Topic I. Foundations of Value Flashcards Preview

Corporate Valuation > Topic I. Foundations of Value > Flashcards

Flashcards in Topic I. Foundations of Value Deck (14)
Loading flashcards...
1

What is the primary goal of a business? 

To maximize economic profit.

2

What is economic profit?

The difference between the total revenue received by the firm from its sales and the total opportunity costs of all the resources used by the firm.

3

What is the revenue-based equation for economic profit?

Revenues

- Explicit Costs

- Opportunity Costs

Economic Profit

4

What is the ROIC-based equation for economic profit?

Economic Profit = (ROIC - WACC)*(Amount Invested)

5

How do you calculate ROIC?

ROIC = NOPAT / Invested Capital 

6

What is the equation for NOPAT?

NOPAT = Gross Profit - (Operating Expenses+Taxes)

7

Does NOPAT included changes in net working capital

No! Does not include changes in net working capital

8

Does NOPAT include depreciaiton and amortization

Yes. It includes non-cash expenses such as depreciation and amortization

 

9

Does NOPAT include capital expenditures

No! Does not include capital expenditures

10

What is the equation for ROIC and, using that equation, how do you increase ROIC?

Increase by:

  • Reducing tax rate
  • Increasing Price/Unit
  • Decreasing Cost/Unit
  • Lowering Invested Capital/Unit

11

What are the three primary sources of revenue growth?

  • New products (portfolio growth)
  • Gains in market share
  • M&A

12

What are the two ways to improve cash flow?

  • Increase ROIC
  • Increase Revenue through Revenue Growth 

13

What is the equation relating Value to:

  • NOPAT
  • ROIC
  • WACC
  • Growth (g)

14

Why is sustaining growth so hard?

“Sustaining growth is difficult because most product markets have natural life cycles. The market for a product—which means the market for a narrow product category sold to a specific customer segment in a specific geography—typically follows an S-curve over its life cycle until maturity,”