Free Cash Flow Model MCQs
The Free Cash Flow (FCF) Model is used primarily to:
A) Evaluate short-term liquidity
B) Assess long-term solvency
C) Estimate company valuation
D) Determine profitability ratios
Answer: C
Free Cash Flow (FCF) is defined as:
A) Cash available for distribution to shareholders
B) Net Income minus Dividends
C) Operating Cash Flow minus Capital Expenditures
D) Cash from financing activities
Answer: C
In the context of the FCF Model, “Free” refers to:
A) Cash available after mandatory expenses
B) Cash available for discretionary spending
C) Cash available without any restrictions
D) Cash available for debt repayment
Answer: C
Which of the following is NOT included in the calculation of Free Cash Flow (FCF)?
A) Capital Expenditures
B) Dividends Paid
C) Interest Expense
D) Operating Cash Flow
Answer: C
True or False: Free Cash Flow (FCF) represents the cash generated by a company that is available to all investors, including debt and equity holders.
A) True
B) False
Answer: A
The Discounted Free Cash Flow (DCF) model values a company based on:
A) Historical earnings per share
B) Projected revenue growth
C) Future expected cash flows
D) Total assets
Answer: C
The FCF Model helps in estimating:
A) Stock price volatility
B) Short-term market trends
C) Long-term company value
D) Bond yields
Answer: C
Which of the following is a limitation of the Free Cash Flow (FCF) Model?
A) It does not consider a company’s capital structure
B) It is based solely on accounting profits
C) It ignores changes in market conditions
D) It requires extensive historical data
Answer: A
The FCF Model is most useful for valuing companies that:
A) Have stable cash flows
B) Are in early growth stages
C) Operate in volatile industries
D) Are focused on short-term profitability
Answer: A
Free Cash Flow (FCF) is calculated as:
A) Net Income + Depreciation
B) Operating Cash Flow – Capital Expenditures
C) Earnings Before Interest and Taxes (EBIT) – Taxes
D) Revenue – Cost of Goods Sold (COGS)
Answer: B
The FCF Model is used primarily by:
A) Short-term investors
B) Value investors
C) High-frequency traders
D) Speculators
Answer: B
Which of the following adjustments is typically made to calculate Free Cash Flow (FCF)?
A) Adding non-operating income
B) Subtracting depreciation
C) Adding dividends paid
D) Subtracting accounts receivable
Answer: A
The FCF Model helps in determining the:
A) Current market share
B) Future growth potential
C) Inventory turnover ratio
D) Return on assets
Answer: B
True or False: Free Cash Flow (FCF) represents the total cash available to equity shareholders after all expenses have been paid.
A) True
B) False
Answer: A
The FCF Model can be used to assess a company’s:
A) Short-term debt obligations
B) Liquidity ratios
C) Long-term sustainability
D) Profit margins
Answer: C
The formula for Free Cash Flow (FCF) includes adjustments for:
A) Inventory turnover
B) Accounts payable
C) Non-cash expenses
D) Gross profit
Answer: C
In the context of the FCF Model, a negative FCF indicates that:
A) The company is profitable
B) The company is financially healthy
C) The company is generating excess cash
D) The company may need external financing
Answer: D
The Discounted Free Cash Flow (DCF) model discounts future cash flows by:
A) The cost of equity
B) The risk-free rate
C) The cost of debt
D) The dividend yield
Answer: A
Which of the following factors is NOT typically considered in the FCF Model?
A) Future revenue projections
B) Management turnover
C) Capital expenditure forecasts
D) Tax rates
Answer: B
The FCF Model is useful for:
A) Short-term trading strategies
B) Assessing investment opportunities
C) Analyzing day-to-day market fluctuations
D) Evaluating liquidity ratios
Answer: B
True or False: Free Cash Flow (FCF) includes cash from financing activities.
A) True
B) False
Answer: B
Which financial statement is crucial for calculating Free Cash Flow (FCF)?
A) Income Statement
B) Statement of Retained Earnings
C) Statement of Cash Flows
D) Balance Sheet
Answer: C
The FCF Model is based on the assumption that:
A) Companies prioritize short-term profitability
B) Cash flows are stable and predictable
C) Equity investors prefer high-risk investments
D) Capital expenditures are irrelevant
Answer: B
The FCF Model helps in assessing a company’s:
A) Historical earnings per share
B) Debt-to-equity ratio
C) Future growth prospects
D) Daily trading volume
Answer: C
Which of the following adjustments is typically made to calculate Free Cash Flow (FCF)?
