CPFM Corporate Valuation Methods 2

Question 1

In a discounted cash flow (DCF) analysis, what does the terminal value typically represent?

Accepted Answer

The value of cash flows beyond the explicit forecast period

Answer

The book value of assets at liquidation

Answer

The initial investment outlay

Answer

The sum of all dividends paid to date

Question 2

The Gordon Growth Model calculates terminal value using which formula?

Accepted Answer

FCF × (1 + g) / (WACC − g)

Answer

FCF / WACC

Answer

FCF × WACC

Answer

FCF / (g − WACC)

Question 3

Which discount rate is most appropriate for discounting free cash flow to the firm (FCFF)?

Accepted Answer

Weighted average cost of capital (WACC)

Answer

Cost of equity only

Answer

Risk-free rate

Answer

After-tax cost of debt only

Question 4

An analyst increases the perpetual growth rate assumption in a DCF. All else equal, what happens to the enterprise value?

Accepted Answer

It increases

Answer

It decreases

Answer

It stays the same

Answer

It becomes negative

Question 5

What is the primary limitation of using the Gordon Growth Model when g approaches WACC?

Accepted Answer

Terminal value approaches infinity, producing unrealistic results

Answer

The model becomes overly conservative

Answer

It ignores all future cash flows

Answer

It overstates the cost of debt

Question 6

When converting enterprise value to equity value, which adjustment is correct?

Accepted Answer

Subtract net debt

Answer

Add net debt

Answer

Subtract total revenue

Answer

Add total equity

Question 7

In a two-stage DCF model, what distinguishes the two stages?

Accepted Answer

A high-growth explicit period followed by a stable perpetual-growth period

Answer

A pre-tax stage and a post-tax stage

Answer

An equity stage and a debt stage

Answer

A historical stage and a current stage