Financial Analysis and Valuation Flashcards

Which financial ratio measures a company's ability to meet short-term obligations using only its most liquid assets?

Answer: Quick (acid-test) ratio

The quick ratio excludes inventory and prepaid expenses from current assets, testing whether the most liquid assets cover current liabilities.

Free cash flow to equity (FCFE) represents:

Answer: Cash available to equity shareholders after capital expenditures and debt repayments

FCFE is calculated as net income plus non-cash charges minus capital expenditures minus changes in working capital plus net borrowing.

When a CFC uses discounted cash flow (DCF) analysis, the terminal value accounts for:

Answer: All cash flows beyond the explicit forecast period in perpetuity

Terminal value captures the present value of all cash flows beyond the explicit projection period, often representing the majority of a DCF valuation.

The debt-to-equity ratio of 2.5 indicates that for every dollar of equity, the company carries:

Answer: $2.50 of debt

A debt-to-equity ratio of 2.5 means the company has $2.50 in debt for every $1.00 of equity, indicating significant financial leverage.

EBITDA is commonly used as a proxy for operating cash flow. What does it add back to net income?

Answer: Interest, taxes, depreciation, and amortization

EBITDA starts with net income and adds back interest expense, income taxes, depreciation, and amortization to estimate core operating cash generation.

In a comparable company analysis, an analyst selects peer companies and calculates valuation multiples primarily to:

Answer: Derive a market-implied value based on how similar businesses are priced

Comparable company analysis uses trading multiples (like EV/EBITDA or P/E) from similar public companies to establish a market-based value range for the subject company.