CASH FLOW

'True'.

A firm's operating cash flow (OCF) is the cash flow it generates from its normal operations: producing and selling its output of goods or services. Select one: True False

$2,300

ABC Publishing recently reported $10,750 of sales, $5,500 of operating costs other than depreciation, and $1,250 of depreciation. The company had $3,500 of bonds that carry a 6.25% interest rate, and its federal-plus-state income tax rate was 35%. During the year, the firm had expenditures on fixed assets and net operating working capital that totaled $1,550. These expenditures were necessary for it to sustain operations and generate future sales and cash flows. What was its free cash flow? A. $1,873 B. $2,076 C. $1,972 D. $2,300 E. $2,185

$400,000

ABC Shipyards has $20 million in total investor-supplied operating capital, and its WACC is 10%. Scranton has the following income statement: What is ABC's EVA? $420,000 A. $486,203 B. $463,050 C. $400,000 D. $441,000

'True'.

FCFE (Free Cash Flow to Equity) are cash flows that are only available for the equity holders. Select one: True False

'False'.

Free cash flow is the amount of cash that if withdrawn would harm the firm's ability to operate and to produce future cash flows. Select one: True False

'True'.

The value of any asset is the present value of the cash flows the asset is expected to provide. The cash flows a business is able to provide to its investors is its free cash flow. This is the reason that FCF is so important in finance. Select one: True False

$2.25

ABC Inc. recently reported operating income of $2.75 million, depreciation of $1.20 million, and had a tax rate of 40%. The firm's expenditures on fixed assets and net operating working capital totaled $0.6 million. How much was its free cash flow, in millions? A. $1.93 B. $2.14 C. $2.03 D. $2.25 E. $2.36

$425

ABC Inc. had the following data for 2011, in millions: Net income = $600; after-tax operating income [EBIT(1 - T)] = $700; and Total assets = $2,000. Information for 2012 is as follows: Net income = $825; after-tax operating income [EBIT(1 - T)] = $925; and Total assets = $2,500. How much free cash flow did the firm generate during 2012? A. $383 B. $514 C. $468 D. $566 E. $425

-$180,000

ABC Motors recently reported the following information: • Net income = $600,000. • Tax rate = 40%. • Interest expense = $200,000. • Total investor-supplied operating capital employed = $9 million. • After-tax cost of capital = 10%. What is the company's EVA? -$208,373 A. -$180,000 B. -$189,000 C. -$198,450 D. -$171,000

$10,225

ABCPumps recently reported $185,250 of sales, $140,500 of operating costs other than depreciation, and $9,250 of depreciation. The company had $35,250 of outstanding bonds that carry a 6.75% interest rate, and its federal-plus-state income tax rate was 35%. In order to sustain its operations and thus generate future sales and cash flows, the firm was required to spend $15,250 to buy new fixed assets and to invest $6,850 in net operating working capital. What was the firm's free cash flow? A. $11,837 B. $10,225 C. $12,429 D. $11,273 E. $10,736

'True'.

Valuation based on what the company can generate in the future is the most common method of valuation. Select one: True False

'False'.

Changes in working capital have no effect on free cash flow. Select one: True False

False MVA gives us an idea about how much value a firm's management has added over the firm's life.

EVA gives us an idea about how much value a firm's management has added over the firm's life. Select one: True False

'True'.

FCFF (Free Cash Flow to the Firm) are cash flows that are available for both the debt holders and the equity holders. Select one: True False

True

Free cash flow (FCF) is, essentially, the cash flow that is available for interest and dividends after the company has made the investments in current and fixed assets that are necessary to sustain ongoing operations. Select one: True False

False

If a firm is reporting its income in accordance with generally accepted accounting principles, then its net income as reported on the income statement should be equal to its free cash flow. Select one: True False

TRUE

In finance, we are generally more interested in cash flows than in accounting profits. Free cash flow (FCF) is calculated as after-tax operating income plus depreciation less the sum of capital expenditures and changes in net operating working capital. Select one: True False

The company sold a new issue of common stock.

Last year, ABC Industries had (1) negative cash flow from operations, (2) a negative free cash flow, and (3) an increase in cash as reported on its balance sheet. Which of the following factors could explain this situation? A. The company had a sharp increase in its inventories. B. The company made a large capital investment early in the year. C. The company had a sharp increase in depreciation expenses. D. The company sold a new issue of common stock. E. The company had a sharp increase in its accrued liabilities.

'False'.

Managers should be less concerned with free cash flow than with accounting net income. Accounting net income is the "bottom line" and represents how much the firm can distribute to all its investors both creditors and stockholders. Select one: True False

'False'.

Most rapidly growing companies have positive free cash flows because cash flows from existing operations will exceed fixed assets and working capital needed to support the growth. Select one: True False Feedback