土豆妮

A firm in stable growth phase should have:

A) a required rate of return close to the market rate of return and capital expenditures that are not too large relative to depreciation expense.

B) a growth rate higher than that of the economy and a required rate of return that is greater than the market rate of return.

C) capital expenditures that are less than the depreciation expense.

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A firm that is in a stable growth phase should have growth rate close to that of the economy, and the cost of equity should approximate the required rate of return on the market. In addition, the capital expenditures should not be disproportionately large relative to the depreciation expense.

土豆妮

In using FCFE models, the assumption of growth should be:

A) independent from the assumptions of other variables.

B) consistent with assumptions of other variables.

C) only consistent with the assumptions of capital spending and depreciation.

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The assumption of growth should be consistent with assumptions about other variables. Net capital expenditures (capital expenditures minus depreciation) and beta (risk) used to calculate required rate of return should be consistent with assumed growth rate.

土豆妮

Which of the following statements about the three-stage FCFE model is most accurate?

A) There is a transition period where the growth rate is stable.

B) There is a transition period where the growth rate declines.

C) There is a final phase when growth rate starts to decline.

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In the three-stage FCFE model, there is an initial phase of high growth, a transition period where the growth rate declines, and a steady-state period where growth is stable.

土豆妮

The stable-growth free cash flow to equity (FCFE) model is best suited for which of the following types of companies? Companies:

A) with patents that will not expire for 20 or more years.

B) with significant barriers to entry.

C) growing at a rate similar or less than the nominal growth rate of the economy.

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Companies growing at a rate similar to or less than the nominal growth rate of the economy are best suited for the Stable Growth FCFE Model. The three-stage FCFE model, or E-Model, is most suited to analyzing firms currently experiencing high growth that will face increasing competitive pressures over time, leading to a gradual decline in growth to a stable level. The two-stage model is best suited to analyzing firms in a high growth phase that will maintain that growth for a specific period, such as firms with patents or firms in an industry with significant barriers to entry.

土豆妮

A three-stage free cash flow to the firm (FCFF) is typically appropriate when:

A) the required rate of return is less than the growth rate in the last stage.

B) growth is currently low and will move through a transitional stage to a final stage wherein growth exceeds the required rate of return.

C) growth is currently high and will move through a transitional stage to a steady-state growth rate.

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The three-stage model using either FCFE or FCFF typically assumes that growth is currently high and will move through a transitional stage to a steady-state growth rate. Multi-stage models assume that the required rate of return exceeds the growth rate in the last stage.

土豆妮

Which of the following types of company is the E-Model, a three-stage free cash flow to equity (FCFE) Model, best suited for? Companies:

A) with patents or firms in an industry with significant barriers to entry.

B) growing at a rate similar to or less than the nominal growth rate of the economy.

C) in high growth industries that will face increasing competitive pressures over time, leading to a gradual decline in growth to a stable level.

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The three-stage FCFE model, or E-Model, is most suited to analyzing firms currently experiencing high growth that will face increasing competitive pressures over time, leading to a gradual decline in growth to a stable level. The two-stage model is best suited to analyzing firms in a high growth phase that will maintain that growth for a specific period, such as firms with patents or firms in an industry with significant barriers to entry. Companies growing at a rate similar to or less than the nominal growth rate of the economy are best suited for the Stable Growth FCFE Model. A firm that pays out all of its earnings as dividends will have a growth rate of zero (remember g = RR × ROE) and would not be valued using the three-stage FCFE model.

土豆妮

The one-stage (stable growth) free cash flow models assume:

A) the required rate of return exceeds the growth rate.

B) the required rate of return is less than the growth rate.

C) a constant growth rate for n years and a high growth rate forever thereafter.

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The one-stage model using either free cash flow to equity (FCFE) or free cash flow to the firm (FCFF) assumes that the required rate of return exceeds the growth rate. If this was not the case, the model would produce an unrealistic negative price.