Which of the Following Statements Is Most Correct

question 27

Multiple Choice

Which of the following statements is most correct?

• A) Free cash flows are called "free" because the cost of capital for these cash flows is zero.
• B) Stock is valuable only because it generates cash flows for the investor.
• C) Managers can affect firm value by changing the riskiness of its cash flows.
• D) (a) and (b) are correct.
• E) (b) and (c) are correct.

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Definitions:

Discounted Payback Period

The amount of time it takes for an investment to generate enough cash flows to recover the initial outlay, with the cash flows discounted to account for the time value of money.

Forecasting Risk

The potential deviation of outcomes from predicted results in financial projections, due to uncertainties in the market or inaccurate assumptions.

Projected Cash Flows

Estimates of the amount of money expected to be received and paid out by a business over a future period.

Capital Rationing

A strategy or situation where a company limits its new investments or projects due to constraints in available capital.