Quiz for Lecture 3 Your Name __________________ Your CWID __________________ 1. Which of the following would not cause an increase in net operating working capital? a. Inventory increases. b. Accounts receivable increases. c. Short-term investments increase. d. Accounts payables decrease. e. Accruals decrease. 2. Harmeling Enterprises experienced a decline in net operating profit after taxes (NOPAT). Which of the following definitely cannot help explain this decline? a. Sales revenues decreased. b. Costs of goods sold increased. c. Depreciation increased. d. Interest expense increased. e. Taxes increased. 3. Which of the following best describes free cash flow? a. Free cash flow is the amount of cash flow available for distribution to shareholders after all necessary investments in operating capital have been made. b. Free cash flow is the amount of cash flow available for distribution to all investors after all necessary investments in operating capital have been made. c. Free cash flow is the net change in the cash account on the balance sheet. d. Free cash flow is equal to the cash flow from non-taxable transactions. Strother Inc. has the following information for the previous year: Net income = $400; Net operating profit after taxes (NOPAT) = $600; Total assets = $2,000; and Total net operating capital = $1800. The information for the current year is: Net income = $900; Net operating profit after taxes (NOPAT) = $800; Total assets = $2,300; and Total net operating capital = $2200. 4. What is the free cash flow of Strother Inc. for the current year? a. $300 b. $400 c. $500 d. $600 e. $700 5. What is the return on invested capital (ROIC) of Strother Inc. for the current year? a. 36.4% b. 23.8% c. 16.0% d. 27.4% 6. Strother Inc. has 2 million shares of stock outstanding. On the balance sheet the company has $20 million worth of common equity. The company’s stock price is $15 a share. What is the company’s Market Value Added (MVA)? a. ($80 million) b. ($20 million) c. $10 million d. $20 million e. $80 million Answers: 1. c 2. d 3. b 4. b Free cash flow = NOPAT - Net investment in total net operating capital = $800 - ($2200 - $1800) = $800 - $400 = $400. 5. a ROIC= NOPAT / Total net operating capital= $800 / $2,200 = 0.364 = 36.4% 6. c MVA = (Shares outstanding)(Stock Price) - Total common equity. = (2,000,000)($15) - $20,000,000 = $10,000,000.
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