A) Adding dividends received
B) Subtracting interest expense
C) Adding accounts receivable
D) Subtracting taxes paid
Answer: D
True or False: The FCF Model is applicable only to publicly traded companies.
A) True
B) False
Answer: B
Which of the following statements about Free Cash Flow (FCF) is true?
A) FCF is always positive for financially healthy companies
B) FCF is equivalent to operating cash flow
C) FCF represents the cash available for debt repayment only
D) FCF includes non-cash expenses
Answer: A
The Discounted Free Cash Flow (DCF) model helps in:
A) Calculating current liabilities
B) Estimating future cash flows
C) Determining market share
D) Analyzing profit margins
Answer: B
Which of the following is NOT a step in calculating Free Cash Flow (FCF)?
A) Adjusting for non-cash items
B) Subtracting interest expense
C) Estimating capital expenditures
D) Adding dividends paid
Answer: B
True or False: Free Cash Flow (FCF) is used primarily for accounting purposes.
A) True
B) False
Answer: B
The FCF Model is used to estimate:
A) Short-term liquidity ratios
B) Long-term enterprise value
C) Daily trading volume
D) Inventory turnover
Answer: B
The formula for Free Cash Flow (FCF) is:
A) Operating Cash Flow – Net Income
B) Earnings Before Interest and Taxes (EBIT) – Taxes
C) Net Income – Dividends Paid
D) Operating Cash Flow – Capital Expenditures
Answer: D
True or False: Free Cash Flow (FCF) is affected by changes in working capital.
A) True
B) False
Answer: A
Which of the following is a limitation of using the FCF Model for valuation?
A) It ignores capital expenditures
B) It assumes stable cash flows
C) It relies solely on historical data
D) It does not account for market trends
Answer: B
The FCF Model is most useful when:
A) Cash flows are unpredictable
B) Capital expenditures are minimal
C) Debt levels are high
D) Growth prospects are favorable
Answer: D
The FCF Model is commonly used in conjunction with:
A) Technical analysis
B) Fundamental analysis
C) Historical analysis
D) Short-term trading
Answer: B
True or False: The FCF Model discounts future cash flows using the company’s cost of debt.
A) True
B) False
Answer: B
The FCF Model helps in assessing a company’s:
A) Historical trading volume
B) Short-term debt obligations
C) Capital structure
D) Net profit margins
Answer: C
Which of the following adjustments is typically made to calculate Free Cash Flow (FCF)?
A) Adding non-operating income
B) Subtracting accounts payable
C) Adding interest income
D) Subtracting cost of goods sold
Answer: A
The Discounted Free Cash Flow (DCF) model discounts cash flows to:
A) Present value
B) Future value
C) Book value
D) Market value
Answer: A
Which of the following statements about the FCF Model is true?
A) FCF is equivalent to net income
B) FCF represents cash available for debt and equity holders
C) FCF is always negative for financially stable companies
D) FCF includes all non-cash expenses
Answer: B
The FCF Model is used primarily to:
A) Analyze historical performance
B) Evaluate market volatility
C) Assess investment opportunities
D) Determine current asset values
Answer: C
True or False: Free Cash Flow (FCF) is calculated as Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) minus Taxes.
A) True
B) False
Answer: B
The FCF Model helps in understanding a company’s:
A) Short-term liquidity
B) Market capitalization
C) Debt-to-equity ratio
D) Long-term value creation
Answer: D
Which of the following adjustments is typically made to calculate Free Cash Flow (FCF)?
A) Adding dividends paid
B) Subtracting taxes paid
C) Adding accounts receivable
D) Subtracting interest received
Answer: B
True or False: Free Cash Flow (FCF) does not consider changes in working capital.
A) True
B) False
Answer: B
The FCF Model is based on the assumption that:
A) Cash flows are unpredictable
B) Capital expenditures are constant
C) Market conditions do not change
D) Earnings drive company value
Answer: D
The Discounted Free Cash Flow (DCF) model discounts future cash flows using:
A) The company’s cost of equity
B) The risk-free rate
C) The dividend yield
D) The company’s market capitalization
Answer: A
True or False: Free Cash Flow (FCF) is the same as Operating Cash Flow (OCF).
A) True
B) False
Answer: B
The FCF Model is useful for:
A) Short-term trading strategies
B) Estimating company valuation
C) Analyzing daily stock prices
D) Calculating profit margins
Answer: B