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Given the following information, calculate the ROPI for the latest fiscal year. At what WACC will the company report zero ROPI? Given the following information, calculate the ROPI for the latest fiscal year. At what WACC will the company report zero ROPI?

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ROPI = NOPAT - (WACC × NOABEG)
ROPI = $25,5...

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Alpine Corporation reported the following information for fiscal 2017 and 2016. Alpine Corporation reported the following information for fiscal 2017 and 2016. What are the company's free cash flows to the firm (FCFF) for 2017? A) $28,430 B) $24,638 C) $28,907 D) $25,797 E) None of the above What are the company's free cash flows to the firm (FCFF) for 2017?


A) $28,430
B) $24,638
C) $28,907
D) $25,797
E) None of the above

F) B) and D)
G) None of the above

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In its 2017 fiscal year report, a company reported the following information: In its 2017 fiscal year report, a company reported the following information: At what weighted average cost of capital would the company report residual operating income (ROPI) of $0 in 2017? At what weighted average cost of capital would the company report residual operating income (ROPI) of $0 in 2017?

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With a WACC of 8%, the company...

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Which of the following descriptions of the residual operating income (ROPI) model is inaccurate?


A) ROPI analysis focuses on the amount by which shareholder value is created during a period.
B) ROPI is positive when NOPAT is higher than WACC × NOABeg.
C) ROPI is useful as a management tool as it forces managers to pay attention to both the income statement and the balance sheet.
D) One critique of the ROPI model is that it focuses managers' attention solely on short-term operating assets and neglects investment in long-term operating assets.
E) None of the above

F) A) and E)
G) B) and C)

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The power of the residual operating income (ROPI) model is that it allows managers to focus on either the income statement or balance sheet to increase firm value.

A) True
B) False

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Explain the concept behind the Residual Operating Income (ROPI) model.

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The ROPI model is the idea that owners and non-owners (e.g. bondholders) each expect a certain amount of return in exchange for the money that they give to the firm. For the firm, this return amounts to a cost. This cost, calculated as WACC × Net Operating Assets, is often referred to as expected net operating profits after tax (Expected NOPAT). Anything the firm earns over and above the Expected NOPAT is money that creates value for the firm. The difference between the firm's actual NOPAT and the Expected NOPAT is called Residual Operating Income (ROPI). Hence, firms that can produce substantial Residual Operating Income should be valued higher, while companies that have low, or negative, Residual Operating Income, should be valued lower.

Konerko Corporation has a forecasted free cash flow to the firm (FCFF) of $13,800 per year in the terminal period, which begins in year 5. What is the present value of the terminal period FCFF assuming a weighted average cost of capital (WACC) of 7% and terminal growth rate of 2%?

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Present value of FCF...

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Following are financial statement numbers and select ratios for Target Corp. for the fiscal year 2016 (dollars in millions). Use the information to determine the residual operating income (ROPI) in 2017. Following are financial statement numbers and select ratios for Target Corp. for the fiscal year 2016 (dollars in millions). Use the information to determine the residual operating income (ROPI) in 2017.

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ROPI = NOPAT - (WACC × NOABeg)
20...

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Calculate the per share value of Cornwell Company if the cumulative present value of horizon period ROPI is $15,700, the present value of terminal ROPI is $20,500, the net operating assets (NOA) are $85,600, and net nonoperating obligations (NNO) are $16,300. The company has 2,500 shares outstanding.

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Alton Enterprises has an after-tax cost of debt of 3.85%. Your online investigation reveals that the company has a beta of 0.90. Assume that the risk free rate in 2017 is 3.0% and an appropriate "spread" of equities over the risk-free rate is 3.5%. The company has 60% of its capitalization from equity. Calculate the company's weighted average cost of capital for 2017.

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WACC = (Cost of debt × debt % capitalization) + (Cost of equity × equity % capitalization). Cost of debt after tax = 3.85%. Cost of equity = 3.0% + (0.90 × 3.5%) = 6.15%. WACC = (3.85% × 40%) + (6.15% × 60%) = 5.23%.

Which of the following is incorrect (rw is the weighted average cost of capital) ?


A) ROPI = NOPAT - (rw × NOA)
B) NOPAT - (rw × NOA) = (NOPAT/NOA - rw) × NOA
C) RNOA = NOPAT / average NOA
D) ROPI = (RNOA × rw) - NOA
E) None of the above

F) A) and E)
G) A) and D)

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The residual operating income (ROPI) model estimates firm value as the current book value of net operating assets plus the present value of expected residual operating income.

A) True
B) False

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Which of following is an advantage of the ROPI model?


A) Well known and widely accepted valuation model
B) Cash flows are not affected by accrual accounting
C) Utilizes both the balance sheet and the income statement, and captures the information in accrual accounting
D) Does not depend on an arbitrary discount rate.
E) None of the above

F) A) and C)
G) All of the above

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Net operating profit after tax (NOPAT) is equal to net income less interest expense incurred during the year.

A) True
B) False

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All of the following are attributes of the ROPI model except:


A) ROPI utilizes both the balance sheet and the income statement, capturing information in accrual accounting.
B) ROPI is immune from the effects of differing accounting policies.
C) ROPI is falsely perceived as influenced by accrual accounting policies.
D) ROPI model is accurately perceived as influenced by accrual accounting policies.
E) None of the above

F) B) and C)
G) A) and D)

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Which of the following descriptions of the free cash flow to the firm (FCFF) model is inaccurate?


A) FCFF analysis focuses on the amount by which shareholder value is created during a period.
B) FCFF is positive when NOPAT is higher than the decrease in NOA during the period.
C) With the FCFF valuation model, firm value is the sum of the present value of horizon and terminal period free cash flows.
D) Managers can increase FCFF by decreasing fixed-asset acquisitions.
E) None of the above

F) All of the above
G) B) and E)

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Which is the better model for valuation when earnings quality is a major concern, DCF or ROPI? Explain.

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Both approaches are suitable. When earni...

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Assume the following free cash flows for Aiello Inc. for 2016 and forecasted FCFF for 2017 onward (in millions) : Assume the following free cash flows for Aiello Inc. for 2016 and forecasted FCFF for 2017 onward (in millions) : The DCF value of the firm using the FCFF information above, a discount rate of 6%, and an expected terminal growth rate of 2%, is: A) $176,900 million B) $126,028 million C) $145,189 million D) $181,836 million E) None of the above The DCF value of the firm using the FCFF information above, a discount rate of 6%, and an expected terminal growth rate of 2%, is:


A) $176,900 million
B) $126,028 million
C) $145,189 million
D) $181,836 million
E) None of the above

F) D) and E)
G) A) and E)

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Discuss why NOPAT is used in calculating the value of a company instead of net income in the ROPI equity valuation model.

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NOPAT, rather than net income, is used i...

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Following is financial information for Washington Corporation for 2017 year-end. Following is financial information for Washington Corporation for 2017 year-end. What are the company's free cash flows to the firm (FCFF) for 2017? What are the company's free cash flows to the firm (FCFF) for 2017?

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FCFF = NOPAT- increase in net operating ...

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