Exam 12: Valuation: Cash-Flow-Based Approaches

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.

Operating assets include all of the following except

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

Below is information from the statement of cash flow and income statement for Garland Products,Inc.for 2012 and 2011.Marketable securities represent investments of excess cash that Garland Products does not need for operations.Garland Products' tax rate is 35%. Using the above information calculate the amount of free cash flows for common equity shareholders for Garland Products for year 2012 and 2011.

Amherst,Inc.had the following balance sheet at December 31,2012: 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?

Morgan Company reported the following items in 2012: Required: Calculate the following: (1)net cash provided by operating activities, (2)the net change in cash during 2012,and (3)free cash flow.

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.

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

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

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

Shady 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 2017 and beyond will be 4% calculate Shady Sunglasses' current value per share.

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 $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. Regarding the equity buyout,compute the unlevered market equity (asset)beta of Simpson before consideration of the LBO.Assume that the book value of the debt equals its market value.The income tax rate is 35 percent.

Financial statements for Hawk Company are presented below: Hawk Company Balance Sheet December 31,2012

Clarmont Corporation engaged in the following cash transactions during 2012: Required: What is Clarmont's free cash flow,assuming that it reported net cash provided by operating activities of $400,000?

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. Required: (a)Prepare a statement of cash flows for 2012 for Otto,Inc. (b)Compute Otto's current cash debt coverage ratio and cash debt coverage ratio. (c)Determine Otto Inc.'s free cash flow and comment on its liquidity and financial flexibility.

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

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

Houston,Inc. The following information pertains to Houston,Inc.a manufacturer of belt buckles: What is Houston's free cash flow for common equity holders for year 2012?

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

Regarding the equity buyout,compute the weighted average cost of capital of the new capital structure.