Negative Projected Cash Flow And Profitability Of A Firm

Question

Answer the following questions relating to Discounted Cash Flow (DCF) projections and valuations.

(a)    Michael Hudson asks a rhetorical question (tongue in cheek): “What’s not to like about free cash flows? They’re free! Duh!” Briefly, what is your understanding of free cash flows? Also, does a negative projected free cash flow in a future year imply that the firm is not operating profitably in that year? Why or why not?
(b)    “Wussup with the whole little ‘g’ thing?” asks James DeStephens. He is referring to the perpetual growth rate assumed to hold after the terminal date T, beyond which details of future Income Statements and Balance Sheets are not explicitly projected. Explain briefly why we commonly assume that free cash flows grow at a constant assumed rate g after the terminal date.
(c)    “This is so confusing,” mutters an exasperated Apoorva Patel, “I’ve been brought up to believe that growth is a good thing. High growth should be better than low growth.” He was referring to the discussion in class about PDI’s assumed terminal growth rate. The different growth scenarios considered all showed the same valuation. Is it possible for higher growth to result in reduced value? Explain why or why not?


Summary

The question belongs to Finance and it discusses about discounted cash flow projections and valuations. Questions such as negative free cash flow implying the firm not operating profitably, future income statements and balance sheets not explicitly being projected, etc have been answered.

Total Word Count 355

Download Full Solution

Comments

  • HWA
    Rasha

    this is a very good website

  • HWA
    maani

    I have 50 questions for the same test your page is showing only 28

  • HWA
    joeanne

    hi can you please help or guide me to answer my assignments. thanks

  • HWA
    joeanne

    hi can anyone help or guide me to my assignments. thanks

  • HWA
    Monik


  • HWA
    Cristina

    This solution is perfect ...thanks

  • HWA
    Janete

    Hello Allison,I love the 2nd image that you did! I also, had never heard of SumoPaint, is something that I will have to exolpre a bit! I understand completely the 52 (or so) youtube videos that you probably watched. Sometimes they have what you want, sometimes they don't! However, it is always satisfying when you are able to produce something that you have taught yourself. Great job!Debra 0 likes

  • HWA
    Sandeep

    Perfect bank of solution. 

  • HWA
    Oxana

    great !

  • HWA
    Paul Brandon-Fritzius

    thanks for the quick response. the solution looks good. :)

  • HWA
    tina Johnson

    thnx for the answer. it was perfect. just the way i wanted it. 

  • HWA
    Giuseppe

    works fine.