FBE 421 MIDTERM QUESTIONS WITH CORRECT ANSWERS
Relationship between Growth, ROIC and Cash Flow - CORRECT ANSWER✅✅✅Growth and ROIC are
the drivers of value, lead to cash flow which leads to value
Guiding Principal of value creation - CORRECT ANSWER✅✅✅If there is a positive spread between
ROIC and WACC, new growth creates value
Examples of Moats - CORRECT ANSWER✅✅✅Low cost producer, High Switching cost, The network
effect, Intangible assets
Buffett's Principles for outstanding business - CORRECT ANSWER✅✅✅High returns on Invested
capital and can reinvest at a high rate, has a moat, outstanding management or is powerfully positioned
ROIC Definition - CORRECT ANSWER✅✅✅focuses on the operations and strategy, not financial
leverage or non-operating items
ROIC Formula - CORRECT ANSWER✅✅✅NOPLAT/Invested Capital
NOPLAT equation - CORRECT ANSWER✅✅✅Operating income x (1 - tax rate)
Why isn't interest expense included in FCF? - CORRECT ANSWER✅✅✅we are interested in the cash
flow generated by the assets of the project, interest paid is a component of cash flow to creditors, not
cash flow from assets
Conservation of Value Principle - CORRECT ANSWER✅✅✅anything that doesn't increase cash flows
doesn't create value, changing the size of the company or structure doesn't change the value unless
there is tax deductibility of interest expense (changing size of pie)
Intrinsic value and Market value are driven by - CORRECT ANSWER✅✅✅Growth and ROIC,
, How do people take advantage of market deviations - CORRECT ANSWER✅✅✅issuing additional
shares to get more capital at a high valuation, repurchase shares at low prices, acquire companies with
stock at high prices, divesting a company when trading and M&A transaction multiples are high
P/E10 Ratio - CORRECT ANSWER✅✅✅P/E ratio averaging the earnings over the past 10 years
Cash from operations - CORRECT ANSWER✅✅✅generated from selling products
Cash from Investing - CORRECT ANSWER✅✅✅cash spent on purchasing assets less cash received
from selling assets
Cash from Financing - CORRECT ANSWER✅✅✅Cash transactions with Claimants
Depreciation (cash flows) - CORRECT ANSWER✅✅✅a source of cash
Accounts receivable (cash flows) - CORRECT ANSWER✅✅✅Use of Cash
Solvency and Liquidity Ratios - CORRECT ANSWER✅✅✅current ratio, quick ratio, cash ratio
Current ratio - CORRECT ANSWER✅✅✅current assets/current liabilities
Quick ratio - CORRECT ANSWER✅✅✅(Cash + marketable securities + Accounts receivable)/ (current
Liabilities)
Long term solvency ratios - CORRECT ANSWER✅✅✅Debt/Ebitda, equity multiplier, TIE ratio, cash
coverage
Debt/EBITDA Ratio - CORRECT ANSWER✅✅✅(Short + Long Term Debt) / EBITDA
Equity Multiplier - CORRECT ANSWER✅✅✅Total Assets/Total Equity
Relationship between Growth, ROIC and Cash Flow - CORRECT ANSWER✅✅✅Growth and ROIC are
the drivers of value, lead to cash flow which leads to value
Guiding Principal of value creation - CORRECT ANSWER✅✅✅If there is a positive spread between
ROIC and WACC, new growth creates value
Examples of Moats - CORRECT ANSWER✅✅✅Low cost producer, High Switching cost, The network
effect, Intangible assets
Buffett's Principles for outstanding business - CORRECT ANSWER✅✅✅High returns on Invested
capital and can reinvest at a high rate, has a moat, outstanding management or is powerfully positioned
ROIC Definition - CORRECT ANSWER✅✅✅focuses on the operations and strategy, not financial
leverage or non-operating items
ROIC Formula - CORRECT ANSWER✅✅✅NOPLAT/Invested Capital
NOPLAT equation - CORRECT ANSWER✅✅✅Operating income x (1 - tax rate)
Why isn't interest expense included in FCF? - CORRECT ANSWER✅✅✅we are interested in the cash
flow generated by the assets of the project, interest paid is a component of cash flow to creditors, not
cash flow from assets
Conservation of Value Principle - CORRECT ANSWER✅✅✅anything that doesn't increase cash flows
doesn't create value, changing the size of the company or structure doesn't change the value unless
there is tax deductibility of interest expense (changing size of pie)
Intrinsic value and Market value are driven by - CORRECT ANSWER✅✅✅Growth and ROIC,
, How do people take advantage of market deviations - CORRECT ANSWER✅✅✅issuing additional
shares to get more capital at a high valuation, repurchase shares at low prices, acquire companies with
stock at high prices, divesting a company when trading and M&A transaction multiples are high
P/E10 Ratio - CORRECT ANSWER✅✅✅P/E ratio averaging the earnings over the past 10 years
Cash from operations - CORRECT ANSWER✅✅✅generated from selling products
Cash from Investing - CORRECT ANSWER✅✅✅cash spent on purchasing assets less cash received
from selling assets
Cash from Financing - CORRECT ANSWER✅✅✅Cash transactions with Claimants
Depreciation (cash flows) - CORRECT ANSWER✅✅✅a source of cash
Accounts receivable (cash flows) - CORRECT ANSWER✅✅✅Use of Cash
Solvency and Liquidity Ratios - CORRECT ANSWER✅✅✅current ratio, quick ratio, cash ratio
Current ratio - CORRECT ANSWER✅✅✅current assets/current liabilities
Quick ratio - CORRECT ANSWER✅✅✅(Cash + marketable securities + Accounts receivable)/ (current
Liabilities)
Long term solvency ratios - CORRECT ANSWER✅✅✅Debt/Ebitda, equity multiplier, TIE ratio, cash
coverage
Debt/EBITDA Ratio - CORRECT ANSWER✅✅✅(Short + Long Term Debt) / EBITDA
Equity Multiplier - CORRECT ANSWER✅✅✅Total Assets/Total Equity
