Reading 41: Free Cash Flow Valuation-LOS m 习题精选 center, expected, valuation, 2010, class

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Session 12: Equity Investments: Valuation Models
Reading 41: Free Cash Flow Valuation

LOS m: Discuss approaches for calculating the terminal value in a multistage valuation model.

 

 

 

In five years, a firm is expected to be operating in a stage of its life cycle wherein its expected growth rate is 5%, indefinitely; its required rate of return on equity is 11%; its weighted average cost of capital is 9%; and the free cash flow to equity is $5.25 per share at the end of year 5. What is its projected terminal value at that time?

A) $87.50.

B) $51.93.

C) $131.25.

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Terminal value = FCFE / (k ? g) = $5.25 / (0.11 ? 0.05) = $87.50

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Terminal value in a multi-stage free cash flow to equity (FCFE) valuation model is often calculated as the present value of:

A) a two-stage valuation model's price.

B) FCFE divided by the total of required rate on equity minus growth.

C) free cash flow divided by the growth rate.

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Terminal values are usually calculated as the present value of the price produced by a constant-growth model as of the beginning of the last stage, which is FCFE / (required rate on equity – growth).

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Terminal value in multi-stage free cash flow valuation models is often calculated as the present value of:

A) a constant growth model's price as of the beginning of the last stage.

B) a two-stage valuation model's price.

C) free cash flow divided by the growth rate.

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Terminal values are usually calculated as the present value of the price produced by a constant-growth model as of the beginning of the last stage.

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In the two-stage FCFE model, the required rate of return for calculating terminal value should be:

A) higher than the required rate of return used for the high-growth phase.

B) lower than the required rate of return used for the high-growth phase.

C) equal to the average required rate of return for the industry.

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In most cases, the required rate of return used to calculate the terminal value should be lower than the required rate of return used for initial high-growth phase. During the stable period the firm is less risky and the required rate of return is therefore lower.