Question #23

of 48 Which of the following best describes the use of FCFF and FCFE when used in private firm valuation? A) FCFE is usually favored if the firm is going to change its capital structure because the equityholders are usually the investors requesting the valuation. B) FCFE is usually favored if the firm is going to change its capital structure because the cost of equity is less sensitive to leverage changes than the WACC. C) FCFF is usually favored if the firm is going to change its capital structure because the WACC is less sensitive to leverage changes than the cost of equity. Paul Smith is an analyst performing valuations for Lumber Limited. Smith has been given a project to value Timber Industries, a firm that Lumber Limited is considering acquiring. Smith is aware that a number of characteristics distinguish private and public companies, and that these characteristics must be considered during his process of valuing Timber Industries. A number of issues complicate Smith's valuation: Timber Industries pays its CEO well below a market-based compensation figure, leases a warehouse at an above-market rate, and owns a vacant office building that is not needed for core operations. Smith is also aware that discounts and premiums based on control and marketability must be considered in his valuation of Timber Industries.