Question #34
Reading: Reading 21 Free Cash Flow Valuation
PDF File: Reading 21 Free Cash Flow Valuation.pdf
Page: 14
Status: Correct
Correct Answer: B
Question
The primary difference between the three-stage DDM and the FCFE model is:
Answer Choices:
A. growth rate assumptions
B. the definition of cash flows
C. cost of equity
Explanation
The primary difference between the dividend discount models and the free cash flow from
equity models lies in the definition of cash flows. The FCFE model uses residual cash flows
after meeting all financial obligations and investment needs. The DDM uses a strict
definition of cash flows to equity, that is, the expected dividends on the stock.