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Question
The interest rate for operating lease adjustments is usually higher than the firm’s cost of debt.
Answer
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The best method for understanding how much value a bank is creating in its different product lines is:
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Which of the following correctly ranks the sources of income for European banks over the period 1988–2013?
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The four-step approach for valuing cyclical companies requires a minimum of two scenarios. If an analyst is using only two scenarios, how should they be constructed?
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As long as international investors have access to an emerging market’s local investment opportunities, local prices will be based on an international cost of capital.
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In a two-scenario model of an emerging market, it is recommended that the analyst create a base-case set of forecasts and a set of forecasts associated with a period of economic distress. Which of the following best represents the range of probability weights to assign the economic distress scenario?
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For emerging markets, the recommended input for the risk-free rate for computing beta is:
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When calculating gross investments, it is appropriate to add the increase in the foreign-currency translation reserve to capital expenditures to obtain the actual cash spent on capital investments.
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An analyst should make financial projections of income statements and balance sheets for a valuation in a high-inflation environment by simply projecting all items on a nominal basis.
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In early years, for a given company with a positive profit, ROIC with capitalized R&D will be higher than that with expensed R&D.
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A firm that capitalizes R&D has more opportunity to manipulate short-term earnings compared to a firm that expenses R&D.
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Which of the following company types is most likely to have operating leases as an off-balance-sheet liability?
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Since interest costs, expected returns on plan assets, and amortization of losses are part of the compensation expenses for a firm, they should be considered to be a part of NOPLAT.
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If there is no line item for prepaid pension assets or unfunded pension liabilities on a firm’s balance sheet, this means the firm’s pension plan is fully funded.
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Analysts in the investment banking industry multiply rental expenses by 8 times to approximate asset value. Although based on reasonable assumptions, the method is very simple and can both overvalue and undervalue the leased assets.
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When computing cash flows for a company with operating leases, an analyst should add back the lease depreciation to NOPLAT.
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What are (1) the WACC before adjustment for leases and (2) the WACC after adjustment for leases? a) WACC before adjustment for leases = 8.63 percent; WACC after adjustment for leases = 6.98 percent. b) WACC before adjustment for leases = 6.63 percent; WACC after adjustment for leases = 6.98 percent. c) WACC before adjustment for leases = 6.93 percent; WACC after adjustment for leases = 8.63 percent. d) WACC before adjustment for leases = 8.63 percent; WACC after adjustment for leases = 8.98 percent.
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Although a company’s ROIC will change following the adjustment for operating leases, its valuation should not change.
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With respect to operating leases, adjusting the financial statements makes ROIC and free cash flow independent of capital structure choices, specifically whether to lease, own, or borrow.
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An analyst’s appropriate adjustments for operating leases would be to increase assets, increase liabilities, and increase operating income.
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List the three recommended steps in assessing the impact of nonoperating expenses and incorporating their information in cash flow forecasts.
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If litigation charges recur frequently and grow with revenue, the analyst should treat the charges as operating.
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Identify warranty reserves as operating or nonoperating and as an asset or a liability. Explain how the required treatment of warranty reserves determines the relationship between cash and accrual-based taxes.
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Human resources costs should be allocated to business units based on the number of employees in the units.
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CEO salaries should be allocated to business units based on the number of employees in the units.