Deck 17: Valuation by Parts

Question 1

Which of the following correctly describes how to determine the beta for a business unit within a multiple-business corporation?

A)Use the average of the equity betas for the industry.
B)Use the beta of the multi-unit enterprise.
C)Relever the unlevered sector median beta using the capital structure of the unit.
D)Relever the unlevered sector median beta using the capital structure of the entire multiple-business corporation.

Answer 1

C

Question 2

Which of the following are steps in valuing a multibusiness company by parts?
I.Building financial statements by business unit,based on incomplete information if necessary.
II.Allocating CEO salaries to business units.
III.Estimating the weighted average cost of capital (WACC )by business unit.
IV.Testing the value based on multiples of peers.

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

Answer 2

C

Question 3

CEO salaries should be allocated to business units based on the number of employees in the units.

Answer 3

False

Question 4

Which of the following are issues an analyst typically encounters when creating financial statements for business units?
I.Allocating corporate overhead costs.
II.Dealing with intercompany transactions.
III.Understanding financial subsidiaries.
IV.Processing overwhelming amounts of public information.

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

Question 5

Financing subsidiaries should be valued separately from other business units.

Question 6

If an analyst estimates the NOPLAT for each of the divisions in a three-division firm at $50 million,$30 million,and $20 million,respectively,it's safe to assume that the divisions contribute 50,30,and 20 percent,respectively,to overall firm value.

Question 7

For multibusiness units,consolidated corporate results:

A)Must eliminate internal revenues,costs,and profits.
B)Are not possible.
C)Are computed by summing the inputs for each accounting entry across units.
D)Are computed by top-down algorithms that give estimated values based on the economic profit or cost of each entry.

Question 8

Using EBITA instead of NOPLAT is a best practice for testing the sum-of-the-parts valuation based on multiples of peers.

Question 9

As CFO,you are trying to allocate investment funds across your three-division firm.You observe the revenues last year for Divisions A,B,and C as $1.0 billion,$4.0 billion,and $5.0 billion,respectively.You should therefore allocate investment budgets of 10,40,and 50 percent,respectively,of the overall firm's investment budget to Divisions A,B,and C.

Question 10

Which of the following are issues in the creation of the financial statements for business units?
I.Allocating corporate overhead costs.
II.Dealing with intercompany transactions.
III.Estimating unit betas.
IV.Dealing with incomplete information when using public information.

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

Question 11

There is undisputed evidence that conglomerate firms trade at a discount relative to a portfolio of pure-play firms.

Question 12

Human resources costs should be allocated to business units based on the number of employees in the units.

Question 13

Eliminating outliers is a best practice for testing the sum-of-the-parts valuation based on multiples of peers.

Question 14

Since many firms' valuations by a sum-of-the-parts multiples methodology are greater than the current market valuation of these firms,one can conclude that a breakup of these firms would add value for shareholders.

Question 15

Which of these are best practices for testing valuation by parts based on multiples of peers?
I.Eliminating outliers.
II.Using means of all peers.
III.Using medians of close peers.
IV.Using NOPLAT instead of EBITA.

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