Question #115 - Reading 22 Market-Based Valuation - Price and Enterprise Value Multiples

Reading: Reading 22 Market-Based Valuation - Price and Enterprise Value Multiples

PDF File: Reading 22 Market-Based Valuation - Price and Enterprise Value Multiples.pdf

Page: 40

Status: Unattempted

Correct Answer: A

Shared Context

- Calculate free cash flow to equity during 2x09 using the data extracted from the 2x09 accounts: A) $90.7 million. B) $94.0 million. C) $120.0 million.

Question

The growth assumption Pedroia uses in calculating his "Best Case Scenario" valuation are most suitable if Iliot is:

Answer Choices:

A. a stable firm in a mature industry with a required return on equity of 4%

B. a stable firm in a mature industry with a required return on equity of 14%

C. a growing firm in an infant industry with a required return on equity of 14%

Explanation

The assumption of constant perpetual growth is suited to stable firms in a mature industry. If Iliot has a cost of equity of 4%, this would be less than the growth rate (5%) assumed and hence the model would not be appropriate.

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