The Value Of Cash Flow - 951 Words

a) Discounted Cash Flow (DCF) valuations aims to establish the value of operating business on a ’cash free/debt free’ basis and therefore it is normally undertaken using ungeared cash flows. The value of the business should remain the same regardless of its financial structure. In case that geared cash flow is used in an equity model valuation, it should be discounted at the cost of equity capital and not a weighted average cost of capital (WACC). This approach estimates the shareholders’ net returns after tax and debt servicing. The other reason why incorporating the interest payments is inappropriate is due to the fact that it leads to double counting the time value of money. This mistake is often realised by discounting positive the positive cash flow in one year and then incorporating interest on the same cash flow in income in the following year. b) Strengths †¢ DCF valuation can provide an estimate of intrinsic value of the business by capturing its underlying fundamentals including WACC, cost of equity and growth rate. The intrinsic value of the business provides an estimate of present value of cash flows that the company will pay its shareholders and therefore it should help investors to identify companies that are inexpensive compared to its peers. †¢ DCF relies on free cash flows which provide a reliable measure that mitigates the subjective accounting practices and often inaccurate estimates of reported earnings. Irrespective of how cash outlays areShow MoreRelatedThe Value Of The Cash Flow1324 Words   |  6 Pages Part: B Net Present Value (NPV) calculates the present value of the cash flow which is based on the opportunity cost of capital and comes up with a value that is added to the wealth of the shareholders if that project is accepted. Apart from Net present Value (NPV) there are a couple of more methods for investment appraisal such as internal rate of return (IRR), Payback period (PBP) and Profitability Index (PI). Net Present Value (NPV) vs. Payback Period (PBP): Payback period calculates the periodRead MoreArcadian: Cash Flow and Terminal Value1103 Words   |  5 Pagesterminal value (TV) a material component of firm values? From the exhibit, we can find the PV of five years’ dividends is small part of the market price of the stock. In my opinion, we buy a stock then get dividend periodically, which like buy a bond. The coupon payment is dividend and the face value is terminal value. The bond value is determined by the terminal value mostly. So the stock price is also determined by terminal value. The concept of going concern can explain that Terminal value is oftenRead MoreNet Present Value and Cash Flow1400 Words   |  6 Pages000. Assuming a company tax rate of 30%, the firm’s cash flow from operations is: (A) $840,000 (B) $180,000 (C) $135,000 (D) $75,000 4. Given an effective annual interest rate of 14 per cent, the present value of a perpetuity consisting of yearly payments of $25,000 starting immediately is, rounded to the nearest dollar (A) (B) $203,571 (C) $178,571 (D) 5. $232,071 $156,641 If the present value of a perpetual income stream is increasing, the discountRead MoreFree Cash Flow and Total Value1218 Words   |  5 Pagesapproach, which means that the debt to equity ratio of AirThread will not be the same from 2008 to 2012, so APV approach would be more suitable to valuate the cash flows between 2008 and 2012. After 2012, AirThread will de-lever to industry norm and thus, they will have a target leverage ratio; therefore WACC is best to estimate the terminal value. Finally, regarding the valuation of non-operating investments in equity affiliates, due to limited data, market multiple approach would be better to useRead MoreNet Present Value and Net Cash Flow1220 Words   |  5 Pagesbudgeting? a Will an investment generate adequate cash flows to promptly recover its cost? b Will an investment generate an acceptable rate of return? c Will an investment have a positive net present value? d Will an investment have an adverse effect on the environment? 3 Which of the following is not considered when using the payback period to evaluate an investment? a The profitability of the investment over its entire life. b The annual net cash flow of the investment. c The cost of the investmentRead MoreThe Value Of Cash Flow For The Financial Year 2015964 Words   |  4 PagesQuestion 1 a. The main source of cash flow for the financial year 2015 of the Harvey Norman Holdings Limited is from franchising operations. The net cash flow from the operating activities increased by 45% to $340.45 million from $338.94 million in the prior year. The strong underlying sales performance is due to the increase of franchise fees of 7.2% or $47.44 million which is from $661.86 million (2014) to $709.3 million (2015). There is also decrease in tactical support to franchise during 2015Read MoreNet Present Value and Free Cash Flow Essay example1101 Words   |  5 PagesGiven the proposed financing plan, describe your approach (qualitatively) to value AirThread. Should Ms. Zhang use WACC, APV or some combination thereof? Explain. (2 points) * From the statement of AirThread case, we know that American Cable Communication want to raise capital by Leveraged Buyout (LBO) approach. This means ACC will finance money though equity and debt to buy AirThread and pay the debt by the cash flows or assets of AirThread. * In another word, it’s a highly levered transactionRead MoreDescribe How Value-Added Is Calculated. to What Extent Are Value Added, Cash Flow, and Profit Connected to a Company’s Sales Performance?1822 Words   |  8 PagesDescribe how value-added is calculated. To what extent are value added, cash flow, and profit connected to a company’s sales performance? Throughout this essay I will be exploring how value added is calculated and to what extent value added, cash flow and profit are connected to a company’s sales performance. I will do this by introducing value added and the formulas in which they are calculated, mathematically and through accounting, the purpose why value added is calculated and the theory ofRead MoreCash Flow Per Period Of A Project790 Words   |  4 Pagesthe time in which the initial cash outflow of an investment is expected to be recovered from the cash inflows generated by the investment. It is one of the simplest investment appraisal techniques. Formula The formula to calculate payback period of a project depends on whether the cash flow per period of the project is even or uneven. In case they are even, the formula to calculate payback period is: Payback Period = Initial Investment Cash Inflow per Period When cash inflows are uneven, we need toRead MoreQuestions On Financial Concepts On Valuation1717 Wo rds   |  7 Pagesvaluation. Firm’s value maximization managers must have check on internal capabilities for external opportunities. Managers can get real option value by doing decisions on time and flexible about firm’s opportunities and capabilities. There are four main parts in the manager’s work box for investment valuation opportunities.  ¬ Net Present Values  ¬ Accounting rated of return  ¬ Real Options  ¬ Payback rules NPV implement require estimates of appropriate discount rate and expected cash flows. And there’s