Reading 47: Free Cash Flow Valuation - LOS b ～ Q6-11

答案和详解如下：

6.In the stable-growth FCFE model, an extremely low value can result from all of the following EXCEPT:

A)   the required rate of return is too high for a stable firm.

B)   the expected growth rate is too high for a stable firm.

C)   capital expenditures are too high relative to depreciation.

D)   the estimated increase in working capital is too high.

The correct answer was B)

If the expected growth rate is too high for a stable firm, the value obtained using the stable-growth FCFE model will be extremely high.

7.If a firm is valued using FCFF, the relevant discount rate is the:

A)   before-tax weighted average cost of capital.

B)   after-tax cost of equity.

C)   before-tax cost of equity.

D)   after-tax weighted average cost of capital.

The correct answer was D)

Since the FCFF is the cash available to all the investors, the after-tax weighted average cost of capital should be used as the discount rate in FCFF models.

8.Valuation with free cash flow to equity and free cash flow to the firm:

A)   both use the after-tax cost of debt.

B)   use different discount rates.

C)   both use the cost of equity.

D)   both use the risk-free rate.

The correct answer was B)

Free cash flow to the firm uses the weighted average cost of capital and free cash flow to equity uses the cost of equity. The key is to use a discount rate that reflects the opportunity cost of the indicated investor group.

9.Free cash flow to the firm valuation uses which discount rate?

A)   After-tax cost of debt.

B)   Cost of equity.

C)   Weighted average cost of capital.

D)   Risk-free rate.

The correct answer was C)

Free cash flow to the firm valuation uses the opportunity cost relevant to the overall firm, which is the weighted average cost of capital.

10.Free cash flow to equity valuation uses which discount rate?

A)   Cost of equity.

B)   After-tax cost of debt.

C)   Weighted average cost of capital.

D)   Risk-free rate.

The correct answer was A)

Free cash flow to equity valuation uses the opportunity cost relevant to stockholders, which is the cost of equity.

11.Free cash flow approaches are the best source of value when:

A)   dividends are paid but do not reflect the company's capacity to pay dividends.

B)   a firm has no preferred stock.

C)   a firm has significant minority interest.

D)   the cost of equity exceeds the cost of debt.

The correct answer was A)

Free cash flow approaches are best when dividends are paid but do not appear to be representative of the firm’s capacity to pay them. The other responses have nothing to do with the decision.