Corporate Valuation Methods Flashcards
7 cards from real CPFM practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Corporate Valuation Methods flashcards as text
In a discounted cash flow (DCF) analysis, what does the terminal value typically represent?
Answer: The value of cash flows beyond the explicit forecast period
Terminal value captures the present value of all cash flows occurring after the explicit forecast horizon.
The Gordon Growth Model calculates terminal value using which formula?
Answer: FCF × (1 + g) / (WACC − g)
The Gordon Growth Model divides the next-period cash flow by the difference between WACC and the perpetual growth rate.
Which discount rate is most appropriate for discounting free cash flow to the firm (FCFF)?
Answer: Weighted average cost of capital (WACC)
FCFF represents cash available to all capital providers, so it is discounted at the WACC.
An analyst increases the perpetual growth rate assumption in a DCF. All else equal, what happens to the enterprise value?
Answer: It increases
A higher perpetual growth rate raises terminal value, increasing total enterprise value.
What is the primary limitation of using the Gordon Growth Model when g approaches WACC?
Answer: Terminal value approaches infinity, producing unrealistic results
As the growth rate nears the discount rate, the denominator shrinks toward zero and value explodes unrealistically.
When converting enterprise value to equity value, which adjustment is correct?
Answer: Subtract net debt
Equity value equals enterprise value minus net debt (debt less cash).
In a two-stage DCF model, what distinguishes the two stages?
Answer: A high-growth explicit period followed by a stable perpetual-growth period
Two-stage models forecast a high-growth phase explicitly, then apply stable growth in perpetuity.