CFA Practice Question

There are 96 practice questions for this study session.

CFA Practice Question

An investor is trying to value the following companies:

Company A: medium size, in the growth phase, highly profitable, large demand for capitals to keep growing.
Company B: profitable, large size, regular dividend-paying but the dividend policy does not bear a consistent relationship to the company's earnings.
Company C: regular dividend-paying. Its free cash flows align with its profitability. The investor is considering acquiring a controlling stake.

Free cash flow model is not appropriate to value:
A. A only.
B. A and C only.
C. B only.
Explanation: As the company has large capital demand, its free cash flow may be negative. Since prediction of free cash flow far in the future would be imprecise, FCF model cannot be used for growth companies.

User Contributed Comments 2

User Comment
yxten1 But can FCF model be used when there's a controlling premium? I doubt
Cesarnew yes it can be used - this issue is mentioned in the los
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