Reading 47: Free Cash Flow Valuation - LOS m ～ Q1-4 black, should, return, required, class

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

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

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

C)   equal to the return of the market portfolio.

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

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

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

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

C)   free cash flow divided by the growth rate.

D)   long-term net income.

3.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)   free cash flow divided by the growth rate.

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

D)   long-term net income.

4.In five years, a firm is expected to be operating in a stage of its life cycle wherein its expected growth rate is 5 percent, indefinitely; its required rate of return on equity is 11 percent; its weighted average cost of capital is 9 percent; 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)   $131.25.

B)   $51.93.

C)   $77.89.

D)   $87.50.

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答案和详解如下：

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

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

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

C)   equal to the return of the market portfolio.

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

The correct answer was A)

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.

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

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

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

C)   free cash flow divided by the growth rate.

D)   long-term net income.

The correct answer was B)

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.

3.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)   free cash flow divided by the growth rate.

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

D)   long-term net income.

The correct answer was C)

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).

4.In five years, a firm is expected to be operating in a stage of its life cycle wherein its expected growth rate is 5 percent, indefinitely; its required rate of return on equity is 11 percent; its weighted average cost of capital is 9 percent; 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)   $131.25.

B)   $51.93.

C)   $77.89.

D)   $87.50.

The correct answer was D)

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