Value Diagnosis and Capital Allocation Review questions Value Diagnosis and Capital Allocation — Integrated Summary Capital allocation begins with a bridge from profit to cash. Analytical after-tax operating profit is not free cash flow to the firm: add back noncash depreciation, then deduct capital expenditure and the increase in operating working capital. Sales and profit can rise as inventory and receivables absorb funding. Test the incremental return on new capital rather than borrowing the old asset base's average; an extra 4 of NOPAT on 50 of capital returns only 8% even if the company average remains higher. Economic profit charges for capital use but does not replace dated cash flows. Under a budget, select a feasible portfolio rather than the highest individual names, respecting project dependencies, rights and liquidity. A smaller stage can buy information and a right to stop or expand, but learning cost and delay must be compared, and the right must actually exist. The module's output is a decision memo naming a calculated fact, uncertain assumption, switching threshold and evidence that would change the choice.
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Question 1 Which bridge must the finance lead request? Reconcile operating profit to cash after working-capital movement. Use revenue growth as a proxy for cash. Treat receivables as cash already collected. Ignore capital expenditure because it is an asset. Question 2 What comparison decides the expansion? Approve because accounting profit rises. Reject the old unit's profitable assets as well. Compare the incremental line return and full cash flows with its relevant hurdle. Approve because the unit average exceeds 10%. Question 3 What belongs in the portfolio comparison? The sum of all positive NPVs despite the budget. Feasible combinations including the dependency and total cash use. A ranking by standalone percentage return alone. Only the cheapest individual project. Question 4 When is staging useful? Whenever a project is labeled flexible. Only when the pilot has zero cost. When management commits to the plant regardless of findings. When the pilot changes a later choice enough to justify its cost and delay. Question 5 What prevents an overstated forecast? Assume collections and recognition have the same date. Separate receipts, earned service, deferred obligation and acquisition cash. Book all receipts as current-year operating profit. Exclude acquisition cost because it may aid future sales. Question 6 Which consistency test comes first? Match cash-flow currency, price basis and claimholder to the rate. Adjust the answer by an unexplained premium. Use the lower rate to be conservative. Ignore currency because both inputs are percentages. Question 7 How should the downside be modeled? Change only a sales cell and hold all else fixed. Add inventory release despite unsold stock. Replace the downside with a single precise point estimate. Link demand, margin, working capital and cash timing in one scenario. Question 8 What is the cross-check? Assume a higher multiple proves a higher DCF. Ignore differences in growth and capital intensity. Normalize maintenance and cash conversion before using the multiple. Apply the peer multiple without adjustment. Question 9 What should financing analysis do? Treat a positive NPV as a covenant waiver. Use average annual cash to conceal the trough. Test service dates and covenant headroom alongside cost and dilution. Choose debt by coupon alone. Question 10 Which schedule exposes the risk? A dated receipts-and-payments bridge showing the minimum balance. A year-end profit figure. A month-end balance that skips week seven. A sales forecast without payment dates. Question 11 What must a hedge proposal address? Hedge the full forecast as a certain payable. Assume the forward has no downside if volume falls. Choose a hedge by predicting spot perfectly. Exposure uncertainty and overhedge risk as well as exchange-rate loss. Question 12 What makes the response plan actionable? An unassigned list of possible cuts. Dated triggers, cash effect, owner and lender communication before breach. A single severe percentage with no timing. A promise to refinance after a breach. Question 13 What decision right is needed? Hide the incentive from the committee. Independent challenge of renewal evidence and a staged release gate. Let the sponsor approve its own forecast. Remove all sponsor input. Question 14 How can performance be attributed? Assign the entire revenue change to pricing. Compare only total profit and name a manager. Treat higher volume as proof of efficiency. Flex the budget to actual volume, then isolate price and unit-cost effects. Question 15 What reconciliation is necessary? Show the adjustment beside operating profit and cash impact with a clear rationale. Use the adjusted number alone. Call every recurring cost exceptional. Treat EBITDA as free cash flow. Question 16 What should the review separate? Only the sales variance. The original sunk cost as a new benefit. Forecast assumptions, execution variance and changed conditions. Only the sponsor's personal fault. Question 17 What is the growth gate? Approve because total revenue rises. Use only the historical average ROIC. Ignore customer acquisition and working capital. Compare incremental after-tax return and cash investment with relevant capital cost. Question 18 How should the financial case respond? Add an arbitrary risk premium and also repeat the full cash shock. Map plausible cash, reinvestment and timing paths; assess accounting tests separately. Declare the internal scenario an IAS 36 recoverable amount. Ignore the shock until it is certain. Question 19 What protects the buyer? Ignore payment timing in contingent consideration. Approve because combined revenue is larger. A walk-away ceiling after integration cost, risk and attributable synergy. Count all forecast synergy as free buyer value. Question 20 What belongs in the final memo? A feasible sequence, downside triggers, covenant headroom and a countercase. A single headline NPV. A cash balance only at year end. A recommendation without release conditions. Create a free account to mark your answers and save your progress.
