Sun Corporation reports the following information: $ \begin{array}{lr}\text { Net cash provided by operating activities } & \$ 255,000 \\ \text { Average current liabilities } & 150,000 \\ \text { Average long-term liabilities } & 100,000 \\ \text { Dividends paid } & 60,000 \\ \text { Capital expenditures } & 110,000 \\ \text { Payments of debt } & 35,000\end{array} $ Sun's free cash flow is:

A) $195,000 B) $145,000 C) $50,000 D) $85,000 A) $195,000 B) $145,000 C) $50,000 D) $85,000

Houston, Inc. The following information pertains to Houston, Inc.a manufacturer of belt buckles: $\begin{array}{l} \begin{array}{lll} \text { (dollar amounts in thousands)}\\ \text { Net Cash Flow from Operations}\\ \text { Interest Expense after tax}\\ \text { Decrease (Increase) in Cash}\\ \text { Required for Operations}\\ \text { Net Cash Flow from Investing}\\ \text { Net Cash from Debt Financing}\\ \\ \text {Present Value Factors for 8.5 \% }\\ \end{array} \begin{array}{lll} \underline {2012}&\underline {2013}&\underline {2014}&\underline {2015}&\underline {2016}&\underline {2017}\\ 564 & 628 & 854 & 1059 & 1345 & 1655 \\ 122 & 134 & 148 & 145 & 155 & 148 \\ \\ -75 & -54 & -48 & -32 & -61 & -48 \\ -287 & -300 & -310 & -285 & -294 & -277 \\ 210 & 204 & 140 & 85 & -40 & -46 \\ \\ 0.922 & 0.849 & 0.783 & 0.722 & 0.665 &\\ \end{array} \end{array}$ -What is Houston's free cash flow for all debt and equity holders for year 2012?

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

Amherst,Inc.had the following balance sheet at December 31,2012: $\text { \quad \quad \quad \quad \quad \quad \quad \quad \quad \quad \quad \quad \quad Amherst Inc. }$ $\text { \quad \quad \quad \quad \quad \quad \quad \quad \quad \quad \quad \quad \quad Balance Sheet }$ $\text { \quad \quad \quad \quad \quad \quad \quad \quad \quad \quad \quad \quad December } 31,2012$ $\begin{array}{|l|r|l|r|} \hline \text { Cash } & \$ 20,000 & \text { Accounts payable } & \$ 30,000 \\ \hline \text { Accounts receivable } & 21,200 & \text { Bonds payable } & 41,000 \\ \hline \text { Investments } & 32,000 & \text { Common stock } & 100,000 \\ \hline \text { Plant assets (net) } & 81,000 & \text { Retained earnings } & 23,200 \\ \hline \text { Land } & 40,000 & &\\ \hline&\$ 194,200&&\$ 194,200\\ \hline \end{array}$ 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.

Its current cash debt coverage is 1.18 t

Suppose a firm faces the following costs of capital: $\begin{array}{|l|l|l|l|l|l|l|} \hline&\text { Proportion in }\\ &\text { Capital }&\text { Pretax }&\text { Tax }& \text { After-tax } &\text { Weighted Average Cost } \\ &\text { Structure }&\text { Cost }&\text { Effect }&\text { Cost }&\text { of Capital }\\ \hline&& & & & \text { Pretax } &\text { After Tax }\\ \hline \text { Debt } & .33 .40 & 12 \% & .35 & 4.2 \% & 4.8 & 2.00 \% \\ \hline \text { Equity } & .67 .65 & 20 \% & -- & 20 \% & 13.00 \% & 13.00 \% \\ \hline & \underline{1.00} & & & & \underline{17.20 \%} & \underline{15 \%} \\ \hline \end{array}$ 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?

(1)[(1-.35)x 95 million = 61,750,000 of

Plough Corporation reports the following information: $ \begin{array}{lr}\text { Net cash provided by operating activities } & \$ 300,000 \\ \text { Average current liabilities } & 150,000 \\ \text { Average long-term liabilities } & 100,000 \\ \text { Dividends paid } & 80,000 \\ \text { Capital expenditures } & 140,000 \\ \text { Payments of debt } & 35,000\end{array} $ Plough's free cash flow is:

A) $80,000 B) $105,000 C) $45,000 D) $10,000 A) $80,000 B) $105,000 C) $45,000 D) $10,000

Exam 12: Valuation: Cash-Flow-Based Approaches

The quarterly cash flows from operations for two computer companies are as follows: (in Millions) 2012 2012 2012 2012 2013 1 2 3 4 1 Firm A \ 406.1 \ 204.2 \ 729.1 \ 440.2 \ 587.8 Firm B \ 136.7 \ 243.1 \ 708.2 (\ 87.90) (\ 161.4) Required: 1)Explain why Firm B has more credit risk than Firm A. 2)Suppose that Firm B's cash flow was $200 million higher each quarter.Explain why Firm B might still be viewed as having higher credit risk than Firm A.

