Question

Which of the following statements is CORRECT? a. The value of operations of a stock is...

Which of the following statements is CORRECT?

a. The value of operations of a stock is the present value of all expected future free cash flows, discounted at the free cash flow growth rate.
b. The free cash flow valuation model for constant growth, Vop = FCF1/(WACC - g), can be used to value firms whose free cash flows are expected to decline at a constant rate, i.e., to grow at a negative rate.
c. The constant growth model cannot be used for a zero growth stock, where free cash flows are expected to remain constant over time.
d. The constant growth model is often appropriate for evaluating start-up companies that do not have a stable history of growth but are expected to reach stable growth within the next few years.
e. If a company has a WACC = 12% and its free cash flow is expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%.
0 0
Add a comment Improve this question Transcribed image text
Answer #1

Answer is (C).

Because in case of stable free cash flows , constant growth model is of no use as the share price can be calculated using perpetuity formula i.e.P0=d/r

where P0 is share price today,

d is constant free cash flow and

r is rate of discounting I.e. risk free rate.

Add a comment
Know the answer?
Add Answer to:
Which of the following statements is CORRECT? a. The value of operations of a stock is...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions
  • Your employer, a mid-sized human resources management company, is considering expan- sion into related fields, including...

    Your employer, a mid-sized human resources management company, is considering expan- sion into related fields, including the acquisition of Temp Force Company, an employment agency that supplies word processor operators and computer programmers to businesses with temporary heavy workloads. Your employer is also considering the purchase of Bigger staff & McDonald (B&M), a privately held company owned by two friends, each with 5 million shares of stock. B&M currently has free cash flow of $24 million, which is expected to...

  • Value of Operations: Constant FCF Growth EMC Corporation's current free cash flow of $400,000 and is...

    Value of Operations: Constant FCF Growth EMC Corporation's current free cash flow of $400,000 and is expected to grow at a constant rate of 4.5%. The weighted average cost of capital is WACC = 12%. Calculate EMC's estimated value of operations. Do not round intermediate calculations. Round your answer to the nearest dollar. Horizon Value of Free Cash Flows Current and projected free cash flows for Radell Global Operations are shown below. Actual Projected 2019 2020 2021 2022 $618.520 $679.200...

  • The value of a share of common stock depends on the cash flows it is expected...

    The value of a share of common stock depends on the cash flows it is expected to provide, and those flows consist of the dividends the investor receives each year while holding the stock and the price the investor receives when the stock is sold. The final price includes the original price paid plus an expected capital gain. The actions of the marginal investor determine the equilibrium stock price. Market equilibrium occurs when the stock's price is Select- its Intrinsic...

  • The value of a share of common stock depends on the cash flows it is expected...

    The value of a share of common stock depends on the cash flows it is expected to provide, and those flows consist of the dividends the investor receives each year while holding the stock and the price the investor receives when the stock is sold. The final price includes the original price paid plus an expected capital ghin. The actions of the marginal investor determine the equilibrium stock price Market equilibrium occurs when the stock's price is Select its intrinsic...

  • Case: Mini Case - Temp Force, (end of Chapter 7). Respond to Questions a, b, d,...

    Case: Mini Case - Temp Force, (end of Chapter 7). Respond to Questions a, b, d, and e (1, 2, 3, 4). Please answer with never used answers. Thanks purchase of Biggerstaff & McDonald (B&M), a privately held company owned by two friends, each with 5 million shares of stock. B&M currently has free cash flow of $24 million, which is expected to grow at a constant rate of 5%. B&M's financial state- ments report short-term investments of $100 million,...

  • Basic Stock Valuation: Free Cash Flow Valuation Model The recognition that dividends are dependent on earnings,...

    Basic Stock Valuation: Free Cash Flow Valuation Model The recognition that dividends are dependent on earnings, so a reliable dividend forecast is based on an underlying forecast of the firm's future sales, costs and capital requirements, has led to an alternative stock valuation approach, known as the free cash flow valuation model. The market value of a firm is equal to the present value of its expected future free cash flows: Market value of company FCF (1+WACC) + FCF (1+WACC)...

  • 14. The stock valuation model, PO = D1/(rs - g), can be used to value firms...

    14. The stock valuation model, PO = D1/(rs - g), can be used to value firms whose dividends are expected to decline at a constant rate, i.e., to grow at a negative rate. True False

  • CORPORATE VALUATION Scampini Technologies is expected to generate $150 million in free cash flow next year,...

    CORPORATE VALUATION Scampini Technologies is expected to generate $150 million in free cash flow next year, and FCF is expected to grow at a | cnstant rate of 5% per year indefinitely. Scampini has no debt or preferred stock, and its WACC is 14%. If Scampini has 35 million shares of stock outstanding, what is the stock's value per share? Round your answer to two decimal places Each share of common stock is worth , according to the corporate valuation...

  • You have been assigned the task of using the corporate valuation model to estimate Hindelang Co.’s...

    You have been assigned the task of using the corporate valuation model to estimate Hindelang Co.’s intrinsic value. Hindelang’s WACC is 12.00%, its expected end-of-year free cash flow (FCF1) is $150 million, the FCFs are expected to grow at a constant rate of 4.00% a year in the future, the company has $175 million of long-term debt plus preferred stock, and it has 50 million shares of common stock outstanding. What is the per-share estimate of the stock’s intrinsic value?

  • Which one of the following factors is not considered in calculating the firm’s cost of equity? risk free rate of retu...

    Which one of the following factors is not considered in calculating the firm’s cost of equity? risk free rate of return beta interest rate on corporate debt expected return on equities difference between expected return on stocks and the risk free rate of return Which one of the following factors is not considered in calculating the firm’s cost of capital? cost of equity interest rate on debt the firm’s marginal tax rate book value of debt and equity the firm’s...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT