anshultongia

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 in year 6 will be $5.25 per share. What is its projected terminal value at the end of year 5?

A) $51.93.

B) $131.25.

C) $87.50.

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

anshultongia

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.

anshultongia

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) free cash flow divided by the growth rate.

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

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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.

anshultongia

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.

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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).