Exam 12: Valuation: Cash-Flow-Based Approaches

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.

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 all debt and common equity holders for years 2012 to 2016.

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

Below is a condensed version of the comparative balance sheets for Stiller Corporation for 2011 and 2012: 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.

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

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.

If an analyst wants to value a potential investment in the net operating assets of a division of another firm,the analyst should discount the projected free cash flows at the:

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

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 ____________________.

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

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

An equity security with systematic risk equal to the average amount of systematic risk of all equity securities in the market:

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

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.

A disadvantage of the free cash flow valuation method is:

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

Sun Corporation reports the following information: Sun's free cash flow is:

Currently,financial reporting does not take into account changes in prices,either at the general level or at the specific level.Many analysts believe that not taking price changes into account distorts the meaningfulness of financial reports.How do changing prices affect financial reports?

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?

Financial statements for Hawk Company are presented below: At the beginning of 2010,Accounts Payable amounted to $12,000 and Bonds Payable was $10,000. Required: Calculate the company's free cash flow.