Choose wisely. There is only one correct answer to each question.
0%
Keep studying!
Review your answers below to learn more.
1.
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.
2.
When calculating discounted cash flow, why are we discounting it at all?
Because the further out a cash flow is, the less it is worth in today's dollars. The math will bear this out.
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.
If a company's perpetuity value for discounted cash flow purposes is, say, $4 billion, the present value of that $4 billion will be _______.
Less than $4 billion. The present value calculation should result in a number that is less than $4 billion, since we have to discount those future cash flows back to the present to account for the time value of money.
5.
A company's cost of capital is the return that investors get for their investments in the company.
