Question #136
Reading: Reading 21 Free Cash Flow Valuation
PDF File: Reading 21 Free Cash Flow Valuation.pdf
Page: 66
Status: Unattempted
Correct Answer: B
Question
A firm in stable growth phase should have:
Answer Choices:
A. a required rate of return close to the market rate of return and capital expenditures that are not too large relative to depreciation expense
B. capital expenditures that are less than the depreciation expense
C. a growth rate higher than that of the economy and a required rate of return that is greater than the market rate of return
Explanation
A firm that is in a stable growth phase should have growth rate close to that of the
economy, and the cost of equity should approximate the required rate of return on the
market. In addition, the capital expenditures should not be disproportionately large
relative to the depreciation expense.