Question #29
Reading: Reading 21 Free Cash Flow Valuation
PDF File: Reading 21 Free Cash Flow Valuation.pdf
Page: 12
Status: Correct
Correct Answer: B
Question
The stable-growth free cash flow to equity (FCFE) model is best suited for which of the following types of companies? Companies:
Answer Choices:
A. with patents that will not expire for 20 or more years
B. growing at a rate similar or less than the nominal growth rate of the economy
C. with significant barriers to entry
Explanation
Companies growing at a rate similar to or less than the nominal growth rate of the
economy are best suited for the Stable Growth FCFE Model. The three-stage FCFE model is
most suited to analyzing firms currently experiencing high growth that will face increasing
competitive pressures over time, leading to a gradual decline in growth to a stable level.
The two-stage model is best suited to analyzing firms in a high growth phase that will
maintain that growth for a specific period, such as firms with patents or firms in an
industry with significant barriers to entry.