Suppose you are evaluating SolarHeat Co., a renewable energy startup that does not pay dividends, and you want to determine the value of their shares using a free cash flow model. To do this, you analyze their financial statements for several things: (1) present value of free cash flows, (2) liabilities, and (3) number of outstanding shares. After some analysis, you determine that the present value of SolarHeat Co.'s free cash flows, labilities, and number of outstanding shares are $140 million, $35 million, and 30 million, respectively, and that the cash flows will show no growth in the future. Using this information, and the free cash flow model, Solartheat Co.'s value per share is: 43.15 $3.50 $3.82 $4.10 Which of the following are limitations to the free cash flows model? Check all that apply. It can result in inaccurate valuations when the firm's forecasted earnings are incorrectly estimated. It can result in inaccurate valuations when the firm's capital investment is incorrectly estimated. It assumes that the dividend growth rate will never be higher than the required rate of return. It assumes that the dividend growth rate will never be lower than the required rate of return.
Suppose you are evaluating SolarHeat Co., a renewable energy startup that does not pay dividends, and you want to determine the value of their shares using a free cash flow model. To do this, you analyze their financial statements for several things: (1) present value of free cash flows, (2) liabilities, and (3) number of outstanding shares. After some analysis, you determine that the present value of SolarHeat Co.'s free cash flows, labilities, and number of outstanding shares are $140 million, $35 million, and 30 million, respectively, and that the cash flows will show no growth in the future. Using this information, and the free cash flow model, Solartheat Co.'s value per share is: 43.15 $3.50 $3.82 $4.10 Which of the following are limitations to the free cash flows model? Check all that apply. It can result in inaccurate valuations when the firm's forecasted earnings are incorrectly estimated. It can result in inaccurate valuations when the firm's capital investment is incorrectly estimated. It assumes that the dividend growth rate will never be higher than the required rate of return. It assumes that the dividend growth rate will never be lower than the required rate of return.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Stock Valuation methods: Free cash now model
Suppose you are evaluating SolarHeat Co., a renewable energy startup that does not pay dividends, and you want to determine the value of their
shares using a free cash flow model. To do this, you analyze their financial statements for several things: (1) present value of free cash flows, (2)
sabilities, and (3) number of outstanding shares. After some analysis, you determine that the present value of SolarHeat Co/s free cash flows,
labilities, and number of outstanding shares are $140 million, $35 million, and 30 million, respectively, and that the cash flows will show no growth in
the future. Using this information, and the free cash flow model, SolarHeat Co's value per share ist
$3.50
$3.82
4.10
Which of the following are limitations to the free cash flows model? Check all that apply
It can result in inaccurate valuations when the firm's forecasted earnings are incorrectly estimated.
It can result in inaccurate valuations when the firm's capital investment is incorrectly estimated
It assumes that the dividend growth rate will never be higher than the required rate of return
It assumes that the dividend growth rate will never be lower than the required rate of return.
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