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# The graph here is a scatter plot of 7 points, each representing a comp

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The graph here is a scatter plot of 7 points, each representing a comp  [#permalink]

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29 Mar 2020, 09:08
Project IR Butler 2019-20 - Get one IR Question Everyday
Question # 179, Date : 29-Mar-2020
This post is a part of Project IR Butler 2019-20. Click here for Details

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The graph here is a scatter plot of 7 points, each representing a company's return on capital and EV/Capital ratio in the fictitious Widgets industry.

Return on Capital is defined as EBIT (Earnings Before Interest and Taxes) divided by Capital (or EBIT/Capital).

The slope provided is y-axis over x-axis; here the slope is (EV/capital) / (EBIT/captial) = EV/EBIT. An EV/EBIT slope of 8.0x is drawn as a dotted line.

Use the drop-down menus to fill in the blanks in each of the following statements based on the information given by the graph.

1) Among the companies listed, if a company had a ROC % no more than 40%, it had EV/Capital ratios of no more than__________.

A. 1.0x
B. 2.0x
C. 3.0x

2) Referencing the 8.0x EV/EBIT slope, the appropriate EV/EBIT multiple for the Widgets industry is most closest to____________.

A. 6.8x
B. 8.0x
C. 9.2x

Spoiler: :: OA
1. B
2. A

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Re: The graph here is a scatter plot of 7 points, each representing a comp  [#permalink]

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29 Mar 2020, 11:16
1)B,since per the graph if a company had a ROC % no more than 40%, it had EV/Capital ratios of no more than 2.
0x
2)A,6.8x,since it is slightly less than 8.0x

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Re: The graph here is a scatter plot of 7 points, each representing a comp  [#permalink]

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10 Apr 2020, 00:01
1
1)B,
As per the graph if a company had a ROC % no more than 40%, it had EV/Capital ratios of no more than 2.

2)A
Any line parallel to 8.0X line has the same slope. Lets draw a line parallel to 8.0X Ev/EBIT line such that it intersects the starting point of the EV/EBIT multiple line for widgets. It is evident that the EV/EBIT multiple line for widgets industry is is below this drawn line which implies that its has slope less less than 8. only option which satisfies this condition is A, 6.8 slope.
Re: The graph here is a scatter plot of 7 points, each representing a comp   [#permalink] 10 Apr 2020, 00:01