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1.
The concept of perpetuity value involves estimating a company's future cash flows for a certain period and then estimating the value of all cash flows after that in what form?
One lump sum. The perpetuity value will be expressed in one lump sum, then discounted for its present value.
2.
As a rule, and all else being equal, the riskier a company is, the _______ its discount rate will likely be.
Higher. Also, the lower the value of its future cash flows will be, all else equal.
3.
When it comes to finding a stock's intrinsic value, what is the problem with simply counting up all the future dividend payments a company is expected to make and expressing them in today's dollars?
Some companies do not pay dividends. That is why cash flow is used.
4.
Chicago Flames Fire Retardant, Inc. is expected to generate $1 billion in cash flow one year from now. If that company has a 10% cost of capital, what is that future cash flow worth today?
$909 million. $1,000,000,000/1.10 = $909,090,909, or $909 million.
5.
Suppose a company has a capital structure with 40% debt and 60% equity. If its after-tax cost of debt is 6% and the cost of equity is 10.5%, what is the company's weighted average cost of capital?
