Topic 7- Investment Analysis II

Question 1

Cash flows are

Answer 1

incremental

Question 2

What generates Cash flows?

Answer 2

assets

Question 3

Financial leverage is

Answer 3

debt

Question 4

What does it mean by unleveraged free cash flow?

Answer 4

calculating the fcf ignoring how the firm is financed

Question 5

When valuing assets of a project you are estimating…?

Answer 5

the asset side of the BS (NPV)

Question 6

Value is created where on the BS

Answer 6

left hand side

Question 7

When conducting valuation you must consider 2 things:

Answer 7

who gets the cash flow
cost of capital (r)

Question 8

NPV calculation using FCF

Answer 8

FCF0 then date back the others using FCF/(1+r)^t

Question 9

Accounting earnings can be different from

Answer 9

CF generated by a project

Question 10

What are the 3 factors that account for the difference in accounting earnings and project CFs?

Answer 10

1) accrual vs cash revenues (revs recognised when sale made not when cash exchanged)
2) accrual vs cash expense (expenses recognised when incurred)
3) non-cash charges, capital (revs- expenditures not done in specific period that they were made)

Question 11

What are free cash flows?

Answer 11

money free/available to pay out to investors like bond and shareholders

Question 12

FCF are CF that f….

Answer 12

float freely away after business operations

Question 13

FCF are in….

Answer 13

incremental after tax CFs

Question 14

What are the 4 components of a FCF/formula?

Answer 14

ocf-change in nwc- capex + tax

Question 15

Capital expenditure

Answer 15

is the initial upfront cost to get assets and get them ready for use

Question 16

What PPE does not get depreciated?

Answer 16

land

Question 17

Depreciation is the

Answer 17

decrease in value of an asset over its useful life

Question 18

SLD method

Answer 18

= cost of asset+ install costs/ useful life

Question 19

Tax effect is the

Answer 19

after tax salvage value

Question 20

Whenever an asset is sold at the market price (salvage vaue) that is different from the book value…

Answer 20

taxes must be paid or received

Question 21

BV formula

Answer 21

CAPEX- accumulated depreciation
CAPEX/useful life then that x amount times by how many years its been which is depreciation so take that away from capex

Question 22

ATS formula

Answer 22

SV- (Tax(Sv-BV))

Question 23

Often the BV in a question will be

Answer 23

0

Question 24

If the SV>BV

Answer 24

ATS>BV

Question 25

SV=BV

Answer 25

ATS=SV

Question 26

SV>BV

Answer 26

ATS

Question 27

Delta net working capital is the money...

Answer 27

invested in inventory or accounts receivable that cannot be used elsewhere which represents a drain in CF

Question 28

An increase in WC means a ___ for CF

Answer 28

decrease (paying )

Question 29

A decrease in WC means a ___ for CF

Answer 29

increase (less expenses so can take money out)

Question 30

Why is forecasting future growth important?

Answer 30

to forecast effects of growth on WC and build these effects into CFs

Question 31

NWC formula

Answer 31

non-cash CA- non-debt CL

Question 32

A non-cash current asset is

Answer 32

an asset not held on continuing basis, consumed or converted to cash within one cycle

Question 33

Non-cash CA example

Answer 33

acc r or inventory

Question 34

A non-debt CL is

Answer 34

accounts payable to outside parties within one operating cycle

Question 35

OCF is the

Answer 35

cash generated from normal operations of the business

Question 36

OCF formula (top down approach)

Answer 36

EBIAT + Dep (Rev-Vc-Fc-Dep)x(1-T)+dep

Question 37

CF effects from 3 other costs

Answer 37

Cannibalisation costs (loss of sales due to new product in market) Sunk costs (can't be recovered costs- don't worry about) Opportunity costs (value foregone as a result of an action, must charge as startup cost)