Exam 12: Valuation: Cash-Flow-Based Approaches

Shady 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 2012 to 2016.

Changes in general price levels due to inflation or deflation cause the ______________________________ of the monetary unit to increase or decrease ______________

Free cash flow is calculated as net cash provided by operating activities less

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

A comparative balance sheet for Otto Inc.is presented below: Additional information: 1.Net income for 2012 was $105,000. 2.Cash dividends of $40,000 were declared and paid. 3.Bonds payable amounting to $50,000 were retired through issuance of common stock.

One advantage of the free cash flow valuation method is cash is the medium of exchange and therefore is a fundamental source of ________________________

Simpson Department Store Simpson Department Stores operates retail department store chains throughout the United States. At the end of Year 10, Simpson reports debt of $5,897 million and common shareholders' equity at book value of $4,400 million. The market value of its common stock is $6,895, and its market equity beta is ..79. 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 25 percent common equity and 75 percent debt carrying an interest rate of 10.65 percent. -Regarding the equity buyout,compute the weighted average cost of capital of the new capital structure.

Continuing free cash flows represent

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

Starting with net cash flow from operations and adjusting for capital expenditures and dividends equals

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

Financial statements for Hawk Company are presented below:

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

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

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

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.

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

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

What is the purpose of a free cash flow analysis?

Suppose a firm faces the following costs of capital: Assume that this firm expects to generate $95 million of pretax-free cash flows. Required: (1)What would be the after-tax free cash flows one year from today? (2)Assuming a one-year horizon,what is the appropriate valuation to be used by the analyst?