Question #124
Reading: Reading 21 Free Cash Flow Valuation
PDF File: Reading 21 Free Cash Flow Valuation.pdf
Page: 62
Status: Unattempted
Correct Answer: A
Question
In the two-stage FCFE model, the required rate of return for calculating terminal value should be:
Answer Choices:
A. lower than the required rate of return used for the high-growth phase
B. higher than the required rate of return used for the high-growth phase
C. equal to the average required rate of return for the industry
Explanation
In most cases, the required rate of return used to calculate the terminal value should be
lower than the required rate of return used for initial high-growth phase. During the stable
period the firm is less risky and the required rate of return is therefore lower.