Question #119
Reading: Reading 21 Free Cash Flow Valuation
PDF File: Reading 21 Free Cash Flow Valuation.pdf
Page: 60
Status: Unattempted
Correct Answer: A
Question
When using the two-stage FCFE model, if increases in working capital appear too high the analyst should:
Answer Choices:
A. switch to a three-stage model
B. use changes that are based upon a working capital ratio that is closer to the industry average
C. normalize them to be equal to zero
Explanation
The best solution is to use changes that are based upon a working capital ratio that
approximates the industry average. The problem will not be eliminated by switching to a
three-stage FCFE model.