Choose wisely. There is only one correct answer to each question.
0%
Keep studying!
Review your answers below to learn more.
1.
When projecting future cash flow of a company in order to determine the fair value of its stock, where should you start?
With past data gotten from financial statements. To look forward, you first have to look backward. That way, you will see important patterns.
2.
Assume you have created a DCF model that estimates a company's value to be $50 per share, but the stock trades at $90 per share. The stock is _______.
Overvalued. Because the stock trades above its estimated fair value, the stock is overvalued, and we should probably not buy the shares. Being able to compare a stock's market price to its fair value is where the effort put into creating the DCF pays off.
3.
Let's assume Mobar has just made an investment that will reduce its required capital expenditures in Year 4. All else equal, what should we expect Mobar's free cash flow to do in that year?
Increase. Recall that free cash flow is defined as operating cash flow minus capital expenditures. Lower capital expenditures mean higher free cash flow. Remember, an important part of creating any DCF model is anticipating future changes to a company's free cash flow.
4.
A company's future cash flow can be determined exactly.
False. Future cash flow can never be determined exactly. At best, it can be estimated based on a number of financial and economic factors.
5.
If we were to increase a company's cost of equity assumption, what would we expect to happen to the present value of all future cash flows?
A decrease. Raising the company's cost of equity assumption would lower the present value of all future cash flows.
