Which of the Following Statements About the Free Cash Flow

question 51

Multiple Choice

Which of the following statements about the free cash flow from the firm (FCFF) approach is true?

• A) The present value of these cash flows exceeds the total value of the firm, or its enterprise value.
• B) We include the cash necessary to pay short-term liabilities that do not have interest charges associated with them, such as accounts payable and accrued expenses.
• C) The costs associated with noninterest-bearing current liabilities, which are included in the firm's cost of sales and other operating expenses, are added in the calculation of FCFF.
• D) The total value of the firm, V_F, is computed as the present value of the FCFF, discounted by the firm's weighted average cost of capital, WACC.

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Definitions:

Entry Barriers

Obstacles that make it difficult for new competitors to enter a market, including high startup costs, strict regulations, and established brand loyalty.

Competitive Price-searcher Market

A market structure where firms have some control over the pricing of their products because their products are differentiated, but there is intense competition due to low entry barriers.

Economic Profit

The total revenue of a business minus both explicit and implicit costs.

Long-run Equilibrium

A state in which all firms in a market are making normal profits, with no incentive for entry or exit, indicating a stable market condition.