QUIZ

DISCOUNTED CASH FLOWS METHOD

THEORIES
1. What is the purpose of deriving Net Cash Flows to the Firm (NCF to the Firm) in
valuation?
a. To determine the cash available for distribution to equity stockholders.
b. To calculate the theoretical value of a company's core business activities.
c. To focus solely on cash flows generated by financing activities.
d. To understand the disparities between cash flows and income.

2. Which of the following is NOT a common non-cash item that needs to be considered
while deriving Net Cash Flows based on net income?
a. Depreciation and amortization
b. Provisions for doubtful accounts
c. After-tax interest expense
d. Restructuring Charges

3. Why is it important to analyze cash flows and their sources in the valuation process?
a. To determine whether investments are funded internally or through debt and
equity financing.
b. To focus on the cash flows generated by financing activities.
c. To avoid overlooking or duplicating certain items in the financial statements.
d. To determine the theoretical value of a company's core business activities.

4. What does the Net Cash Flows to Equity represent?

a. The cash flow available to all investors, whether debt or equity holders.
b. The cash is accessible to equity stockholders after deducting net debt and
outstanding liabilities.
c. The cash flow generated by a company's core business operations.
d. The cash available for distribution to debt and equity claims.

5. This represents how much cash is disbursed (received) for investments in (sale of)
long-term assets like property, plant, and equipment and strategic investments in other
companies.
a. Cash flow from Operating Activities
b. Cash flow from Financing Activities
c. Cash flow from Investing Activities
d. Tax Savings on Non-cash Charges

6. This represents how much cash was raised (or repaid) to finance the company. This is
not considered when computing NCFF.
a. Cash flow from Operating Activities
b. Cash flow from Investing Activities
c. Cash flow from Financing Activities
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DISCOUNTED CASH FLOWS METHOD
d. Tax Savings on Non-cash Charges

7. A confidential activity in a company for or for an analyst. It is the task of building an

abstract representation of the real-world financial situation
a. Information
b. Financial modelers
c. Financial modeling
d. Historical Information

8. Most ideal reference for the historical performance of the company.

a. Audited Financial Statements
b. Corporate Disclosures
c. Contracts
d. Peer Information

9. It is the total amount used to service the loans or debt financing. This is the total amount
of loan repayment and the interest expenses, net of income tax benefit.
a. Debt Interest
b. Debt Service
c. Borrowing Options
d. Proceeds from Borrowing

10. It represents the level of cash available for ordinary shareholders as a form of dividends
after paying operating expenses, satisfying operating and fixed capital requirements, and
settling cash flow transactions involving creditors and preferred shareholders.
a. Net Cash Flow to Equity
b. Net Cash Flow to the Firm
c. Net Cash Flow to Liabilities
d. Net Cash Flows to Operating Expenses
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DISCOUNTED CASH FLOWS METHOD

TRUE OR FALSE

Non-cash charges are not typically adjusted if NCFF starts with EBITDA. However,
TRUE it is important that analysts should check whether non-cash charges were already
deducted in computing for EBITDA or not.

Pro-forma Financial Statements presents the 3 components of the financial

TRUE statements namely: Statement of Income, Statement of Financial Position, and
Statement of Cash Flows.

Terminal value refers to the estimated value of an investment or business if it were

FALSE
to be sold or liquidated, typically under distressed or unfavorable circumstances.

There are three levels of Net Cash Flows: (1) Net Cash Flows to the Firm; (2) Net
FALSE
Cash Flows to the Creditors and (3) Net Cash Flows to the Equity.

Measures like EBITDA and EBIT are more accurate than net cash flows in
FALSE
capturing the impact of interest payments and capital structure differences.

Net Cash Flows to the Firm (NCF to the Firm) represent the cash flow available to
TRUE debt and equity claimants after covering operating expenses, taxes, and
investments in capital and working capital.

In the valuation process, analyzing cash flows and their sources is not essential,
FALSE
as long as net income is accurately determined.

The financial model should be designed in a way that the investor or the client of
the analyst or the proponent themselves can understand the dynamics and follow
TRUE
the drivers to enable them to have a better appreciation and sound judgment of the
results.

The Enterprise Value refers to the entity’s cash after paying its financial
FALSE
obligations.

Data Key Results serve as the dashboard to enable the modelers to analyze the
TRUE
results and to facilitate the readers' appreciation of the results of the project.
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DISCOUNTED CASH FLOWS METHOD

COMPUTATIONAL

1. In determining the terminal value, one of its basis is the estimated perpetual
value. And to solve for the terminal value, one step is determining the growth
rate. What is the formula for getting the growth rate?

a.

b.

c.

d.

