Valuation Models Use the Relationship Between Share Value, Future Cash

question 20

Multiple Choice

Valuation models use the relationship between share value, future cash flows, and the cost of capital to estimate these quantities for a given firm. Realistically, for a publicly traded firm, what can we reliably use such models to determine? I. the firm's future cash flows
II. the firm's cost of capital
III. the firm's stock price

• A)I only
• B)II only
• C)III only
• D)I and II

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Definitions:

Accounting Rate

The accounting rate, or rate of return, measures the profitability of investments or projects, expressed as a percentage.

Discounted Cash Flows

A valuation method used to estimate the value of an investment based on its expected future cash flows, adjusted for time value of money.

Initial Cost

Typically refers to the acquisition price of an asset or investment, including all expenses incurred to bring it to its intended use.

Investment

The action of dedicating financial resources in expectation of gaining profits or income.