Card 21
Question
How can multiple internal rates of return complicate investment decisions?
Answer
Multiple IRRs can arise from alternating cash flows, making it difficult to interpret investment profitability.
CHAPTER 2
Discover CHAPTER 2: 35 flashcards with questions and answers.
- Subject
- No category / Others
- Language of creation
- English
35 flashcards
No ratings yet
0 views
Add to my sets
Sign in to add this set to your collection. You will return here afterwards.
Cards in this set
Card 22
Question
How can expected cash flow estimates be categorized as either pessimistic or optimistic?
Answer
Estimates can be conservative when additional costs are considered, or optimistic when potential revenues are maximized.
Card 23
Question
What are the steps involved in estimating project free cash flows?
Answer
Forecast future cash flows, estimate a discount rate, and discount cash flows to present value.
Card 24
Question
How can small changes in assumptions impact DCF valuations?
Answer
Even minor adjustments can significantly alter the calculated value due to sensitivity in cash flow predictions.
Card 25
Question
How does a price decay function inform price forecasting?
Answer
It suggests that as market volume increases, prices decrease based on historical patterns.
Card 26
Question
Why are only incremental cash flows relevant in a DCF analysis?
Answer
They represent the additional cash flows generated by the investment, which are critical for assessing its value.
Card 27
Question
How do external economic factors impact income-based valuation?
Answer
Market forces such as economic conditions can influence company performance and, consequently, valuation.
Card 28
Question
Why is attention to detail crucial in defining cash flows for valuations?
Answer
Precise cash flow definitions ensure accuracy in forecasting and subsequent analysis.
Card 29
Question
What methodology is generally used for forecasting industry sales estimates?
Answer
Historical data analysis combined with forecasting techniques based on past trends.
Card 30
Question
What is the distinction between equity cash flows and project cash flows?
Answer
Equity cash flows are returns to shareholders, while project cash flows include all cash movements related to a specific project.
Card 31
Question
How does the time value of money (TVM) principle impact DCF analysis?
Answer
TVM states that a dollar today is worth more than a dollar in the future; future cash flows must be discounted to present value.
Card 32
Question
What cash flows are considered relevant for DCF valuation?
Answer
Only cash flows that directly result from the acceptance of the investment, known as incremental cash flows.
Card 33
Question
What is the Discounted Cash Flow (DCF) analysis method?
Answer
DCF is a method used to value an investment by discounting estimated future cash flows.
Card 34
Question
What are the factors that influence the assumptions made during cash flow forecasting?
Answer
Market conditions, past performance, competition, and economic outlook.
Card 35
Question
How do you calculate net operating profit after taxes (NOPAT)?
Answer
NOPAT = (Revenues - Total Expenses) × (1 - Tax Rate).
How to use this set
Read the preview and check whether the content and answers suit your learning goal. You can add the public set to your sets to study it. Your account shows the available actions.