SUSTAINABILITY AND STRATEGIC AUDIT

True or False

1. The evaluation of suitability is also called the criteria of inconsistency.

2. Acceptability is concerned with whether an alternative address the key issues

relating to the strategic position of the company.

3. Feasibility is concerned with whether a company has the resources and

capabilities to deliver a strategy

4. CFROI assumes that the financial markets set the prices of stocks based on a

company's cash flow, rather than primarily on earnings or other metrics.

5. CFROI is a registered trademark of HOLT, a unit of Credit Suisse, the Swiss

bank.

6. The CFROI is a measure of the dollar surplus value created by an investment or

a portfolio of investments.

7. The cash flow return on investment (CFROI) for a firm is the internal rate of

return on existing investments, based on real cash flows.

8. If the gross investment in existing assets is reduced, the CFROI may be

increased.

9. Another term for Economic Value added is Economic profit

10. Calculating invested capital is an important step in finding economic profit

because a key idea underlying this metric is charging the company for its use of

capital.

11. Economic profit is the profits (or returns) our company must generate in order to

satisfy the lenders and shareholders who have "rented" capital to the company.

12. EVA is a very useful tool for comparing the returns generated by the stock under

consideration and stocks of other companies of similar industries.

13. TSR is calculated in case of publicly traded companies, in a divisional or

individual level.

14. TSR is expressed as a percentage, thus the figure is readily comparable with

industry benchmarks or companies in the same sector

15. There are two basic ways that an Investor makes money in stocks - capital gains

and current income (dividends).

Multiple Choice Questions

1. These criteria attempt to measure the extent to which the proposed strategies fit

the situation identified in the strategic analysis

a. Criteria of Suitability

b. Criteria of Feasibility

c. Criteria of Sustainability

d. Criteria of Acceptability

2. The following are the factors to be considered in Suitability, except

a. Environment

b. Capabilities

c. Expectations

d. Scenarios

3. These criteria, assess the practical implementation and working of the strategy

a. Criteria of Suitability

b. Criteria of Feasibility

c. Criteria of Sustainability

d. Criteria of Acceptability

4. This measure highlights net cash flows from operations rather than reported

income and produces a rate of return that can be compared with alternative

company or market rates of return (the cost of capital)

a. Cash flow return on investment

b. Cash flow return of investment

c. Economic Value Added

d. Total Shareholders Return

5. The __________ for a firm is the internal rate of return on existing

investments, based on real cash flows.

a. cash flow return on investment (CFROI)

b. Economic Value Added (EVA)

c. Total Shareholders Return

d. Return on Investment

6. The elements that must be considered in using EVA are as follows, except

_________.

a. Reasonableness of earnings

b. Appropriate cost of Capital

c. Volatility of the market

d. None of the above

7. _________ is the total amount returned by an investment to the investor

a. cash flow returns on investment (CFROI)

b. Economic Value Added (EVA)

c. Total Shareholders Return

d. Return on Investment

8. The following statements are correct for the Economic Value Added (EVA),

except,

a. The most conventional way to determine the value of the asset is through

its economic value added

b. Economic value Added (EVA) is a convenient metric in evaluating

investment as it quickly measures the ability of he firm to support its cost

of capital using its earnings

c. EVA is the excess of the company's equity after deducting the cost of

capital

d. The general concept here is that higher EVA is better for the firm

9. Ernesto, Inc. has projected average earnings every year of P 100 million. Debt

to Equity Ratio is 3:1. After tax cost of debt is 5% while cost of equity is 10%. The

Board of directors of the company decided to sell the company for P 1 Billion.

Compute for the Economic Value Added. (EVA).

a. P37.5 Million

b. P 50 Million

c. P 0

d. P 25 Million

10. SPRO Corp is planning to expand and new projects is expected to have an EVA

of P200,000. The annual coast of capital at 10% amounts to P400,000. What is

the average monthly earning projected for this project?

a. 600 000

b. 50 000

c. 60 000

d. 500 000

Problem Solving

Show your solutions.

1. Quantum and Time company is engaged in merchandising business. During the

year 2020, the company generated a net income of 45 million. In the process it

incurred depreciation of 3 million & amortization of 2 million, while accounts

receivables increased by 2 million, inventory decreased by 3 million and trade

payables increased by 2 million. It reported total assets, total current liabilities,

and total non-current liabilities of 200million, 50 million and 75 million

respectively as on the balance sheet date. Calculate the CFROI of the company

based on the given information.

2. You have been asked by an investor to compute for the Economic Value Added

of the companies he is considering to invest into as follows:

E V A

Net Investment 55,000,000 60,000,000 70,000,000

WACC 8% 9% 10%

Net Income after Tax 3,510,000 2,750,000 5,230,0000

Net Operating Income

After Tax 4,550,000 5,450,000 6,850,000

a. Which Company under consideration has the highest EVA

b. Which companies would you recommend for investment, Why?

c. What is the EVA of each companies under consideration?

3. A publicly traded company that manufactures medical supplies wishes to

evaluate its overall performance on the market compared to its competitors. Their

beginning stock price for the year was $3.78 per share. Their ending stock price

was 5.48 per share and the average price per share was 4.63. They paid 1.30

in dividends to each share with a growth rate of 5%. What is their total

shareholder return rate?

VALUATION METHOD

Show your solution.

Exercise No. 1

Assume that West Corp shares returns required in the market by investors are a function of two

economic factors: S1 is 0.04 and S2 is 0.01, where risk-free rate is 7%. West shares have

reaction coefficient to the factors, such that S1 = 1.3 and S2 = 0.90.

Compute the expected rate of return using the arbitrage pricing model.

Exercise No. 2

Assume that the market price of West Corp share is P40. The dividend to be paid at the end of

the coming year is P4 per share; it is expected to grow at a constant annual growth of 6%.

Compute the cost of the ordinary share of West Corp.

Exercise No. 3

Assume that a company's shares has intrinsic value P125 per share and is trading at P130. This

company requires an 6% minimum rate of return and will pay a dividend per share next year

which is expected to increase by 4% annually.

a. How much the company will pay for dividend per share?

b. What is the status of the shares in the market?

Exercise No. 4

Mr. A wants to borrow funds from B. The risk-free rate is 6% and current inflation is 2%. It is

expected that the inflation is expected to grow at 3%. B finds a relevant margin of 4% on the

loan.

Compute:

a. Risk free rate

b. New nominal risk free rate

c. Interest rate for the loan