Module 13 Cash-Flow-Based Valuation Learning Objectives – coverage by question True/False Multiple Choice Exercises Problems Essays LO1 – Identify equity valuation models and explain the inf... ormation required to value equity securities. 1, 2 1, 2 1 1, 2 LO2 – Describe and apply the discounted free cash flow model to value equity securities. 1-6 3-10 3-12 2-7 3 ©Cambridge Business Publishers, 2013 Test Bank, Module 13 13-1Module 13: Cash-Flow-Based Valuation True/False Topic: Discounted Cash Flow (DCF) Valuation Model LO: 2 1. One advantage of the DCF model is that it only recognizes value evidenced by cash flow, which is less easily manipulated by accrual accounting practices. Answer: True Rationale: The DCF model is based on accrual accounting principles. In fact, free cash flow is defined as NOPAT – change NOA. Cash flow is not affected by accrual accounting practices, which recognize revenue when earned and the matching of expenses when incurred. Topic: Free Cash Flow LO: 2 2. Firms can increase free cash flow to the firm (FCFF) in the short run by cutting back on investment in fixed assets. Answer: True Rationale: Capital expenditures are a deduction in the computation of FCF. As a result, firms can increase FCF in the short run by cutting back on CAPEX. Long-run FCFF may be lessened by the failure to invest in PPE. Topic: Terminal Value LO: 2 3. The higher the expected growth rate of the terminal free cash flow to the firm, the lower the present value of the terminal value becomes. Answer: False Rationale: The terminal value is given by FCF/(r-g) where g is the growth rate and r is the discount rate. As g increases, the terminal value increases as well. Topic: Stock Price, Cash Flow and Discount Rate LO: 2 4. The price one is willing to pay for a common stock is positively related to expected free cash flows to the firm (FCFF) and negatively related to the required rate of return. Answer: True Rationale: Higher expected FCFF and lower required rate of return will lead to a higher valuation. ©Cambridge Business Publishers, 2013 13-2 Financial Statement Analysis & Valuation, 3rd EditionTopic: DCF Valuation Model LO: 2 5. The DCF valuation of a firm’s equity involves the following three steps: a. Forecast free cash flows to the firm (FCFF) for the horizon period. b. Forecast discount FCFF for the terminal period. c. Sum the horizon and terminal periods to yield firm value. Answer: False Rationale: To value the firm’s equity, we sum the present values of the horizon and terminal periods. Topic: NOPAT LO: 2 6. Net operating profit after tax (NOPAT) is equal to net income less interest expense incurred during the year. Answer: False Rationale: NOPAT is computed from the income statement and equals operating revenues less operating expenses, all of which is expressed on an after-tax basis. ©Cambridge Business Publishers, 2013 Test Bank, Module 13 13-3Multiple Choice Topic: Equity Valuation Models LO: 1 1. There are many types of equity valuation models. They differ mainly in: A) The choice of length of horizon periods B) The treatment of the terminal period C) The choice of what is forecast D) The interaction of income statement and balance sheet items E) None of the above Answer: C Rationale: Different models forecast different items. Commonly forecasted items include dividends, cash flows, and residual income. Topic: Dividend Discount Model LO: 1 2. The advantage of the dividend discount model is that: A) It is simple B) Dividends are easily observable C) Capital gains can be earned instead of dividends D) Firms publish their dividend policies E) All of the above Answer: A Rationale: many firms do not pay dividends and relying on their observability would mean some firms would have a zero stock price. Capital gains are irrelevant to the dividend discount model. The model is simple. Topic: Projecting Revenue