Exam 12: Valuation: Cash-Flow-Based Approaches

Regarding the equity buyout, compute the cost of equity capital with the new capital structure that results from the LBO. Assume a risk-free rate of 4.6 percent and a market risk premium of 6.0 percent.

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

The analyst can use expectations of the dividends to be paid to the investor or the free cash flows to be generated by the firm (that will ultimately be paid to the investor) as equivalent approaches to measure the ____________________ expected payoffs to shareholders.

Simpson Department Stores operates retail department store chains throughout the United States. At the end of Year 10, Simpson reports debt of $4,658 million and common shareholders' equity at book value of $4,323 million. The market value of its common stock is $6,905, and its market equity beta is .89. An equity buyout group is considering an LBO of Simpson as of the beginning of Year 11.The group intends to finance the buyout with 20 percent common equity and 80 percent debt carrying an interest rate of 11 percent.

Even in relatively efficient securities markets, ____________________ is observable but ____________________ is not; therefore, ____________________ must be estimated.

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

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

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

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

____________________ is an estimate of systematic risk based on the degree of covariation between a firm's stock returns and an index of stock returns for all firms in the market.

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

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 ______________________________________________________________________.

Net income for the year for Tanglewood Inc. was $750,000, but the statement of cash flows reports that cash provided by operating activities was $860,000. Tanglewood also reported capital expenditures of $75,000 and paid dividends in the amount of $30,000. Compute Tanglewood's free cash flow.

What is the purpose of a free cash flow analysis?

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.

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.

Houston, Inc. The following information pertains to Houston, Inc. a manufacturer of belt buckles: (dollar aniounts in thousands) Net Cash Flow from Operations Interest Expense after tax Decrease (Increase) in Cash Required for Operations Net Cash Flow from Investing Net Cashifrom Debt Financing Present Value Factores for 85 \% 564 122 -75 -287 210 0.922 628 134 -54 -300 204 0.849 854 148 -48 -310 140 0.783 1059 145 -32 -285 85 0722 1345 155 -61 -294 -40 0.665 165 148 -48 -277 -46 - What is Houston's free cash flow for all debt and equity holders for year 2012?

Plough Corporation reports the following information: Net cash provided by operating activities $215,000 Average current liabilities 150,000 Average long-term liabilities 100,000 Dividends paid 60,000 Capital expenditures 110,000 Payments of debt 35,000 Plough's free cash flow is

Amherst, Inc. had the following balance sheet at December 31, 2012: $\text {Amherst Inc.}$ $\text {Bulance Sheest}$ $\text {Decamber 31, 2012}$ Cash \ 20,000 Accounts payable \ 30,000 Accounts receivable 21,200 Bondspayable 41,000 Investments 32,000 Comunon stock 100,000 Plant assets(net) \ 1,000 Reteined earnings Land During 2013 the following occurred. 1. Amherst liquidated its available for sale investment portfolio at a loss of $5,000. 2. A tract of land was purchased for $38,000. 3. An additional $30,000 in common stock was issued at par. 4. Dividends totaling $10,000 were declared and paid to stockholders. 5. Net income for 2013 was $35,000, including $12,000 in depreciation expense. 6. Land was purchased through the issuance of $30,000 of additional bonds. 7. At December 31, 2013, Cash was $70,200, Accounts Receivable was $42,000 and Accounts Payable was $40,000. Required: (a) What were Amherst's cash flows from operating activities for the year ended December 31, 2013? (b) Compute Amherst's free cash flow and current cash debt coverage for 2013. (c) How does information in the balance sheet and statement of cash flows help the user or analyst of the financial statements?

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