Questions:
Questions and Exercises
1. Free Cash Flows. Explain ‘‘free'' cash flows.
• Describe which types of cash flows are free and which are not.
• How do free cash flows available for debt and equity stakeholders differ from free cash flows available for common equity shareholders?
2. Free-Cash-Flows-Based Valuation Approaches.
• Explain the theory behind the free cash flows valuation approaches.
• Why are free cash flows value-relevant to common equity shareholders when they are not cash flows to those shareholders but rather are cash flows into the firm?
• Explain required income. What does required income represent? How is required income conceptually analogous to interest expense?
3. Residual Income:
• Explain residual income. What does residual income represent? What does residual income measure?
4. Value Determinants.
• What are the fundamental determinants of share value, and how do they affect market-based valuation multiples, such as market-to-book and price- earnings ratios?
Residual ROCE. Explain residual ROCE (return on common shareholders' equity).
• What does residual ROCE represent? What does residual ROCE measure?