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LOS l: Explain how sensitivity analysis can be used in FCFF and FCFE valuations. ffice ffice" />
Q1. A firm has:
- Free cash flow to equity = $4.0 million.
- Cost of equity = 12%.
- Long-term expected growth rate = 5%.
- Value of equity per share = $57.14 per share.
What will happen to the value of the firm if free cash flow to equity decreases to $3.2 million?
A) There is insufficient information to tell.
B) The value will increase.
C) The value will decrease.
Correct answer is C)
Everything else being constant, a decrease in free cash flow to equity should decrease the value of the firm.
Q2. A firm has:
- Free cash flow to the firm = $4.0 million.
- Weighted average cost of capital = 10%.
- Total debt = $30.0 million.
- Long-term expected growth rate = 5%.
- Value of the firm = $50.00 per share.
What will happen to the value of the firm if the weighted average cost of capital increases to 12%?
A) The value will decrease.
B) The value will remain the same.
C) The value will increase.
Correct answer is A)
Everything else being constant, an increase in the relevant required rate of return should decrease the value of the firm.
Q3. A firm has:
- Free cash flow to equity = $4.0 million.
- Cost of equity = 12%.
- Long-term expected growth rate = 5%.
- Value of equity per share = $57.14 per share.
What will happen to the value of equity if the cost of equity decreases to 10%?
A) The value will increase.
B) There is insufficient information to tell.
C) The value will decrease.
Correct answer is A)
Everything else being constant, a decrease in the relevant required rate of return should increase the value of the equity per share.
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发表于 2009-3-9 16:18
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