Scenarios in projecting future cash flows

Question

Answer true or false to each question with one or two sentences of explanation for each.

Question 1. The greater the uncertainty of the future, the greater the need for alternative scenarios in projecting future cash flows.

Question 2. The reliability of continuing value estimates is greater than of explicit forecast estimates.

Question 3. Competition is a factor in forecasts that relates more to the pricing estimates in a forecast than to the costs to produce a firm's product.

Question 4. Forecasting labor costs over the future is more difficult for an industry that is seriously restructuring than for a firm in the retailing sector.

Question 5. Forecasting cash flows in the last five years for major airlines has become much easier than fifteen or twenty years ago.

Question 6. The changing market structure facing a firm in its product market has more impact on a firms pricing policy than do changes in tax laws.

Question 7. A firm's balance sheet is a stock statement while its income statement is a flow statement reflecting the changes in two consecutive balance sheets.

Question 8. In Marshall's economic profit model, economic profit increases the more competitive are product markets.

Question 9. Because of the time value of money, the discounted present values of a given absolute dollar amount are smaller for estimates of continuing value than the explicit forecasted values of the near term or explicit forecasts.

Question 10. The Payback model has more significance in an industry with rapid technological change than in one where such rapid changes do not occur.

Question 11. The greater the discontinuities in addition to a firm's fixed capital, the more difficult are forecasts of near term cash flows.

Question 12. In times of rapid technological change in product markets and in the determination of such things as the labor to capital ratio, the assumptions in the continuing value model are less reliable than if the firm operated in product and resource markets where little change occurred.

Question 13. As opposed to the Discounted Cash Flow (DCF) Models, the Economic Profit Model does not involve the estimation of future profits and cash flows.

Question 14. Free cash flows (FCF) are subject to management decisions for increasing or decreasing capital investments.

Question 15. Charges for depreciation must be added back to profits in calculating FCF.

Question 16. Corporate taxes paid in-cash must be added back in determining FCF.

Question 17. Growth is only a successful driver of increased business value if Return on Invested Capital (ROIC) exceeds weighted average cost of capital (WACC).

Question 18. As industries become increasingly competitive, economic profit, as defined by Alfred Marshall, tends to increase in size.

Question 19. As interest rates rise, in a persistent and significant manner, the WACC tends to decrease.

Question 20. According to the Modigliani-Miller Model, in a tax-free world, the enterprise value of company is independent of the capital structure, that is, the ratio of debt to equity.

Question 21. Return on Assets (ROA) and Return on Equity (ROE) are metrics determined by FCF.

Question 22. On the balance sheet, the values of fixed assets are based on historical costs, not on the present value on expected FCF.

Question 23. In estimating the WACC, we use the current cost of the capital components as viewed in current markets, rather than the historical costs, when the existing capital was raised.

Question 24. If interest rate expense on debt capital is deductible in determining the tax liability, while dividends on capital stock are not, the component weight of debt capital will be greater than if dividends and interest rates were treated equally for tax purposes.

Question 25. If you anticipated rising interest rates over the next several years and you wished to issue long-term debt bonds to raise capital, callable bonds would make more sense than if interest rates were to fall over the next few years.