Which of the following does not properly describe the Altman Z-score?

Multiple Choice

• The Z-score is a multiple discriminant analysis using five financial ratios to estimate default risk.

• A high score is an indication of default risk.

• The Z-score was originally designed only for publicly traded manufacturing firms.

• Each ratio has its own unique weight in calculating the final score.

Cash flow assessment plays a central role in analyzing:

Multiple Choice

• the future earnings potential of a company.

• the credit risk of a company.

• managements effectiveness.

• the firms investment potential.

Which of the following statements is false regarding the business valuation process?

Multiple Choice

• FASB contends that current accrual earnings are a proxy for free cash flow.

• A simplified version of the discounted free cash flow valuation model assumes a zero-growth perpetuity for future cash flows. This approach is best applied to growth companies with stable cash flow patterns.

• If a company is currently generating a sustainable free cash flow of $10 per share and the discount rate is 10%, the estimated share price is $100.

• One popular approach to estimate a firms equity cost of capital is the capital asset pricing model.

Under the abnormal earnings approach of equity valuation, investors willingly pay a premium for those firms that:

Multiple Choice

• earn less than the cost of equity capital.

• produce negative abnormal earnings.

• produce positive abnormal earnings.

• earn an amount equal to the equity cost of capital.