Question

In: Finance

Which of the following is not commonly used in discounted cash flow valuation to calculate the...

Which of the following is not commonly used in discounted cash flow valuation to calculate the value of the firm?

	a.	Dividends.
	b.	Free Cash Flow to the Firm.
	c.	Free Cash Flow to Equity.
	d.	Share Buy Backs

Which of het following adjustments would you make after calculating the value of the firm to get to the value of equity?

	a.	Subtract the value of debt.
	b.	Subtract capital expenditures on new projects.
	c.	Subtract the expected liabilities from any lawsuits.
	d.	Subtract any unfunded pension and health care obligations.

Regardless of the choice of cash flows, the process of estimating the firm valuation requires some common inputs. Which of the following is not one of those inputs?

	a.	The future cost of debt.
	b.	The estimated cash flows during the high growth period.
	c.	A discount rate that corresponds to the cash flows.
	d.	An estimation of the terminal value.

If you are using free cash flow to the firm in the firm valuation model, the correct discount rate is ...

	a.	the cost of equity.
	b.	the risk free rate.
	c.	the cost of debt.
	d.	the weighted average cost of capital.

When using the firm valuation model, the present value of the cash flows from the end of the quick growth period to infinity is called?

	a.	The constant growth value.
	b.	The final value.
	c.	The last value.
	d.	The terminal value.

Expert Solution

1. Share buy backs are not commonly used in discounted cash flow valuation to calculate the value of the firm.

So the correct answer is option d.

2. We will subtract the value of debt from value of firm in order to get value of equity because of below mentioned formula:

value of firm = value of debt + value of equity

So the correct answer is option a.

3. The future cost of debt is not one of the inputs in the process of estimating the firm valuation.

So the correct answer is option a.

4. If we are using free cash flow to the firm in the firm valuation model, the correct discount rate is weighted average cost of capital

So the correct answer is option d.
5. When using the firm valuation model, the present value of the cash flows from the end of the quick growth period to infinity is called terminal value

So the correct answer is option d.

Feel free to ask in case of any query relating to this question

jeff jeffy answered 6 months ago

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