Free

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Question 1

Correct Answer:

Verified

1.The quarterly operating cash flows of both firms exhibit seasonal volatility,meaning that operating cash flow levels change from quarter to quarter.Seasonal patterns in sales and operating cash flow are common in many industries,and the cash flow volatility produced by seasonal sales is itself a contributor to increased credit risk.In addition,Firm B's operating cash flows are lower than those of Firm A and are negative in the two most recent quarters.These two features of Firm B's operating cash flow make it a greater credit risk than Firm A.
2.Here are the revised operating cash flow amounts for each firm:
$\begin{array}{|l|c|c|c|c|c|}\hline & \mathbf{2 0 1 2} & \mathbf{2 0 1 2} & \mathbf{2 0 1 2} & \mathbf{2 0 1 2} & \mathbf{2 0 1 3} \\\hline & \mathrm{Q1} & \mathrm{Q} 2 & \mathrm{Q} 3 & \mathrm{Q} 4 & \mathrm{Q1} \\\hline \text { Firm A } & \$ 406.1 & \$ 204.2 & \$ 729.1 & \$ 440.2 & \$ 587.8 \\\hline \text { Firm B (revised } & \$ 336.7 & \$ 443.1 & \$ 908.2 & \$ 112.1 & \$ 38.6\\\hline\\\hline\text { \% change in quarterly}&\text { cash flow }\\\hline\text { Firm A } & & 50 \% & 357 \% & 60 \% & 134 \% \\\hline \text { Firm B } & & 132 \% & 205 \% & 12 \% & 34 \%\\\hline\end{array}$
Firm B now exhibits higher operating cash flows than Firm A in two of the five quarters,but the sharp decline in the two most recent quarters is still a cause for concern.The level of operating cash flows in these two most recent quarters,especially when compared to those of Firm A,make Firm B a greater credit risk.

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

Free

(Multiple Choice)

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Question 2

Correct Answer:

Verified

C

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:

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Question 3

Correct Answer:

Verified

A

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

(Multiple Choice)

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Question 4

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

(Short Answer)

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Question 5

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.

(Short Answer)

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Question 6

A disadvantage of the free cash flow valuation method is:

(Multiple Choice)

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Question 7

Sun Corporation reports the following information: Net cash provided by operating activities \ 255,000 Average current liabilities 150,000 Average long-term liabilities 100,000 Dividends paid 60,000 Capital expenditures 110,000 Payments of debt 35,000 Sun's free cash flow is:

(Multiple Choice)

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Question 8

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

(Multiple Choice)

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Question 9

If a firm's stock returns co-vary identically with returns to a market-wide portfolio,then its market beta from such a regression is:

(Multiple Choice)

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Question 10

Houston, Inc. The following information pertains to Houston, Inc.a manufacturer of belt buckles: (dollar amounts in thousands) Net Cash Flow from Operations Interest Expense after tax Decrease (Increase) in Cash Required for Operations Net Cash Flow from Investing Net Cash from Debt Financing Present Value Factors for 8.5 \% 564 628 854 1059 1345 1655 122 134 148 145 155 148 -75 -54 -48 -32 -61 -48 -287 -300 -310 -285 -294 -277 210 204 140 85 -40 -46 0.922 0.849 0.783 0.722 0.665 -What is Houston's free cash flow for all debt and equity holders for year 2012?

(Multiple Choice)

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Question 11

Amherst,Inc.had the following balance sheet at December 31,2012: $\text { \quad \quad \quad \quad \quad \quad \quad \quad \quad \quad \quad \quad \quad Amherst Inc. }$ $\text { \quad \quad \quad \quad \quad \quad \quad \quad \quad \quad \quad \quad \quad Balance Sheet }$ $\text { \quad \quad \quad \quad \quad \quad \quad \quad \quad \quad \quad \quad December } 31,2012$ Cash \ 20,000 Accounts payable \ 30,000 Accounts receivable 21,200 Bonds payable 41,000 Investments 32,000 Common stock 100,000 Plant assets (net) 81,000 Retained earnings 23,200 Land 40,000 \ 194,200 \ 194,200 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.

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Question 12

Suppose a firm faces the following costs of capital: Proportion in Capital Pretax Tax After-tax Weighted Average Cost Structure Cost Effect Cost of Capital Pretax After Tax Debt .33.40 12\% .35 4.2\% 4.8 2.00\% Equity .67.65 20\% -- 20\% 13.00\% 13.00\% 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?

