1.Explain the difference between NOPAT and Net Profit (Net Income). Which one is a better to measure the performance of
Posted: Wed Mar 30, 2022 3:43 pm
1.Explain the difference between NOPAT and Net Profit (Net
Income). Which one is
a better to measure the performance of a company’s operation and
why?
2. Suppose a firm has Revenues of $11.0M, COGS (excluding
depreciation) of $5.0M,
other operating expenses of $1.0M, depreciation of $2.0M, interest
expense of
$1.0M and a tax rate of 30%. Calculate (showing) EBITDA, EBIT,
NOPAT and Net
Income. Which one is a better proxy for FCFF (considering that
investments in
fixed assets in a stable company tend not to differ much from
depreciation), and
why have you excluded the other alternatives?
3. What is FCFF; what are its components (sources of cash) and
what are its main
uses? Why are interest charges not deducted when computing FCFF,
and how do
FCFF and FCFE differ? Do not answer with formulas, but with your
own words.
4. Define MVA and EVA and explain the difference between them.
Secondly, how
does EVA differ from accounting measures of profit, especially in
regard to the
treatment of the cost of equity?
5. Explain the concepts of business risk and financial risk, and
how the presence of
the latter magnifies the first. Relatedly, explain both the
expected advantages and
disadvantages of financial leverage regarding the relationship
between risk and
return.
6. If the CAPM held, investors should be concerned only with a
project’s market-risk.
Explain how the existence of bankruptcy and asymmetric information
(both of which
violate CAPM assumptions) implies that stand-alone risk and
corporate risk
should also be of investors’ concern.
Income). Which one is
a better to measure the performance of a company’s operation and
why?
2. Suppose a firm has Revenues of $11.0M, COGS (excluding
depreciation) of $5.0M,
other operating expenses of $1.0M, depreciation of $2.0M, interest
expense of
$1.0M and a tax rate of 30%. Calculate (showing) EBITDA, EBIT,
NOPAT and Net
Income. Which one is a better proxy for FCFF (considering that
investments in
fixed assets in a stable company tend not to differ much from
depreciation), and
why have you excluded the other alternatives?
3. What is FCFF; what are its components (sources of cash) and
what are its main
uses? Why are interest charges not deducted when computing FCFF,
and how do
FCFF and FCFE differ? Do not answer with formulas, but with your
own words.
4. Define MVA and EVA and explain the difference between them.
Secondly, how
does EVA differ from accounting measures of profit, especially in
regard to the
treatment of the cost of equity?
5. Explain the concepts of business risk and financial risk, and
how the presence of
the latter magnifies the first. Relatedly, explain both the
expected advantages and
disadvantages of financial leverage regarding the relationship
between risk and
return.
6. If the CAPM held, investors should be concerned only with a
project’s market-risk.
Explain how the existence of bankruptcy and asymmetric information
(both of which
violate CAPM assumptions) implies that stand-alone risk and
corporate risk
should also be of investors’ concern.