- CFA Exams
- CFA Level I Exam
- Topic 5. Equity Investments
- Learning Module 8. Equity Valuation: Concepts and Basic Tools
- Subject 5. Multiplier Models
CFA Practice Question
Which of the following statements is the LEAST ACCURATE with respect to the rationales and drawbacks of using the price-to-cash-flow (P/CF) ratio for valuation purposes?
B. Cash flow is much less subject to manipulation than earnings, thus allowing for a more sound comparison of P/CF among various firms. The P/CF ratio neutralizes any quality of earnings differences which may exist among firms.
C. Even when earnings are negative, free cash flow measures usually are positive, thus allowing a more frequent use of P/CF.
A. If the definition of cash flow is simply net income plus any non-cash charges, then this metric may be influenced by accounting options.
B. Cash flow is much less subject to manipulation than earnings, thus allowing for a more sound comparison of P/CF among various firms. The P/CF ratio neutralizes any quality of earnings differences which may exist among firms.
C. Even when earnings are negative, free cash flow measures usually are positive, thus allowing a more frequent use of P/CF.
Correct Answer: C
Free cash measures are usually negative just as often as earnings are. Free cash flow is what's left after a company makes its necessary capital expenditures. For a company in a growth phase, this could mean FCF is negative more often than earnings are.
User Contributed Comments 3
| User | Comment |
|---|---|
| 2014 | In FRA, we learned it is myth that Cashflow are not subject to manipulation |
| stevo | I agree, I would have thought that B would be the least accurate as cash flow can be manipulated by accounting options chosen. I guess because B stipulates that it is "much less" and does not rule out the possibility of manipulation. |
| MathLoser | I haven't seen any fin statement that has negative Net Income but positive free cash flow. |