# Financial Reporting

Business

## Quiz 6 :

The Role of Financial Information in Valuation and Credit Risk Assessment

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Stock valuation involves estimating the worth of a company,one of its operating units,or its ownership shares.

Free

True False

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False

Pro forma financial statements of a business,prepared by a credit analyst,would include constructing worst-case scenarios that incorporate alternative assumptions about sales,costs,competitor behavior,etc.

Free

True False

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True

Business valuation involves estimating the intrinsic value of a company,or one of its operating units.

Free

True False

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True

Fundamental valuation uses basic accounting measures to assess the amount,timing,and uncertainty of a firm's future operating cash flows or earnings.

True False

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Cash flow assessment plays a central role in analyzing the credit risk of a company.

True False

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Lenders compare their cash flow projections for a company to the firm's future dividend commitment as stated in the firm's dividend policy.

True False

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When determining the discount rate to apply to a firm's expected future cash flows,analysts should select a rate that reflects the risk (or uncertainty)associated with these cash flows.

True False

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In theory,the abnormal earnings approach and the free cash flow approach never produce the same valuation estimate.

True False

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The cost of capital,expressed in dollars,reflects the level of earnings investors demand from the company as compensation for the risks of investment.

True False

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Operating cash flow minus cash outlays to replace existing operating capacity is free cash flow.

True False

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The "free cash flow valuation approach" expresses current stock price as the discounted present value of expected future distributable cash flows.

True False

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The amount available to finance planned expansion of operating capacity,reduce debt,pay dividends,or repurchase stock is distributable (or free)cash flow.

True False

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In applying the discounted free cash flow valuation model,the discount rate used is the average cost of capital.

True False

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One popular approach used to estimate a firm's equity cost of capital is the capital asset pricing model,which expresses the equity cost of capital as the sum of the return on a riskless asset plus an equity risk premium multiplied by the company's systematic risk.

True False

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A simplified version of the discounted free cash flow valuation model assumes a zero-growth perpetuity for future cash flows.This assumption is best applied to growth companies with stable cash flow patterns.

True False

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If a company is currently generating a free cash flow of $10 per share,which is expected to continue indefinitely,and if the discount rate is 10%,the estimated share price would be $100.

True False

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The details of free cash flow valuation are important only for stock analysts and investors.

True False

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The FASB believes that the most useful predictor of future cash flows is accrual accounting earnings.

True False

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Accrual accounting produces an earnings number that smoothes out the unevenness in year-to-year cash flows,and provides an estimate of sustainable annualized long-run future free cash flows.

True False

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