Question #2
Reading: Reading 21 Free Cash Flow Valuation
PDF File: Reading 21 Free Cash Flow Valuation.pdf
Page: 1
Status: Incorrect
Correct Answer: B
Your Answer: B
Question
The stable-growth free cash flow to the firm (FCFF) model is most useful in valuing firms that:
Answer Choices:
A. have capital expenditures that are significantly higher than depreciation
B. are growing at a rate significantly lower than that of the overall economy
C. have capital expenditures that are not significantly higher than depreciation
Explanation
The stable-growth FCFF model is useful for valuing firms that are expected to have growth
rates close to that of the overall economy. Since the rate of growth approximates that for
the overall economy, these firms should have capital expenditures that are not
significantly different than depreciation.