Chapter 3: CASH FLOW VALUATION TECHNIQUES Flashcards
Amount of cash avaliable for distribution to both debt and equity claims of the business or asset.
Net Cash Flows
Can be done by determining the present value of the net cash flows of the investment opportunity
Discounted Cash Flow Analysis (DCF)
The best case for firms is to fund its investments wholly or partly through cash from operations
Source of financing needed for investments
Significant disparities between cash flows and income may indicate earnings does NOT get converted to cash early, suggesting low quality.
Quality of earnings
Is an excellent financing strategy especially for expanding companies
Reliance of debt financing
Represents the amount of cash flows made available to the equity stockholders after deducting the net debt or outstanding liability to the creditors less available cash balance of the cmpany.
Net cash flows to equity
Refers to the cash flow available to the parties who supplied capital after paying all operating expenses, including taxes, and investing in capital expenditures
Net cash flows to the firm
Net cash flows to the firm can be computed or derived using:
Net income
Statement of cash flows
EBITDA
Is the amount made available to both debt and equity claims againts the company.
Net cash flows to the firm
Basic measure of a firm’s profitability which refers to the bottom-line figure in an income statement.
Net income available to common shareholders
_____ added back to the net income since the objective of NCF is to measure the cash flows associated with operating activities of the business
After-tax interest expense
Pertains to non-cash items that are included in the computation of the net income
Non-cash charges (net)
True or false
In quality of earnings, significant disparities between cash flows and income may indicate earnings does get converted to cash easily, suggesting low quality.
False.
Does not get converted cash easily
Pertains to cash outflows made to purchase or pay for capital expenditures that are required to support existing and future operating needs
Investment in Fixed Capital
Represents how much cash was raised or paid to finance the company
Cash flow from financing activities
Represents the net investment in current asset such as receivables and inventory reduced by current liabilities like payable.
Working Capital Adjustments
Represents how much cash is disbursed (received) for investments in (sale of) long-term assets
Cash flow from investing activities
Not typically adjusted if NCFF startscwith EBITDA
Non-cash charges
True or false
If non-chash charges are deducted, then there is a need to add the item back. If not yet deducted from EBITDA, there is no need to add it back to compute for NCFF
True
This refers to the amount of cash received by the company as a result of borrowing of long-term debt
Proceeds from borrowings
Refers to cash available for common equity participants or shareholders only after paying expenses satisfying operating and fixed capital requirements
Net Cash flows to Equity
True or false
Cash flow from financing activities are considered when computing NCFF
False. Not considered.
Same with the debt, preferred shares as another form of financing, must also be factored in the calculation of the net cash flows available to equity.
Proceeds from issuance of preferred shares
This is the total amount of loan repayment and the interest expenses, net of income tax benefit
Debt service
Payments made to preferential shareholders in the form of dividends are outflows.
Dividends on preferred shares
Total amount used to service the loans or debt financing
Debt service
Is a financial method of valuation and it is widely used to assess any investment value or estimate the valuation of a company or project
DCF model formula
States that if the value reached through discounted cash flow analysis is higher than the current cost of the investment, the opportunity would be attractive.
Thumb rule
