Question #31
Reading: Reading 21 Free Cash Flow Valuation
PDF File: Reading 21 Free Cash Flow Valuation.pdf
Page: 13
Status: Correct
Correct Answer: A
Question
A firm has: Free cash flow to equity = $4.0 million. Cost of equity = 12%. Long-term expected growth rate = 5%. Value of equity per share = $57.14 per share. What will happen to the value of the firm if free cash flow to equity decreases to $3.2 million?
Answer Choices:
A. The value will increase
B. There is insufficient information to tell
C. The value will decrease
Explanation
Everything else being constant, a decrease in free cash flow to equity should decrease the
value of the firm.