Question 1

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

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Question 2

Starting with free cash flows from operations,discuss how an analyst would measure free cash flows to common equity shareholders.

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Question 3

What is the purpose of a free cash flow analysis?

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Question 4

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.

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The answer of Simpson Department Store
Simpson Department Stores operates retail...

Question 5

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 cost of equity capital with the new capital structure that results from the LBO.Assume a risk-free rate of 3.75percent and a market risk premium of 5.0 percent.

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Simpson Department Stores operates retail...

Question 6

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

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Question 7

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 to all debt and equity capital stakeholders for Garland Products for year 2012 and 2011.

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Question 8

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?

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Question 9

Shady Sunglasses operates retail sunglass kiosks in shopping malls.Below is information related to the company:  Using the above information and assuming that steady-state growth in year 2017 and beyond will be 4% calculate Shady Sunglasses' current value per share.

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The answer of Shady Sunglasses operates retail sunglass kiosks in...

Question 10

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 common equity holders for years 2012 to 2016.

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The answer of Shady Sunglasses operates retail sunglass kiosks in...

Question 11

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.

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The answer of Below is information from the statement of...

Question 12

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.

Accepted Answer

The answer of Simpson Department Store
Simpson Department Stores operates retail...

Question 13

Clarmont Corporation engaged in the following cash transactions during 2012:
  Required:
What is Clarmont's free cash flow,assuming that it reported net cash provided by operating activities of $650,000?

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Question 14

When should an analyst use nominal cash flows and when should an analyst use real cash flows?

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Question 15

Morgan Company reported the following items in 2013:  Required:
Calculate the following:
(1)net cash provided by operating activities,
(2)the net change in cash during 2013,and
(3)free cash flow.

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Question 16

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

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Question 17

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?

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Question 18

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.

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The answer of Shady Sunglasses operates retail sunglass kiosks in...

Question 19

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.

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Question 20

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.

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Quiz 12: Valuation: Cash-Flow-Based Approaches

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

Starting with free cash flows from operations,discuss how an analyst would measure free cash flows to common equity shareholders.

What is the purpose of a free cash flow analysis?

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

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?

Shady Sunglasses operates retail sunglass kiosks in shopping malls.Below is information related to the company: Using the above information and assuming that steady-state growth in year 2017 and beyond will be 4% calculate Shady Sunglasses' current value per share.

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 common equity holders for years 2012 to 2016.

Clarmont Corporation engaged in the following cash transactions during 2012: Required: What is Clarmont's free cash flow,assuming that it reported net cash provided by operating activities of $650,000?

When should an analyst use nominal cash flows and when should an analyst use real cash flows?

Morgan Company reported the following items in 2013: Required: Calculate the following: (1)net cash provided by operating activities, (2)the net change in cash during 2013,and (3)free cash flow.

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

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?

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.

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.