SD9-Free Cash Flow and Model Analysis

SD9-Free Cash Flow and Model Analysis - CHAPTER 9 FREE CASH...

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CHAPTER 9 FREE CASH FLOW MODEL AND ANALYSIS LEARNING OBJECTIVES 1. The free cash flow valuation model. 2. The difference between free cash flow and GAAP definitions of cash flow. 3. The definition of free cash flow equivalents and why they are included in the free cash flow model. 4. How to derive a free cash flow statement from a historical combined GAAP income statement and cash flow model. TRUE/FALSE QUESTIONS 1. Because a forecast is forward looking, it is often a good predictor of the future. (moderate, L.O. 1, Section 1, true) 2. Although the free cash flow breakdown differs from the GAAP cash flow categories, the net cash flow is exactly the same. (moderate, L.O. 2, Section 2, true) 3. Net cash flow can be defined as the change in cash that occurs over a period for a firm. (moderate, L.O. 2, Section 2, true) 4. Certain noncash transactions that are not included in the GAAP income statement but are included in the GAAP statement of cash flows are called free cash flow equivalents. (moderate, L.O. 3, Section 2, false) 5. Adding GAAP cash flow from operations and GAAP cash flow from investing is a good starting point to derive free cash flow. (difficult, L.O. 3, Section 2, true) 6. When preparing a free cash flow statement, any cash flow resulting from an item such as a nonoperating net asset must be moved into the free cash flow section of the statement. (moderate, L.O. 4, Section 3, false) 7. Published balance sheets prepared under GAAP provide sufficient detail to create an accurate cash flow statement. (difficult, L.O. 4, Section 3, false) 8. It is not necessary to understand how GAAP treats the firm’s transactions when preparing the free cash flow statement. (moderate, L.O. 4, Section 3, false) 9. Free cash flow adjustments can be made without a thorough understanding of GAAP, since this statement is not prepared under GAAP. (moderate, L.O. 4, Section 3, false) 10. The analyst must know the firm’s federal and state income tax rates to determine the amounts of tax effects on various items in the free cash flow statement. (moderate, L.O. 4, Section 3, true) 11. The analyst double-checks that no items have been missed in the conversion of the GAAP cash flow statement to the free cash flow statement by confirming that the total net change in cash is the same for both statements. 56
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(moderate, L.O. 4, Section 3, true) 12. Unlike changes in interest payable, the amortization of bond discount or premium is a difference between interest expense recognized and cash paid. (difficult, L.O. 4, Section 3, false) 13. Any change in the principal amount of debt during the year that is not explained by issuances or repayments is due to amortization. (moderate, L.O. 4, Section 3, true) 14. If there is essentially no difference between capitalized interest for financial reporting and for tax, there is no tax effect necessary in making this adjustment in the free cash flow statement.
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This note was uploaded on 11/22/2010 for the course CAC BSA taught by Professor Kairus during the Spring '10 term at Korea University.

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SD9-Free Cash Flow and Model Analysis - CHAPTER 9 FREE CASH...

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