Seminar 2 N1591

Valuation of Companies and Cash Flow Generating Assets (N1591)

Autumn Term 2019/20

Seminar 2: ROIC (McK Chap 6)

Short Answer Questions

1. From a value creation perspective, is it more important for a company to know where to
compete or how to compete? That is, is it more important to play in the right markets or to be
the best player in your current market?

2. Why are Porter’s Five Forces relevant to ROIC?

3. List and briefly explain the five sources of price premiums. Why do they matter?

4. Explain the difference between ROIC excluding and ROIC including goodwill for US
companies: What does this difference imply, and why has it increased so much over the past
decade?

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Multiple Choice Questions

5. A firm’s additional cost for producing each additional unit of its product are essentially zero.
The best term for describing the firm’s product is that it is:

A. A superior good.
B. A normal good.
C. A scalable good.
D. An inferior good.

6. Given that a company charges $ 3.40 per unit, has a cost per unit of $ 1.80 and a tax rate
of 32%, and requires $ 16 of invested capital per unit, what is the ROIC?

A. 6.8%
B. 10.2%
C. 15.6%
D. 30.3%

7. Which of the following are sources of competitive advantage that allow a firm to charge a
price premium?

I. Quality.
II. Customer lock-in.
III. Innovative products.
IV. Rational price discipline.

A. I and II only.
B. I, III, and IV only.
C. II and III only.
D. I, II, III, and IV.

8. Which of the following are strategies that will most likely support a sustainable ROIC?

I. Extend life cycles of products and services.

II. Offer generic products.
III. Implement a temporary cost-reduction programme.
IV. Use established brands to launch new products.

A. I and IV only.
B. I, III, and IV only.
C. II and III only.
D. I, II, III, and IV.

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9. Which factors are likely to contribute to a sustained high ROIC?

I. Length of product life cycle.

II. Growth.
III. Difficulty of imitation.
IV. Product renewal.

A. II, III and IV only.

B. I, III, and IV only.
C. I, II and III only.
D. I, II, III, and IV.