SD10- Forecasting Free CashFlows

SD10- Forecasting Free CashFlows - CHAPTER 10 FORECASTING...

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CHAPTER 10 FORECASTING FREE CASH FLOWS LEARNING OBJECTIVES 1. How to build a free cash flow valuation model. 2. Why the assumptions that drive the valuation model must be reasonable and internally consistent. 3. How to set assumptions for a valuation model. 4. How to refine a valuation model. 5. How to prepare a sensitivity analysis. TRUE/FALSE QUESTIONS 1. Forecasting is more of an art than a science, and since it is subjective, it is difficult and prone to error. (moderate, L.O. 1, Introduction, true) 2. Many acquisitions are failures simply because the buyer overpays for the target firm. (moderate, L.O. 1, Introduction, true) 3. There are several “official” ways to forecast the line items included in the free cash flow forecast. (moderate, L.O. 2, Section 1, false) 4. Reasonableness means the forecasted numbers are logical in relation to each other. (easy, L.O. 2, Section 1, false) 5. Net revenues (sales) projections are often one of the most important variables affecting value. (moderate, L.O. 2, Section 1, true) 6. Revenue in the first year of the forecast does not depend on actual revenue or an assumed growth rate. (moderate, L.O. 2, Section 1, false) 7. The concepts of reasonableness and internal consistency require the analyst to build the model using cause-and-effect relationships. (moderate, L.O. 3, Section 2, true) 8. Using the Gordon Growth Model, an analyst can forecast a finite number of periods explicitly and assume a regular pattern of cash flows after that point. (moderate, L.O. 3, Section 2, false) 9. Once a firm has lost its competitive advantage, it will not be able to find positive net present value projects. (difficult, L.O. 3, Section 2, true) 10. Historical relationships are not generally used for setting forecast assumptions. (moderate, L.O. 3, Section 2, false) 11. A valuation model is a way to quantify the valuation implications of the assumptions an analyst makes about what the future holds for a firm. (difficult, L.O. 3, Section 2, true) 63
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12. A refinement in a valuation model, making it more accurate, will usually be worth the cost even if it has little impact on the forecast. (easy, L.O. 4, Section 3, false) 13. Using several different ratios to model an element of the free cash flow forecast may improve the forecast’s accuracy. (moderate, L.O. 4, Section 3, true) 14. Sensitivity analysis is not meaningful when the range of assumptions used covers the most extreme (both positive and negative) deviations from the base cash that could reasonably occur. (moderate, L.O. 5, Section 4, false) 15. A combined sensitivity analysis gives the analyst a different picture than the single-assumption sensitivities because many of the assumptions in a free cash flow forecast may be interdependent.
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SD10- Forecasting Free CashFlows - CHAPTER 10 FORECASTING...

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