Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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4. Stock valuation methods: Free cash flow model
Suppose you are evaluating PowerWind Co., a renewable energy startup that does not pay dividends, and you want to determine the value of their
shares using a free cash flow model. To do this, you analyze their financial statements for several things: (1) present value of free cash flows, (2)
liabilities, and (3) number of outstanding shares. After some analysis, you determine that the present value of Power Wind Co.'s free cash flows,
liabilities, and number of outstanding shares are $155 million, $30 million, and 20 million, respectively, and that the cash flows will show no growth in
the future. Using this information, and the free cash flow model, PowerWind Co.'s value per share is:
$5.06
$5.63
$6.25
$6.81
Which of the following are limitations to the free cash flows model? Check all that apply.
It assumes that the dividend growth rate will never be higher than the required rate of return.
It can result in inaccurate valuations when the firm's forecasted earnings are incorrectly estimated.
It can result in inaccurate valuations when the firm's noncash expenses are incorrectly estimated.
It assumes that the dividend growth rate will never be lower than the required rate of return.
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Transcribed Image Text:4. Stock valuation methods: Free cash flow model Suppose you are evaluating PowerWind Co., a renewable energy startup that does not pay dividends, and you want to determine the value of their shares using a free cash flow model. To do this, you analyze their financial statements for several things: (1) present value of free cash flows, (2) liabilities, and (3) number of outstanding shares. After some analysis, you determine that the present value of Power Wind Co.'s free cash flows, liabilities, and number of outstanding shares are $155 million, $30 million, and 20 million, respectively, and that the cash flows will show no growth in the future. Using this information, and the free cash flow model, PowerWind Co.'s value per share is: $5.06 $5.63 $6.25 $6.81 Which of the following are limitations to the free cash flows model? Check all that apply. It assumes that the dividend growth rate will never be higher than the required rate of return. It can result in inaccurate valuations when the firm's forecasted earnings are incorrectly estimated. It can result in inaccurate valuations when the firm's noncash expenses are incorrectly estimated. It assumes that the dividend growth rate will never be lower than the required rate of return.
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