Deck 4: The Alchemy of Stock Market Performance

Question 1

What is the TRS?

A)7.0 percent.
B)3.0 percent.
C)4.4 percent.
D)14.4 percent.

Answer 1

D

Question 2

What is the TRS from performance?

A)-2.0 percent.
B)0.0 percent.
C)1.4 percent.
D)7.0 percent.

Answer 2

C

Question 3

The traditional approach to analyzing TRS treats the key components as if they were independent of each other,and this does not link TRS to the true underlying sources of value creation.

Answer 3

True

Question 4

Which of the following are problems with expressing total returns to shareholders (TRS )in the traditional three-component format?
I.It does not distinguish the source of earnings growth.
II.It excludes return from moves in the overall market.
III.It does not account for the impact of financial leverage.
IV.It does not recognize that dividend yield can affect future earnings.

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

Question 5

Company Y can outperform Company Z on all key value drivers (e.g. ,growth and ROIC )but still deliver lower total returns to shareholders (TRS).

Question 6

What is the dividend yield?

A)2.0 percent.
B)4.4 percent.
C)5.0 percent.
D)7.0 percent.

Question 7

Which of the following is NOT one of the three components in the traditional approach's three-component breakdown of total returns to shareholders??

A)Percent change in cash flow.
B)Percent change in earnings.
C)Percent change in P/E.
D)Percent change in dividend yield.

Question 8

Which of the following represents the minimum horizon where the focus of managers on improving total returns to shareholders (TRS )to win performance bonuses will align their interests and the interests of their shareholders?

A)3-5 years.
B)6-9 years.
C)10-15 years.
D)16-20 years.

Question 9

The expectations treadmill can be detrimental to total returns to shareholders (TRS )if the managers grow the company without keeping the ROIC above the cost of capital or if they make unnecessary acquisitions that do not create value.

Question 10

Suppose that on January 1, 2014, you bought 100 shares of M.Co for $100 per share with the expectation of receiving a perpetual dividend of $10 per share. On January 1, 2015, M.Co announces that it will increase its annual dividend to $20 per share. Upon announcement, the stock price rises to $200.

-What was the expected return on the investment as on January 1,2014?

A)110 percent.
B)10 percent.
C)20 percent.

Question 11

The expectations treadmill is the dynamic behind the adage that a good company and a good investment may not be the same.

Question 12

List and describe the four-part decomposition of TRS that gives a clearer insight into how much of the measure derives from changes in operational performance.

Question 13

Which of the following are potential reasons why TRS over short periods of time may not reflect the actual performance of a company and its management?
I.A well-performing company may not deliver a high TRS if the expectations include knowledge of the performance.
II.When TRS is analyzed in its traditional way,it does not show the degree to which improvements in operations produced or increased the TRS.
III.Outside factors such as changing interest rates can affect TRS and be unrelated to the firm's operations.
IV.TRS is difficult to calculate for short periods of time.

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

Question 14

What is the zero-growth return?

A)10.0 percent.
B)14.4 percent.
C)3.0 percent.
D)7.0 percent.

Question 15

Use the following financials to answer the next question.
$$\begin{array} { | l | r | r | } \hline \text { \$ mi llion } & \text { Base Year } & \text { 1 year Later } \\\hline \begin{array} { l } \text { Invested } \\\text { capital }\end{array} & \text { \$50 } & \$ 54 \\\hline \text { Earnings } & 5.0 & 5.1 \\\hline \text { P/E } & 10.0 & 10.4 \\\hline \text { Dividends } & 2.5 & 2.55 \\\hline \text { Equity Value } & 96 & 113.4 \\\hline\end{array}$$

-Total returns to shareholders is closest to:

A)8.0 percent.
B)9.5 percent.
C)11.1 percent.
D)15.5 percent.

Question 16

Total returns to shareholders (TRS )equal dividends plus share repurchases.

Question 17

The expectations treadmill refers to the fact that recent growth builds expectations of future growth.

Question 18

Which of the following are frequently observed detrimental activities of managers on the "expectations treadmill"?
I.Increasing leverage.
II.Decreasing the weighted average cost of capital (WACC).
III.Pursuing risky major acquisitions.
IV.Pursuing unrealistic earnings growth.?

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

Question 19

Use the following financials for the next question.
$\begin{array} { | l | r | r | } \hline \text { \$ mi llion } & \text { Base Year } & \text { 1 year L ater } \\\hline \begin{array} { l } \text { Invested } \\\text { capital }\end{array} & \$ 100 & \$ 104 \\\hline \text { Earnings } & 8 & 9 \\\hline \text { P/E } & 12 & 12.6 \\\hline \text { Dividends } & 4 & 4.1 \\\hline \text { Equity Value } & 96 & 113.4 \\\hline\end{array}$

-The enhanced TRS from performance is closest to:

A)-4.4 percent.
B)3.1 percent.
C)4.4 percent.
D)8.4 percent.

Question 20

Given that TRS is not a clear measure of management performance,which of the following metrics should be used to gauge a company's performance?

A)ROIC and growth.
B)ROIC,growth,and TRS performance relative to peers.
C)EPS and TRS.
D)None of the above.

Question 21

An effective compensation system of a company should focus on period to period changes in TRS performance rather than TRS relative to peers in the industry.

Question 22

Suppose that on January 1, 2014, you bought 100 shares of M.Co for $100 per share with the expectation of receiving a perpetual dividend of $10 per share. On January 1, 2015, M.Co announces that it will increase its annual dividend to $20 per share. Upon announcement, the stock price rises to $200.

-If an investor bought 100 shares of M.Co on January 1,2015,what will be the expected return?

A)110 percent.
B)10 percent.
C)20 percent.

Question 23

Suppose that on January 1, 2014, you bought 100 shares of M.Co for $100 per share with the expectation of receiving a perpetual dividend of $10 per share. On January 1, 2015, M.Co announces that it will increase its annual dividend to $20 per share. Upon announcement, the stock price rises to $200.

-If you sold the shares on January 1,2015,what would be your return?

A)110 percent.
B)10 percent.
C)20 percent.