Question

Which of the following is true for Free Cash Flows?

		Forecast horizons are smaller in free cash flow models which makes it easy to calculate Terminal Values
		Free cash flows measure value added in the short term
		Analysts focus on free cash flows more than earnings
		Free cash flows are real and are unaffected by accounting rules

In free cash flow for equity (FCFE) models, which rate is used to discount the cash flows?

		None of the above
		Weighted Average Cost of Capital
		Cost of Debt
		Cost of Equity

Answer 1

Answer 1)

option C is correct. Analysts focus on free cash flows more than earnings because they are concerned with the Cash inflows to see whether co will be able to generate enough cash to survive or not. Earnings comes later on, their first concern is Free Cash Flows.

Answer 2)

Option C is correct. Cost of Equity because we calculating the Free Cash Flows for the Equity shareholders. If we caluculate the Free Cash Flows for the whole Firm, we use Weighted Average Cost of Capital (WACC) but since we are only concerned with Free Cash Flow for Equity we will take Cost of Equity.

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