ACCA Applied Skills · Financial Management · Nature and purpose of the valuation of business and financial assets
Which of the following is the most appropriate cash flow to discount when valuing the whole of a business using a free cash flow to the firm approach?
Free cash flow to the firm is operating cash flow after tax and reinvestment but before interest paid to lenders. It is discounted at WACC to value the whole business, because it is available to all providers of finance. Flows after interest are equity flows.
- AOperating cash flow after tax and reinvestment, before interest payments to lendersCorrect
- BCash flow remaining after interest and loan repayments, available to shareholders only
- CAccounting profit after tax and interest for each year
- DDividends paid to shareholders in each year
Explanation
Free cash flow to the firm is the cash generated by operations after tax and after investment in non-current assets and working capital, but before financing flows such as interest. It is discounted at the WACC to give the value of the whole business. The option after interest and loan repayments is a flow to equity, which is not matched to WACC.
Did you get it right without looking?
One question tells you little. A timed set on Nature and purpose of the valuation of business and financial assets shows your real accuracy, how long you take and where you lose marks.
More Nature and purpose of the valuation of business and financial assets questions
- Orla Co has 400,000 shares. Its statement of financial position shows total assets $5,000,000 including goodwill of $600,000 and development…
- Brenner Co's statement of financial position shows net assets of $2,400,000 at carrying amounts. Receivables of $150,000 include $40,000 tha…
- Which of the following is an assumption of the dividend valuation model (without growth) when used to value a share?
- Which of the following is a recognised limitation of using the net asset basis to value a going concern?
- Kestrel Co expects free cash flows to the firm of $4.0m in one year's time, growing at 3% a year in perpetuity. Its WACC is 11%. Kestrel has…
- Dalton Co has forecast free cash flows to the firm of $6.0m at the end of year 1 and $7.2m at the end of year 2. From year 3 onwards they wi…