Reading 42: Free Cash Flow Valuation- LOS l～ Q1-3 expected, share, growth, equity

wzaina

 

LOS l: Explain how sensitivity analysis can be used in FCFF and FCFE valuations.

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.

 

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.

 

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.

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