34 The forecasting process begins with an estimate of a. interest rates b. expected stock price in five (5) years c. desired expected cash flows d sales based on a sales growth rate 35 An example of making sure forecast assumptions are internally consistent, a good example might be: a. assume tax rates will never rise, and always be slashed or lowered b. always used expected earnings and free cash flows that are positive only, never negative c it is unadvisable to forecast an increased gross profit margin during an economic recession unless we can make compelling arguments (page 11-5 \& 6) 36 Plainsmith Clothing Inc has a beta of 1.75. The overall market rate of return has been 8%, and the risk free rate is 1.25%. Calculate the investor's required rate of return, using these variables. \begin{tabular}{ll} a. & 13.06% \\ b. & 12.07% \\ c. & 11.35% \\ d & 10.21% \end{tabular} 37 Instrinsic value, or the value of any asset can best be desribed as a the future value of all expected cash flows b the sum of all expected cash flows c reflected in its market price d the discounted value of all expected cash flows 38 Plans to modernize a production line could lead to cash flow increases of $5,000,000 every year, for the next seven years. If the project's required rate of return is 12.5%, what is the value of this investment (closest answer) a. 27,682,000 b. 25,325,250 c. 22,461,500 d 20,310,000 39 Free Cash Flows to the firm can best be described as a. an operating asset b. net income plus cash from in-flows from financing c. net operating profit after tax that is not used to grow net operating assets d the line item at the top of the balance sheet 40 The order for forecasting estimates follows this order a. income statement, cash flow statement, statement of retained earnings b statement of cash flows, tax returns, income statement, balance sheet c balance sheet, income statement and statement of cash flows d income statement, balance sheet and statement of cash flows