Financial Accounting for MBAs 9

Test Bank For Financial Accounting for MBAs 9 th

Edition By Easton, Wild, Halsey, McAnally (All Chapters 1-13, 100% Original Verified, A+ Grade)

All Chapters Arranged Reverse:

13-1 This is The Original Test Bank for 9th Edition, All other Files in

Market are Fake/Old/Wrong Edition. 1 / 4

Module 13 Using Financial Statements for Valuation Learning Objectives – Coverage by question True/False Multiple Choice LO1 – Identify equity valuation models and explain the information required to value equity securities.

1, 21-3, 9

LO2 – Describe and apply the discounted free cash flow model to value equity securities.

3, 5-11 4-8, 10-15

LO3 – Describe and apply the residual operating income model to value equity securities.

9, 12-14 4-8, 16-23

LO4 – Explain how equity valuation models can inform managerial decisions.

4, 9, 1524, 25

These questions are available to assign in myBusinessCourse.© Cambridge Business Publishers, 2025 13-1Financial Accounting for MBAs, 9 th Edition 2 / 4

Module 13: Using Financial Statement for Valuation

True/False

Topic: Valuation Models in General

LO: 1

• Valuation models are typically based on payments investors expect to receive in the future.

Answer: True

Rationale: Most valuation models discount expected future streams. Common models include dividend discount model, discounted cash flow model, or residual operating income model.Topic: Valuation Models: Debt vs. Equity

LO: 1

• There is no difference between valuing debt securities and equity securities since the value of a debt

security is the present value of the interest and principal payments that the investor expects to receive in the future and the valuation of equity securities is also based on expectations.

Answer: False

Rationale: The difference lies in the increased uncertainty surrounding the timing and amount of payments from equity securities.

Topic: Free Cash Flows to the Firm

LO: 2

• One definition of free cash flows to the firm is net cash flows from operations+/- net cash flows from

investing activities.

Answer: True

Rationale: FCFF is typically defined as net cash flows from operations +/- net cash flows from investing activities. The sum of the two represents the net cash flows available to all providers of capital to the firm, both its creditors and shareholders.

Topic: Discounted Cash Flow (DCF) Valuation Model

LO: 4

• One advantage of the DCF model is that it only recognizes value evidenced by cash flow, which is

less easily manipulated by accrual accounting practices.

Answer: True

Rationale: The DCF model is based on accrual accounting principles. In fact, free cash flow is defined as NOPAT – change NOA. Cash flow is not affected by accrual accounting practices, which recognize revenue when earned and the matching of expenses when incurred.© Cambridge Business Publishers, 2025 Test Bank, Module 1313-2 3 / 4

Topic: Free Cash Flow

LO: 2

• Firms can increase free cash flow to the firm (FCFF) in the short run by cutting back on investment in

fixed assets.

Answer: True

Rationale: Capital expenditures are a deduction in the computation of FCF. As a result, firms can increase FCF in the short run by cutting back on CAPEX. Long-run FCFF may be lessened by the failure to invest in PPE.

Topic: Terminal Value

LO: 2

• The higher the expected growth rate of the terminal free cash flow to the firm, the lower the present

value of the terminal value becomes.

Answer: False

Rationale: The terminal value is given by FCF/(r-g) where g is the growth rate and r is the discount rate. As g increases, the terminal value increases as well.

Topic: Stock Price, Cash Flow and Discount Rate

LO: 2

• The price one is willing to pay for a common stock is positively related to expected free cash flows to

the firm (FCFF) and negatively related to the required rate of return.

Answer: True

Rationale: Higher expected FCFF and lower required rate of return will lead to a higher valuation.

Topic: DCF Valuation Model

LO: 2

8. The DCF valuation of a firm’s equity involves the following three steps:

• Forecast free cash flows to the firm (FCFF) for the horizon period.
• Forecast discount FCFF for the terminal period.
• Sum the horizon and terminal periods to yield firm value.

Answer: False

Rationale: To value the firm’s equity, we sum the present values of the horizon and terminal periods.

Topic: DCF Model and Accounting Policies

LO: 2, 3, 4

• The Discounted Cash Flow model of valuation is superior to ROPI in that it addresses investors’

increasing concern with perceived earnings management by companies.

Answer: False

Rationale: The ROPI model is immune to the effects of differing accrual accounting practices.© Cambridge Business Publishers, 2025 13-3Financial Accounting for MBAs, 9 th Edition

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