Deck 12: Valuation: Cash-Flow-Based Approaches

Question 1

Operating assets include all of the following except

A) accounts receivable
B) property, plant and equipment
C) intangible assets
D) Property held for sale

Answer 1

D

Question 2

If the objective is to value operating assets net of operating liabilities of a firm then the appropriate free cash flow measure to be used is ______________________________________________________________________.

Answer 2

free cash flow for all debt and equity capital

Question 3

The following information pertains to Dallas, Inc. a manufacturer of Cowboy boots: What is Dallas' free cash flow for all debt and equity holders for year 2007?

A) $564
B) $399
C) $324
D) $202

Answer 3

C

Question 4

Which of the following is not a problem with using a dividend-based valuation formula

A) dividends are arbitrarily established
B) dividends represent a transfer of wealth to shareholders
C) some firms do not pay a regular periodic dividend
D) it is a challenge to forecast the final liquidating dividend

Question 5

The risk-adjusted discount rate used to compute the present value of all the projected free cash flows for common equity shareholders equals the _______________________________________________________.

Question 6

The following information pertains to Dallas, Inc. a manufacturer of Cowboy boots: What is Dallas' free cash flow for common equity holders for year 2007?

A) $564
B) $399
C) $324
D) $412

Question 7

Free cash flows for common equity shareholders are the cash flows specifically available to the common shareholders after making all capital expenditures, _____________________________________________ and ____________________________________________________________.

Question 8

The conceptual framework for free cash flows separates all assets and liabilities into the following categories:

A) Current and non-current
B) Monetary and non-monetary
C) Operating and non-operating
D) Operating and financial

Question 9

A disadvantage of the free cash flow valuation method is

A) The terminal value tends to dominate the total value in many cases.
B) The projection of free cash flows depends on earnings estimates.
C) The free cash flow method is not rigorous.
D) The free cash flow method is not used widely in practice.

Question 10

Operating liabilities include all of the following except

A) accounts payable
B) pension obligations
C) accrued taxes
D) long-term debt

Question 11

When calculating free cash flows to common equity shareholders financing activities do not include:

A) Debt cash flows
B) Adjustments for capital expenditures
C) Adjustments for Preferred stock cash flows
D) Financial asset cash flows

Question 12

The conceptual framework for free cash flows separates the balance sheet equation into the following categories:

A) CA + LT A = CL + LT L + SE
B) OA + FA = OL + FL + SE
C) OA + FA = OL + FL + OSE + FSE
D) Non-FA + FA = Non-FL + FL + SE

Question 13

Continuing free cash flows represent

A) the cash flows remaining after deducting cash flows attributable to debt holders
B) the free cash flows after the point at which the firm has settled into a long-run steady-state growth rate.
C) all sustainable free cash flows
D) all after-tax free cash flows

Question 14

If an analyst wants to value a potential investment in the net operating assets of a division of another firm the analyst should discount the projected free cash flows at the

A) Cost of debt capital
B) cost of equity capital
C) weighted average cost of capital
D) risk free rate

Question 15

Starting with cash flow from operations and adjusting for net interest after tax and cash requirements for liquidity equals

A) free cash flows for all debt and equity capital stakeholders
B) free cash flow
C) free cash flows to common equity capital shareholders
D) free cash flow from operations

Question 16

If an analyst wants to value a potential investment in the common stock equity of a firm the analyst should discount the projected free cash flows at the

A) required return on equity capital
B) weighted average cost of capital
C) risk free rate
D) market risk premium

Question 17

If an analyst wants to value a potential investment in the net operating assets of a division of another firm the relevant cash flows the analyst should use are

A) free cash flow from operations
B) free cash flows for all debt and equity capital stakeholders
C) free cash flows to common equity shareholders
D) cash flow from operations

Question 18

The cash-flow-based valuation approach measures and values the cash flows that are "free" to be ________________________________________ unencumbered by necessary reinvestments in operating assets or required payments to debt holders.

Question 19

Steady-state growth in free cash flows could be driven by long-run expectations for growth attributable to

A) interest rates
B) national exports
C) general economic productivity
D) balance of payments

Question 20

If an analyst wants to value a potential investment in the common stock equity in a firm the relevant cash flows the analyst should use are

A) free cash flow from operations
B) free cash flows for all debt and equity capital stakeholders
C) free cash flows to common equity shareholders
D) cash flow from operations

Question 21

Provide the rationale for using expected free cash flow in valuation.

Question 22

When should an analyst use nominal cash flows and when should an analyst use real cash flows?

Question 23

The forecasting and valuation process is particularly difficult for ______________________________ when the near term free cash flows tend to be negative.

Question 24

For most firms, ______________________________ include cash and short-term investment securities, accounts receivable, inventory, property, plant and equipment, intangible assets and investments in affiliated companies.

Question 25

Free cash flow from operations equals cash flow from operations adjusted for net interest after tax and adjusted for __________________________________________________.

Question 26

Below is information from the statement of cash flow and income statement for Graham Products, Inc. for 2002 and 2001. Marketable securities represent investments of excess cash that Graham Products does not need for operations. Graham Products' tax rate is 35%.
Using the above information calculate the amount of free cash flows to all debt and equity capital stakeholders for Graham Products for year 2002 and 2001.

Question 27

LA Sunglasses operates retail sunglass kiosks in shopping malls. Below is information related to the company:
Using the above information and assuming that steady-state growth in year 2012 and beyond will be 4% calculate LA Sunglasses' current value per share.

Question 28

Discuss under which scenario it is appropriate to use free cash flows for all debt and equity capital stakeholders.

Question 29

Changes in general price levels cause the ______________________________ of the monetary unit to change over time.

Question 30

What three elements are needed to value a resource when using cash flows?

Question 31

Steady-state growth in ___________________________________ could be driven by long-run expectations for growth attributable to economy-wide inflation, general economic productivity, the population, or long-run growth in industry's sales.

Question 32

LA Sunglasses operates retail sunglass kiosks in shopping malls. Below is information related to the company:
Using a five-year forecast horizon compute the sum of the present value of free cash flows accruing to common equity holders for years 2007 to 2011.

Question 33

If cash flow projections include the effect of inflation then the discount rate used should be a ____________________ rate.

Question 34

Starting with free cash flows from operations discuss how an analyst would measure free cash flows to common equity shareholders.

Question 35

One disadvantage of the free cash flow valuation method is that many times the ______________________________ dominates the total value.

Question 36

Below is information from the statement of cash flow and income statement for Graham Products, Inc. for 2002 and 2001. Marketable securities represent investments of excess cash that Graham Products does not need for operations. Graham Products' tax rate is 35%.
Using the above information calculate the amount of free cash flows for common equity shareholders for Graham Products for year 2002 and 2001.

Question 37

WACC
An analyst wants to value the sum of the debt and equity capital of the firm and is provided with the following information:
An analyst wants to value the sum of the debt and equity capital of Bridgetron, compute the relevant cost of capital that should be used.

Question 38

The present value of future free cash flows valuation method focuses on free cash flows, a base that economists argue has more economic meaning than ____________________.

Question 39

If a firm generates a rate of return on __________________________________________________ equal to the discount rate used by the investor then it does not matter if an analyst uses cash flows to the investor or cash flows to the firm.

Question 40

________________________________________ typically include accounts payable, accrued expenses, accrued taxes, deferred taxes, pension obligations and other retirement benefit obligations.

Question 41

LA Sunglasses operates retail sunglass kiosks in shopping malls. Below is information related to the company:
Using a five-year forecast horizon compute the sum of the present value of free cash flows accruing to all debt and common equity holders for years 2007 to 2011.