SOLVED

11) For what reason is a higher discount rate is often used when performing Shareholder Value Analysis (SVA)? A) To weight future cash flows more heavily than current cash flows. B) When the desire is to project a more optimistic scenario. C) To avoid overestimating the value of the business to the shareholder. D) When returns from capital projects are not expected to be achieved in the short term. E) When factors that impact cash flows are less predictable. 12) Cardomaine Seaway Inc. is looking to make a share bid for Laker Transportation’s 20 million common shares. Laker is struggling to turn the company around and carry a debt at a market value of $30 million. Laker’s cost of capital is 9%. Sales revenue for this year is expected to be $50 million and Cardomaine believes Laker will be increasing it by 5% annually for the next four. Operating expenses are 75% of sales revenue with depreciation expenses equalling investment in replacement assets. Income taxes can be estimated at 24% of operating income. The company has published plans of additional asset investment at $5 million this year, $5 million next year and $7 million in each of the following three years. Working capital is 30% of sales revenue and the company expects to drop this by $3.2 million this year with additional declines of $3.2 in each of the following four years. What price per share would Cardomaine offer Laker’s shareholders that would leave them as well off as before? A) $2.76 B) $3.28 C) $4.13 D) $5.41 E) $6.35 13) What is a reason why supporters of SVA believe that EPS is not a valid measure of shareholder value? A) EPS does not include consideration of the interest earnings of lenders. B) EPS includes estimated future profits that are, as yet, unearned. C) EPS is based on market values rather than the more conservative book values. D) EPS does not consider the future value of the shares. E) EPS relies on share price rather than solely on quantifiable internal measures. 14) Why is the treatment of a loan in the SVA model is consistent with the long-term horizon of SVA? A) The book value of long-term liabilities is consistently used. B) Present value of planned future debt financing and a terminal value for estimates outside the planning range are used. C) The market value of debt used is consistent with the market value of the earnings represented by the discounted FCFs. D) Loans are assumed to be rolled over in perpetuity. E) The treatment of loan capital is a weakness as it is not consistent with the long-term horizon of SVA. 15) A company has a weighted average cost of capital of 11%, EBIT of $3.4 million, gross assets of $20.2 million, current liabilities of $6 million, and accumulated depreciation of $4 million. The company pays interest of $650,000 and has a tax rate of 34%. What is the company’s Economic Value Added (EVA)? A) $1.3 million B) $1.6 million C) $2.0 million D) $2.3 million E) $3.1 million 16) When is a company is successfully increasing shareholder’s wealth? A) Only when EVA is lower than the period before. B) When EVA is higher than market capitalization. C) When EVA is negative. D) When EVA stays within one z-score of mean earnings. E) When EVA is positive. 17)Â What is a common adjustment made to calculate EVA from a company’s audited financial statements? A) The addition of goodwill to total assets. B) The addition of restructuring costs to operating expenses. C) The subtraction of marketable securities’ income from operating expenses. D) The inclusion of advertising costs in total assets and its depreciation. E) The addition of an allowance for doubtful accounts to invested capital. 18) What is a significant disadvantage to EVA? A) Once calculated, it is difficult to interpret correctly. B) It can be unfairly biased by company size. C) It is not directly comparable to the EVA of another company. D) It is not directly comparable to the EVA of a previous period. E) It can be unfairly biased by the liquidity of the company. 19) Pelisse Packaging Ltd. has a cost of capital of 12%. The company’s balance sheet at year end shows current assets of $2.2 million, capital assets of $6.1 million, current liabilities at $1.3 million, long-term liabilities of $4.1 million, shareholders equity of $2.9 million. Its income statement for the year shows sales revenue of $5.1 million, cost of goods sold of $2.1 million, salaries of $500,000, marketing and promotions of $350,000, administration expense of $300,000, rent expense of $100,000, and depreciation of $100,000. Non-operating income and expenses included interest expense of $250,000 and new product development costs of $550,000. Income taxes amounts to $230,000. Marketing and promotions are expected to impact revenues in this year and next, and the results of the new product development for an infinite period. After performing the common adjustments to the accounts, what is the EVA for Pelisse? A) $563,600 B) $663,600 C) $833,600 D) $1,011,600 E) $1,550,000 20) What calculations always have to be made to the value of EVA to achieve the same value as SVA? A) Capital invested would be added to the NPV of future EVA flows from which the market value of debt would be subtracted. B) Find NPV of future EVA flows as these are equivalent to free cash flows, and then follow the same as calculating SVA. C) Since SVA is based on non-traditional accounting methods and EVA is based on traditional financial statements, the measures will always be incompatible. D) Delete adjustments to debt, assets and equity and follow the steps for finding SVA. E) Add the market value of debt to the NPV of future EVA flows.