One Year Out (Numerical calculations required) LO: 2 3. Following is information from adidas-Salomon AG for fiscal 2011 (€ in millions). Total 2011 revenue € 13,344 Total revenue growth rate 11.3% Terminal revenue growth rate 6.1% Net operating profit margin (NOPM) 5.4% Net operating asset turnover (NOAT) 2.80 Projected 2012 total revenue would be: A) € 13,344 million B) € 1,507 million C) € 14,158 million D) € 14,852 million E) None of the above Answer: D Rationale: € 13,344 million × 1.113 = € 14,852 million ©Cambridge Business Publishers, 2013 13-4 Financial Statement Analysis & Valuation, 3rd EditionTopic: Projecting Revenue Two Years Out – Numerical calculations required LO: 2 4. Following is information from Williams Engineering for 2012. Total 2012 revenue $159,110 Projected revenue growth rate, for next five years -1.3% Terminal revenue growth rate, after year 5 5.2% Net operating profit margin (NOPM) 6.6% Net operating asset turnover (NOAT) 1.11 Projected 2014 total revenue would be: A) $157,042 B) $161,178 C) $163,274 D) $155,000 E) None of the above Answer: D Rationale: $159,110 × 0.987 × 0.987 = $155,000 Topic: Terminal Period Present Value LO: 2 5. Which of the following represents the present value of a terminal period FCFF if rw is the weighted average cost of capital? A) (FCFFt+1/(rw-g))/(1+rw)t B) (FCFFt+1/(g- rw))/(1+rw)t C) (FCFFt/(rw-g))/(1+g)t D) (FCFFt/(g- rw))/(1+g)t Answer: A Rationale: The present value of a terminal period FCFF is computed as (FCFFt+1/(rw-g))/(1+rw)t ©Cambridge Business Publishers, 2013 Test Bank, Module 13 13-5Topic: Computing Free Cash Flows – Numerical calculations required LO: 2 6. Bundy Manufacturing reported the following information for fiscal 2012 and 2011. What are the company’s free cash flows to the firm (FCFF) for 2012? December 31 2012 2011 Operating assets $50,330 $48,122 Operating liabilities 24,778 26,978 Net cash flow from operations 13,396 11,968 Net operating profit after tax (NOPAT) 11,368 9,794 Discount factor 6.0% 5.8% A) $6,566 B) $6,960 C) $8,988 D) $8,480 E) None of the above Answer: B Rationale: FCFF = NOPAT- increase in net operating assets (NOA) NOA = Operating assets – Operating liabilities 2011 NOA = $21,144 2012 NOA = $25,552 FCFF = $11,368 – ($25,552 – $21,144) = $6,960 Topic: Computing Free Cash Flows – Numerical calculations required LO: 2 7. Catfish Inc. manufactures life-vests for marine use. Based on the following information, what are the company’s free cash flows to the firm (FCFF) for the year ended October 31, 2012? October 31 2012 2011 Cash $8,800 $7,120 Net operating working capital $2,800 $1,400 Net long-term operating assets $4,800 $4,000 Net nonoperating obligations (NNO) $600 $400 Net operating profit after tax (NOPAT) $800 $720 Discount factor 5.4% 5.8% A) -$700 B) $0 C) -$600 D) -$1,400 E) None of the above Answer: D [Show More]
Last updated: 6 months ago
Preview 1 out of 24 pages
Finance> TEST BANK > Troy UniversityMGT 337337278190-Test-Bank-for-Heizer-Operations-Management-9e (All)
CHAPTER 1: OPERATIONS AND PRODUCTIVITY TRUE/FALSE 1. Some of the operations-related activities of Hard Rock Café include designing meals and analyzing them for ingredient cost and labor requiremen...
By Dr Medina Reed , Uploaded: Sep 27, 2021
Finance> TEST BANK > Foundations of Finance, 10E by Keown Test Bank (All)
Test Bank for Foundations of Finance, 10E, 10th Edition by Arthur J. Keown,John D. Martin,J. William Petty TEST BANK ISBN-13: 9780135639382 Full chapters included PART 1: THE SCOPE AND ENVIRONMEN...
By Test-Bank Lounge , Uploaded: Sep 12, 2022
Finance> TEST BANK > FIN 2603 TESTBANK CHAPTERS 1 - 8 FINANCE FOR NON-FINANCIAL MANAGERS (All)
University of South Africa FIN 2603 TESTBANK CHAPTERS 1 - 8 FINANCE FOR NON-FINANCIAL MANAGERS Chapter 1: The financial goal of a firm Any organisation that is Page : 4 Group Chapter 2: Underst...
