Question

1. Free cash flow valuation is one of the best methods to value a growing                  ______

company

2. The time value of money requires that we compare amounts within                       ______

              the same timeframe

3. The value of a good in the finance world is the price you originally paid for it         ______

4. In a bankruptcy, bond holders get paid before equity holders                                 ______

5. The nominal interest rate = the real interest rate plus inflation                               ______

6. A partnership is a type of firm which is subject to double taxation                          ______

7. To value an asset, we calculate the present value of all future cash flows               ______

8. Annuities are a series of equal payments, provided at a regular frequency             ______

for a fixed period of time

Answer 1

1. Free cash flow measures a company's financial performance. It shows cash that a company can produce after all the capital expenditures. FCF measures the most important thing to the investors; cash that can be distributed in a dicretionary way. Knowing the company's FCF the management can decide the future ventures which can improve the shareholder value. Also, decent amount of FCF shows that a company can is capable of paying its monthly due, which is a very important factor for a growing company.

Free Cash Flow = Operating Cash flow - Capital Expenditures

Due to the transparency it provides, FCF Valuation can be considers as one of the best methods to value a growing company.

2. Yes, in order to get the correct picture we should always compare the 2 amounts within the same time frame. Otherwise, it will not make any sense to compare present values of an investment 10 years from now & present value of another investment 20 years from now.

3. The value of a good in finance is how much you paid for it and will it worth more or same in the future period. As per the concept of Time Value of Money, the money you have now is worth more than the identical sum in future due to its potential to earn more money.

4. Yes, in a bankruptcy bond holders are paid before the equity holders, as they come under the category of secured creditors, who are paid first because their money is secured by a collateral or a contract. Unsecured creditors are to be paid next in this order. These creditors include employess, banks, govt. if any taxes are due. The last tier to be paid are general creditors which include Preferred Shareholders and Common stock shareholders.

5. True. Real interest rate is an interest rate that has been adjusted to remove the effects of inflation to reflect the real cost of funds to the borrower and real yield to the investor. Nominal interest rate refers to the interest rate before taking inflation into account.

6. False. Double Taxation is when you pay income tax twice on the same sourced of income. in case of businesses, it means corporation is taxed at both personal and business level. Partnerships, LLC's & Sole proprietors are what is called as "Pass Through Entities" meaning that income of busniess is passed through to the owners, who pay the taxes on their invidual tax returns . So, the owners here are taxed directly, unlike a corporation that pays its own taxes.

7. True. Net Present Value (NPV) is a methof to determine the current value of all the future cash flows generated by a project, including initial capital investment.

8. True. Annuity is a sum of money or investment paid at regular intervals. There are 2 types of Annuitites namely, Fixed rate Annuity & Variable Annuity. Fixed Rate Annuity payout a guaranteed amount & Variable Annuity provides a an oppertunity for potentially higher returns accompanied by greater risk.