Which of the Following Statements Is CORRECT

question 46

Multiple Choice

Which of the following statements is CORRECT?

• A) If a company has a WACC = 12% and its free cash flow is expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%.
• B) The free cash flow valuation model for constant growth, V_op = FCF₁/(WACC − g), can be used to value firms whose free cash flows are expected to decline at a constant rate, i.e., to grow at a negative rate.
• C) The value of operations of a stock is the present value of all expected future free cash flows, discounted at the free cash flow growth rate.
• D) The constant growth model cannot be used for a zero growth stock, where free cash flows are expected to remain constant over time.
• E) The constant growth model is often appropriate for evaluating start-up companies that do not have a stable history of growth but are expected to reach stable growth within the next few years.

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Definitions:

Economies of Scale

Cost advantages reaped by companies when production becomes efficient, as the cost of producing each additional unit decreases with the increase in total output.

Raise Capital

The process of acquiring funds for business purposes, which can be achieved through various means such as issuing stocks or obtaining loans.

Model Business Corporation Act

A set of model laws prepared by the Committee on Corporate Laws of the American Bar Association to provide a standard for state corporation statutes.

American Bar Association

A large voluntary association of attorneys and law students in the United States which aims to improve the legal profession, set academic standards for law schools, and formulate ethical codes for the legal profession.