2. In determining the terminal value using the estimated perpetual value, after
getting the growth rate is solving for the final terminal value. What is the formula
for the terminal value?

a.

b.

c.

d.
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DISCOUNTED CASH FLOWS METHOD

For number 3 - 5:
RBD Company is expecting for 18% returns for a venture and assumes that their net
cash flows for the next five years are as follows:

Year Net Cash Flows

(in millions Php)
1 1.00
2 1.08
3 1.17
4 1.26
5 1.36

3. Using the estimated perpetual value, what is the growth rate of RBD Company?
a. 4%
b. 6%
c. 8%
d. 10%

Solution for No.3:

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DISCOUNTED CASH FLOWS METHOD

4. Using the estimated perpetual value, what is the net cash flow in the year 6 (CFn+1) of
RBD Company?
a. 1.37 million
b. 1.47 million
c. 1.57 million
d. 1.67 million

Solution for No.4:

5. Using the estimated perpetual value, what is the terminal value of RBD Company?
a. 13.2 million
b. 13.7 million
c. 14.2 million
d. 14.7 million

Solution for No.5:

6. ABC Co. is developing its financial plan for the next 3 years. In the current year, they are
very certain that the volume to be sold is 30,000 units at Php 120 per unit. Certified Inc.
is expecting a growth rate of 12%. They will not increase their prices to maintain their
captured market. Compute for the projected SALES that the company will earn for
the next 3 years.

Year 1 Year 2 Year 3

a. 3,600,000 3,996,000 4,435,560

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DISCOUNTED CASH FLOWS METHOD
b. 3,600,000 4,140,000 4,761,000

c. 3,600,000 4,320,000 5,184,000

d. 3,600,000 4,032,000 4,515,840

Solution:

7. ABC Co. is developing its financial plan for the next 3 years. In the current year, they are
very certain that the volume to be sold is 30,000 units at Php 120 per unit. Certified Inc.
is expecting a growth rate of 12%. They will not increase their prices to maintain their
captured market.

The company has an operating profit margin of 40%. Compute for the company’s
CASH NET INCOME for Year 1, Year 2, and Year 3.

Year 1 Year 2 Year 3

a. 1,476,000 1,771,200 2,125,440

b. 1,440,000 1,612,800 1,806,336

c. 1,440,000 1,771.400 2,130,789

d. 1,476,000 1,612,800 2,130,78

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DISCOUNTED CASH FLOWS METHOD

Solution:

8. ABC Co. is developing its financial plan for the next 3 years. In the current year, they are
very certain that the volume to be sold is 30,000 units at Php 120 per unit. Certified Inc.
is expecting a growth rate of 12%. They will not increase their prices to maintain their
captured market.

The company has an operating profit margin of 40%. The estimated required return is
10%. Compute for the company’s Discounted Net Cash Flow using the following
discount factor:

Year 1 0.91

Year 2 0.83

Year 3 0.75

Year 1 Year 2 Year 3

a. 1,310,000 1,338,624 1,354,752

b. 1,310,400 1,338,624 1,354,752

c. 1,343,160 1,470,096 1,594,080

d. 1,310,400 1,343,160 1,354,752

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DISCOUNTED CASH FLOWS METHOD

Solution:

9. ABC Co. is developing its financial plan for the next 3 years. In the current year, they are
very certain that the volume to be sold is 30,000 units at Php 120 per unit. Certified Inc.
is expecting a growth rate of 12%. They will not increase their prices to maintain their
captured market.

The company has an operating profit margin of 40%. The estimated required return is
10% which results in discount factors for the following years of 0.91, 0.83, 0.75,
respectively. Using this information, compute the company’s ENTERPRISE VALUE.

a. 4,407,336

b. 4,157,336

c. 4,003,776

d. 4,562,004
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DISCOUNTED CASH FLOWS METHOD

Solution:

10. ABC Co. is developing its financial plan for the next 3 years. In the current year, they are
very certain that the volume to be sold is 30,000 units at Php 120 per unit. Certified Inc.
is expecting a growth rate of 12%. They will not increase their prices to maintain their
captured market.

The company has an operating profit margin of 40%. The estimated required return is
10% resulting into discount factors of 0.91, 0.83, 0.75, respectively. The company also
incurred a debt of 250,000. Using this information, compute the company’s EQUITY
VALUE.

a. 3,753,776

b. 4,157,336

c. 3,465,118

d. 4,141,996

Solution: