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Basic Question 5 of 5
Which of the following statements is (are) true with respect to the use of the various measures of cash flow when performing valuation calculations?
II. If the investor exerts a considerable influence on the firm's decision making process, then, free cash flow would be a better measure of cash flow than dividends.
III. The residual income model assumes that the value of the stock should be its book value plus or minus an adjustment that's equal to the present value of all future residual income amounts on a pro rata basis.
IV. The most practical of all the measures of cash flow is dividends.
I. Free cash flow measures can only be used to calculate the total value of the firm that's available to both bondholders and stockholders.
II. If the investor exerts a considerable influence on the firm's decision making process, then, free cash flow would be a better measure of cash flow than dividends.
III. The residual income model assumes that the value of the stock should be its book value plus or minus an adjustment that's equal to the present value of all future residual income amounts on a pro rata basis.
IV. The most practical of all the measures of cash flow is dividends.
User Contributed Comments 3
| User | Comment |
|---|---|
| letg | why III is right? |
| NillePet | the formula for the residual income model: V=B(t)+RI(t)/R-G whereas: R = required rate G = growth B(t) - BV at time t RI - Residual Income at time t: RI=E(t)-R*B(t-1) E(t) - Earnings at time t B(t-1) - BV at time t-1 |
| davidt876 | i didn't get why they had to include "pro rata" at the end of III |
I am happy to say that I passed! Your study notes certainly helped prepare me for what was the most difficult exam I had ever taken.
Andrea Schildbach
Learning Outcome Statements
compare dividends, free cash flow, and residual income as inputs to discounted cash flow models and identify investment situations for which each measure is suitable;
CFA® 2025 Level II Curriculum, Volume 3, Module 21.