Chapter 12 Valuation Cash Flow Based Approaches Questions and Answers

Chapter 12 Valuation Cash Flow Based Approaches Questions and Answers Which of the following is not a problem with using a dividend-based valuation formula? a. Dividends are arbitrarily established. b. Dividends represent a transfer of wealth to shareholders. c. Some firms do not pay a regular periodic dividend. d. It is a challenge to forecast the final liquidating dividend. b The conceptual framework for free cash flows separates the balance sheet equation into the following categories: a. CA + LT A = CL + LT L + SE b. OA + FA = OL + FL + SE c. OA + FA = OL + FL + OSE + FSE d. Non-FA + FA = Non-FL + FL + SE b The conceptual framework for free cash flows separates all assets and liabilities into the following categories: a. Current and non-current b. Monetary and non-monetary c. Operating and non-operating d. Operating and financial d Starting with net cash flow from operations and adjusting for capital expenditures and dividends equals: a. free cash flows for all debt and equity capital stakeholders. b. free cash flow. c. free cash flows to common equity capital shareholders. d. free cash flow from operations. b When calculating free cash flows to common equity shareholders, financing activities do not include: a. Debt cash flows b. Adjustments for capital expenditures c. Adjustments for Preferred stock cash flows d. Financial asset cash flows b 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: a. free cash flow from operations. b. free cash flows for all debt and equity capital stakeholders. c. free cash flows to common equity shareholders. d. cash flow from operations. c 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: a. free cash flow from operations. b. free cash flows for all debt and equity capital stakeholders. c. free cash flows to common equity shareholders. d. cash flow from operations. b 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: a. required return on equity capital. b. weighted average cost of capital. c. risk-free rate. d. market risk premium. a 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: a. cost of debt capital. b. cost of equity capital. c. weighted average cost of capital. d. risk-free rate. c A disadvantage of the free cash flow valuation method is: a. The terminal value tends to dominate the total value in many cases. b. The projection of free cash flows depends on earnings estimates. c. The free cash flow method is not rigorous. d. The free cash flow method is not used widely in practice. a Continuing free cash flows represent: a. the cash flows remaining after deducting cash flows attributable to debt holders. b. the free cash flows after the point at which the firm has settled into a long-run steady-state growth rate. c. all sustainable free cash flows. d. all after-tax free cash flows. b Steady-state growth in free cash flows could be driven by long-run expectations for growth attributable to: a. interest rates b. national exports c. general economic productivity d. balance of payments c Financial assets include all of the following except: a. excess cash b. short term investments c. intangible assets d. long-term investments c Financial liabilities include all of the following except: a. mortgages payable b. current maturities of long-term debt c. accrued taxes d. bonds payable c All of the following are logical steps that enable the analyst to determine reliable estimates of value except: a. Understand the economics of the industry b. Assess the particular firm's strategy c. Evaluate the quality of the firm's accounting d. Derive a single point estimate of value for a share's current price d Free cash flow is calculated as net cash provided by operating activities less: a. dividends. b. capital expenditures and depreciation. c. capital expenditures. d. capital expenditures and dividends. d 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: a. equal to zero. c. less than one. b. equal to one. d. greater than one. b Nonsystematic risk factors would include all of the following except: a. the sustainability of the firm's strategy b. the firm's ability to generate revenue growth c. the firm's ability to control expenses d. unemployment levels d An equity security with systematic risk equal to the average amount of systematic risk of all equity securities in the market: a. has a market beta equal to one. b. should expect to earn the same rate of return as the average stock in the market portfolio. c. gives no insight into the risk premium of stock. d. Both a and b are correct. d