Ch. 19 - Valuations: Income-Based Approaches

Question 1

Different Income Based Approaches

Answer 1

1. Capitalized Cash Flow
2. Discounted Cash Flow
3. Market Based
   4 Other

Question 2

When to use the Capitalized Cash Flow Approach

Answer 2

1. The entity is a going concern and has active operations
2. Historical results reflect future results
3. No reliable projections are prepared

Question 3

Steps in the Capitalized Cash Flow Approach

Answer 3

Maintainable operating cash flows (EBITDA)
- Income Taxes
- sustaining capital investment
/ capitalization rate
= capitalized cash flows
\+ PV of existing tax pools
\+- redundant assets/liabilities
- O/S interest bearing debt
= Equity value

Question 4

Steps in the Discounted Cash Flow Approach

Answer 4

PV of cash flows
\+ PV of residual/terminal value
\+ PV of existing tax shield
= Enterprise value
\+ NRV of redundant assets/liabilities
- O/S interest-bearing debt
= Equity value

Question 5

Steps in the Capitalized Earnings Method

Answer 5

1. Determine type of earnings (EBITDA, EBIT, after tax, free cash flow)
2. normalize earnings
3. chose a capitalization rate (or multiplier)
4. calculate investment value