Topic2.1 Valuation Foundation Quiz

Why is historical accounting information important for valuation?

• It provides exact future cash flow projections

• It helps in understanding past performance to estimate future performance

• It is not important; only future projections matter

• It is used directly as the valuation amount

Free Cash Flow (FCF) is calculated as Cash Flow from Operations (CFO) minus Capital Expenditure (CAPEX) minus change in Operating Working Capital (OWC).

• True

• False

According to the lecture notes, how is CFO calculated?

• Net Income + Depreciation

• (EBIT * (1 - tax rate)) + D&A

• Revenue - Operating Expenses - Taxes

• Cash receipts from customers minus cash payments to suppliers and employees

How does an increase in CAPEX affect a company's cash flow?

• Increases cash flow

• Decreases cash flow

• Has no effect on cash flow

• Depends on the source of funding for CAPEX

What is Enterprise Value (EV)?

• Market capitalization of the company

• Total assets minus total liabilities

• Market value of equity plus net debt

• Book value of equity

CASE STUDY: A company is projecting its cash flow for the next year. It expects revenue to be $1,000 million, with CAPEX at 5% of revenue, and an increase in OWC of $10 million. Its CFO for the next year is projected to be $200 million. What is the expected FCF for the next year?

• $200 million - (5% of $1,000 million) - $10 million = $140 million

• $200 million - (5% of $1,000 million) + $10 million = $160 million

• $200 million + (5% of $1,000 million) - $10 million = $240 million

• $200 million + (5% of $1,000 million) + $10 million = $260 million

A high Price-to-Book (P/B) ratio indicates that:

• The stock is undervalued

• The stock is overvalued

• The company has high growth potential

• The company has a lot of intangible assets

Which of the following is a correct valuation multiple?

• EV / Revenue

• EV / Net Income

• P/E for EV

• P/B for EV

If a company has a market value of equity of $500 million, total debt of $200 million, and cash of $50 million, what is its Enterprise Value (EV)?

• $500 million + $200 million + $50 million = $750 million

• $500 million + $200 million = $700 million

• $500 million + ($200 million - $50 million) = $650 million

• $500 million - $200 million + $50 million = $350 million

Why is EV/EBITDA preferred over P/E for comparing companies with different capital structures?

• EV/EBITDA includes the value of debt, while P/E does not

• EV/EBITDA uses operating earnings that are not affected by interest expenses

• P/E is influenced by the company's tax rate

• EV/EBITDA is easier to calculate