What Is the Primary Reason Why the Cash Flow from Assets

question 58

Multiple Choice

What is the primary reason why the cash flow from assets (CFA) is adjusted when used to value a firm?

• A)Depreciation is a non-cash expense so both it and the depreciation tax shield must be eliminated from the CFA.
• B)Net working capital (NWC) is excluded from firm valuations so the change in NWC must be added back to the "normal" CFA calculation
• C)Interest expense is a financing cost and thus the tax benefit of this expense needs to be eliminated from the CFA.
• D)CFA is normally based on historical performance but since firm valuations are forward looking the CFA must be adjusted for timing.
• E)The CFA must be lowered by the amount of the noncash expenses to ascertain a more accurate firm value.

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Definitions:

Standard Oil

An American oil producing, refining, and transporting company established by John D. Rockefeller and partners in the late 19th century that became synonymous with monopolistic practices before being broken up by the U.S. government.

American Tobacco

A historic company in the tobacco industry, known for manufacturing and marketing cigarettes and other tobacco products.

Rule of Reason

A legal doctrine used to determine if a business practice is unlawful as being anti-competitive, considering the practice's overall circumstances and its actual impact on competition.

Supreme Court

The highest federal court in the United States, serving as the ultimate arbiter of legal disputes.