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Question 13

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

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Question 14

Plough Corporation reports the following information: Net cash provided by operating activities \ 300,000 Average current liabilities 150,000 Average long-term liabilities 100,000 Dividends paid 80,000 Capital expenditures 140,000 Payments of debt 35,000 Plough's free cash flow is:

(Multiple Choice)

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Question 15

Shady Sunglasses operates retail sunglass kiosks in shopping malls.Below is information related to the company: (dollar amounts in thousands) Net Cash Flow from Operations Interest Expense after tax Decrease (Increase) in Cash Required for Operations Net Cash Flow from Investing Net Cash from Debt Financing Present Value Factors (WACC =805\%) 564 628 854 1059 1345 1655 122 134 148 145 155 148 -75 -54 -48 -32 -61 -48 -287 -300 -310 -285 -294 -277 210 204 140 85 -40 -46 0.922 0.849 0.783 0.722 0.665 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 2012 to 2016.

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Question 16

Nonsystematic risk factors would include all of the following except:

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Question 17

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 ____________________.

(Short Answer)

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Question 18

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

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Question 19

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%. Cash Flow Statement (in thousands) 12/30/2012 12/30/2011 Cash from operations Net cash provided by operations 106,484 113,880 Cash from investments Increase) decrease in property \& plant -31,536 -47,960 Acquisition (disposition) of subsidiaries or other business -702 -19 Increase (decrease) in marketable securities -18,825 380,737 Net cash provided by (used in) investing -51,063 332,758 Cash from financing ssuances (purchases) of equity shares -370 -434,570 ssuances (repayment) of debt - - ncrease (decrease) in bank, or other borrowings -25,000 25,000 Dividends, other distributions -29,377 -37,202 Net cash provided by (used in) financing -54,747 -446,772 Net change cash \& cash equivalents 674 -134 Cash and cash equivalents at start of year 3,255 3,389 Cash and cash equivalents at year-end 3,929 3,255 Interest Revenue 50 35 Interest paid 394 1400 Using the above information calculate the amount of free cash flows for common equity shareholders for Garland Products for year 2012 and 2011.

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Question 20

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

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:

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

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

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.

A disadvantage of the free cash flow valuation method is:

Sun Corporation reports the following information: Net cash provided by operating activities \ 255,000 Average current liabilities 150,000 Average long-term liabilities 100,000 Dividends paid 60,000 Capital expenditures 110,000 Payments of debt 35,000 Sun's free cash flow is:

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

If a firm's stock returns co-vary identically with returns to a market-wide portfolio,then its market beta from such a regression is:

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

Plough Corporation reports the following information: Net cash provided by operating activities \ 300,000 Average current liabilities 150,000 Average long-term liabilities 100,000 Dividends paid 80,000 Capital expenditures 140,000 Payments of debt 35,000 Plough's free cash flow is:

Nonsystematic risk factors would include all of the following except:

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 ____________________.

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

Overview of Financial Reporting, Financial Statement Analysis, and Valuation

Asset and Liability Valuation and Income Recognition

Income Flows versus Cash Flows: Understanding the Statement of Cash Flows

Profitability Analysis

Risk Analysis

Accounting Quality

Financing Activities

Investing Activities

Operating Activities

Forecasting Financial Statements

Risk-Adjusted Expected Rates of Return and the Dividends Valuation Approach

Valuation: Earnings-Based Approaches

Valuation: Market-Based Approaches

Filters

Exam 12: Valuation: Cash-Flow-Based Approaches

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

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:

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

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

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.

A disadvantage of the free cash flow valuation method is:

Sun Corporation reports the following information: Net cash provided by operating activities \ 255,000 Average current liabilities 150,000 Average long-term liabilities 100,000 Dividends paid 60,000 Capital expenditures 110,000 Payments of debt 35,000 Sun's free cash flow is:

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

If a firm's stock returns co-vary identically with returns to a market-wide portfolio,then its market beta from such a regression is:

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

Plough Corporation reports the following information: Net cash provided by operating activities \ 300,000 Average current liabilities 150,000 Average long-term liabilities 100,000 Dividends paid 80,000 Capital expenditures 140,000 Payments of debt 35,000 Plough's free cash flow is:

Nonsystematic risk factors would include all of the following except:

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 ____________________.

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

Overview of Financial Reporting, Financial Statement Analysis, and Valuation

Asset and Liability Valuation and Income Recognition

Income Flows versus Cash Flows: Understanding the Statement of Cash Flows

Profitability Analysis

Risk Analysis

Accounting Quality

Financing Activities

Investing Activities

Operating Activities

Forecasting Financial Statements

Risk-Adjusted Expected Rates of Return and the Dividends Valuation Approach

Valuation: Earnings-Based Approaches

Valuation: Market-Based Approaches

Filters

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