Asset Valuation Flashcards

Which valuation approach estimates a firm's value by discounting its expected future free cash flows to the firm (FCFF) at the weighted average cost of capital?

Answer: FCFF discounted cash flow model

The FCFF DCF model discounts cash flows available to all capital providers at the WACC to arrive at total firm value.

A stock has a required return of 10% and pays a dividend of $2 next year that is expected to grow at 5% forever. Using the Gordon Growth Model, what is the intrinsic value?

Answer: $40

V = D1 / (r − g) = $2 / (0.10 − 0.05) = $40.

In the enterprise value (EV) calculation, which of the following is subtracted from EV to derive equity value?

Answer: Net debt

Equity value = EV − net debt (total debt minus cash and equivalents).

Which method is most appropriate for valuing a company that has negative earnings but positive operating cash flows?

Answer: EV/EBITDA multiple

EV/EBITDA is useful when earnings are negative because EBITDA strips out non-cash and financing charges, often remaining positive.

When using comparable company analysis, a valuation multiple is considered 'clean' primarily because it:

Answer: Is calculated from market prices reflecting current expectations

Market-derived multiples embed current investor expectations about growth and risk, making them timely and observable.

A bond with a $1,000 par value pays a 6% annual coupon and matures in 5 years. If the market yield is 8%, what is the bond's approximate price?

Answer: $920.15

Discounting $60 annual coupons and $1,000 par at 8% for 5 years yields approximately $920.15.

The justified P/E ratio based on fundamentals equals:

Answer: (1 − b) / (k − g)

Justified P/E = payout ratio (1−b) divided by (required return k minus growth g), derived from the Gordon Growth Model.