Question #12
Reading: Reading 21 Free Cash Flow Valuation
PDF File: Reading 21 Free Cash Flow Valuation.pdf
Page: 5
Status: Correct
Correct Answer: A
Question
A biotech firm is currently experiencing high growth and pays no dividends. One of their product patents is scheduled to expire in 5 years. This firm would be a good candidate for which of the following valuation models?
Answer Choices:
A. Two-stage dividend discount model (DDM)
B. Two-stage free cash flow to equity (FCFE)
C. Single-stage free cash flow to equity (FCFE)
Explanation
The two-stage FCFE model is well suited to value a firm that is currently experiencing high
growth and will likely see this growth drop to a lower, more stable rate in the future.