By QuizMaster , Uploaded: Aug 18, 2022
Finance> TEST BANK > Fundamentals of Financial Management, 14E by Eugene F. Brigham/Joel F. Houston-|Test bank| Reviewed/Updated for 2021-CompleteOCRALL Chapters Included (All)
Fundamentals of Financial Management, 14E by Eugene F. Brigham/Joel F. Houston-|Test bank| Reviewed/Updated for 2021-Complete>>ALL Chapters Included The Test bank borrows from the elaborated text b...
By ProfXams , Uploaded: Aug 26, 2021
Finance> TEST BANK > FIN100-HK1. Principles of Finance - Final Term Exam Questions And Answers.;TOP SCORE/.RATED A (All)
The primary goal of a publicly owned corporation is to maximize shareholder wealth The five basic principles of finance include al of the following EXCEPT: incremental profits determine value All...
By Nicky , Uploaded: Mar 02, 2022
Finance> TEST BANK > Public Finance in Canada, 5th Canadian Edition, By Harvey Rosen, Ted Gayer, Jean-Francois Wen, Tracy Snoddon (Test Bank) (All)
Market leading Rosen/Wen/Snodden Public Finance in Canada provides a modern treatment of the theory of public finance, and a thorough discussion of empirical issues from a Canadian perspective. Compr...
By eBookSmTb , Uploaded: Dec 02, 2022
Finance> TEST BANK > International Financial Management Test Bank (All)
International Financial Management Test Bank
By quizprof , Uploaded: Jul 15, 2021
Finance> TEST BANK > Test Bank – Financial Markets and Institutions 6th Edition by Saunders, Cornett (All)
Test Bank Financial Markets and Institutions 6th Edition Saunders Chapter 01 Introduction True / False Questions 1. Primary markets are markets in which users of funds raise cash by selling sec...
By A+ Solutions , Uploaded: Feb 21, 2021
Finance> TEST BANK > Corporate Finance The Core, 5e Jonathan Berk (Test Bank All Chapters, 100% original verified, A+ Grade) (All)
Corporate Finance The Core, 5e Jonathan Berk (Test Bank All Chapters, 100% original verified, A+ Grade) Corporate Finance The Core, 5e Jonathan Berk (Test Bank All Chapters, 100% original verified,...
By eBookSmTb , Uploaded: Dec 04, 2023
Finance> TEST BANK > Test Bank For Principles of Managerial Finance, 16th Edition By Chad Zutter, Scott Smart (Pearson) (All)
Using a proven teaching and learning framework to solve real-world problems The Teaching and Learning System, a hallmark feature of Principles of Managerial Finance, weaves pedagogy into concepts and...
By studenthelp , Uploaded: Jul 18, 2023
Connected school, study & course
About the document
May 07, 2022
Number of pages
This document has been written for:
May 07, 2022
Avoid resits and achieve higher grades with the best study guides, textbook notes, and class notes written by your fellow students
Your fellow students know the appropriate material to use to deliver high quality content. With this great service and assistance from fellow students, you can become well prepared and avoid having to resits exams.
Your fellow student knows the best materials to research on and use. This guarantee you the best grades in your examination. Your fellow students use high quality materials, textbooks and notes to ensure high quality
Get paid by selling your notes and study materials to other students. Earn alot of cash and help other students in study by providing them with appropriate and high quality study materials.
Florida State University
Great way to get paid for all of the hard work!.
It is an excellent site to post assignment.
Florida State University
Awesome and a great way to make money!.
Thank you so much for this nice platform.
University Of South Florida
Great! It is a good place to share knowledge.
University of Windsor
G D Goenka University
It is helpful Platform for offering the notes
Louisiana State University
I love this site, they make everything so easy
Florida State University
Great tool for learning! I wish you success.
In Browsegrades, a student can earn by offering help to other student. Students can help other students with materials by upploading their notes and earn money.
Copyright © Browsegrades · High quality services·