Question #3
Reading: Reading 21 Free Cash Flow Valuation
PDF File: Reading 21 Free Cash Flow Valuation.pdf
Page: 1
Status: Incorrect
Correct Answer: A
Your Answer: B
Question
Which of the following is most useful in analyzing firms that have high leverage and high growth?
Answer Choices:
A. Two-stage free cash flow to the firm (FCFF) model
B. Two-stage free cash flow to equity (FCFE) model
C. Stable-growth free cash flow to the firm (FCFF) model
Explanation
Of the cash flow valuation models mentioned above, the two-stage FCFF model is most
useful in analyzing the firms that have high leverage and high growth. The high growth will
make the stable growth models inapplicable, while the high leverage makes the FCFF
model more attractive.