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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Current
Forecast Horizon
Terminal Year
2017
2018
2019
2020
2021
Free cash flows to the firm
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$4,884
$5,128
$5,384
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2
3
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1.
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