Exam 12: Valuation: Cash-Flow-Based Approaches

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

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

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

Below is a condensed version of the comparative balance sheets for Stiller Corporation for 2011 and 2012: 2012 2011 Cash \ 157,000 \ 78,000 Accounts Receivable 180,000 185,000 Investments 52,000 74,000 Equipment 298,000 240,000 Less Accumulated depreciation (106,000) (89,000) Current liabilities 134,000 151,000 Common Stock 160,000 160,000 Retained Earnings 287,000 177,000 Additional information: Investments were sold at a loss (not extraordinary)of $7,000; no equipment was sold; cash dividends paid were $50,000; and net income was $160,000. Required: (a)Prepare a statement of cash flows for 2012 for Stiller Corporation. (b)Calculate the company's free cash flow.

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

All of the following are logical steps that enable the analyst to determine reliable estimates of value except:

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 0.79.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 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.

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

Financial liabilities include all of the following except:

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.

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:

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

Explain "free" cash flows.Describe which types of cash flows are free and which are not.How do free cash flows available for debt and equity stakeholders differ from free cash flows available for common equity shareholders?

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

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

________________ 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.

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

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 =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 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.

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

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 0.79.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.