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:

Secondary Markets

Markets where securities are bought and sold after their initial issuance, allowing for liquidity and valuation of financial instruments.

Working Capital Financing Policy

Strategies a company uses to manage and finance its current assets and current liabilities to ensure it has sufficient liquidity to run its operations.

Net Working Capital

Current assets minus current liabilities.

Current Ratio

A financial metric that assesses a firm's capacity to meet immediate liabilities using its current assets.