FIN 674 - M&A Quiz 3 (Cash Flows) Questions and Answers correct

FIN 674 - M&A Quiz 3 (Cash Flows) Questions and Answers correct A valuation model based on the cash flows that a firm will have available to pay dividends in the future is best characterized as a(n): Free cash flow to equity model (T/F) A "constant" growth rate is called a stable growth rate and cannot be higher than the growth rate of the economy in which the firm operates. True (T/F) The stable growth rate cannot be negative. False In forecasting free cash flows it is common to assume that: The firm uses a target capital structure Free cash flow to the firm (FCFF) adjusts earnings before interest and taxes (EBIT) by: Deducting taxes, adding back depreciation, and deducting the investments in fixed capital and working capital. Free cash flow to the firm (FCFF) is the cash available to: All of the firm's investors (T/F) The tax savings have already been accounted for in the WACC by using the before-tax cost of debt. False Assume you are valuing a company that is reporting a loss of $500M, because of a one-time charge of $1B. What is the earnings we should use in the valuation? A profit of $500M (because it is a one-time loss) (T/F) The increase in non-cash net working capital will decrease cash flows in that period. True How do you calculate FCFF? EBIT(1 - t) - (Capex - Depreciation) - Increase in Non-Cash NWC = FCFF (T/F) "Trailing 12 months" (TTM) earnings is calculated by summing up the earnings for the most recent 4 quarters. True What is correct to assume when it comes to re-classifying accounting expenses? Accountants categorize R&D expenses as operating expenses but they are really capital expenses because R&D not expected to generate returns in the current year What is the intuition of capitalizing R&D expenses? 1) Better estimate of the ROC of the firm 2) Better estimate of how much the firm is reinvesting for future growth 3) Measure whether R&D is value-creating or value-destroying for the firm