. What is the relationship between value and risk?

3. What is the expectations treadmill? And what should practicing managers do about this?

4. Specifically from the book, beside the tax rate, what are the other two drivers of ROIC?

5. How would you estimate the sustainability of a firm’s competitive advantage?

6. What does the empirical evidence (cited in the book) say about the ability of firms to sustain ROIC over time?

7. Per the book, what can managers do to exploit difference between the intrinsic value and the market price?

8. What are the drivers of growth?

9. What does the empirical evidence (cited in the book) say about the ability of individual firms to sustain growth over time?

10. Besides the enterprise discounted cash flow model, there are other models like economic profit, adjusted present value, capital cash flow model and the cash flow to equity model. Are these different models that arrive at different valuation or (if done correctly) will these models arrive at the same valuation?

11. What are we doing when we reorganize the financial statements? Separating what from what?

12. I make stereos and have inventory, operating cash, excess cash, accounts receivable, and long term investments in treasuries, which of these assets should be removed to get invested capital?

13. I have cash, accounts payable, inventory, long-term debt and accrued expenses. Which of these are operating liabilities? And what do we do with operating liabilities to get invested capital? Why?

14. I have cash, accounts payable, inventory, long-term debt, accrued expenses, unfunded pension obligations, and current portion of long term debt. Which of these are non-operating liabilities?

15. I have sales, cost of goods sold, selling expenses, general and administrative expenses, interest expense, and interest revenue. What items should be removed to calculate NOPLAT?

16. Is NOPLAT a before tax or after tax amount?

17. In words (starting with NOPLAT) what do we add or subtract to/from NOPLAT to get to free cash flow?

18. What ratio would better indicate if the company is successful in implementing a strategy based upon product differentiation along some feature that the customer cares about – the asset turnover ratio or the profit margin?

19. What ratio would better indicate if the company is successful in implementing a strategy based upon capacity control and not overspending on plant, property and equipment, and uses lean manufacturing techniques like just in time inventory, or only stocks enough product to meet demand? The profit margin or the asset turnover ratio.

20. Is an increase in working capital a source or use of funds? (Pick one)

21. XYZ company earns $1100 in NOPLAT, working capital increases by $300, it has $150 in depreciation, and $300 in capital investments (plant, property and equipment). Nothing else happens in the capital investments account. What is XYZ’s free cash flow?

Answer 1

1).Overemphasis on Efficiency, Systems & processes.

Rather emphasis should be done on Education & Awareness and wanting to create value rather than being forced to do so.

2). Risk can be both a threat to a firm's financial health and an opportunity to get ahead of the competition. Risk is defined as systematic and non-diversifiable risk and its effect on value are isolated to the discount rate. Higher the discount rate, Lower will be the Value & Vice-versa.

3).The performance of the company and that of management are frequently measured by total returns to shareholders (TRS). This measure can be computed through any increase in the share price over a given period of time with the sum of dividends paid over the period. Practicing managers should adopt a predictable Revenue Growth Methodology along with other emerging best practices. The emphasis should be on revenue growth, not profit optimization, because both public and private markets place a higher value on revenue growth than they do on profit growth.

4). Operating Profit and Operating Capital

ROIC= NOPAT/ Invested Capital

NOPAT= Net Operating Profit after taxes

Invested Capital= Company's debt and equity

5). A Firm can gain a competitive advantages on two bases:

a). Cost Leadership b).Differentiation

   For estimating the sustainability, the factors which should be kept in mind are:

1). Superior and long-lasting performance

2). Long Term pro active environment friendly approach

3). Consistency

4). Economical, Environmental & Social