Question

The discounted free cash flow model indicates that the true value of a firm todaydepends on......

The discounted free cash flow model indicates that the true value of a firm todaydepends on...

  • A. The present value of all firms' debt

  • B. The future value of all firms' cash flows

  • C. The present value of all future cash flows generated by the firm's operations that are available to all investors.

  • D. The future value of firm's stock prices

  • E. The market value added that the company generates above its book value ad cost of capital

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Answer #1

CORRECT OPTION IS : C

Option 1: Incorrect because discounted cash flow takes into consideration present value of future cash inflows and not debt

Option 2: Incorrect because the present value of future cashflows are considered and not just future cash flows

Option 3: CORRECT because the future cashflows are the free cash flows available to all investors. When we calculate its present value using a discount rate, we get the true value of a firm's investment

Option 4:Incorrect as present value of future cash flows are considered

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