Asked by Khánh Tr??ng on Jul 22, 2024
Verified
A simplified version of the discounted free cash flow valuation model assumes a zero-growth perpetuity for future cash flows.This assumption is best applied to
A) start-up companies with stable cash flow patterns.
B) growth companies with increasing cash flow patterns.
C) growth companies with stable cash flow patterns.
D) mature firms with stable cash flow patterns.
Zero-growth Perpetuity
A type of investment that pays a fixed amount of cash flows indefinitely, with no expectation of growth in the payments.
Stable Cash Flow Patterns
A financial condition where the inflows and outflows of cash are predictable and consistent over time, facilitating business planning.
- Gain insight into the foundational principles of business appraisal and the function of cash flows.
Verified Answer
KB
Krishna BhattJul 22, 2024
Final Answer :
D
Explanation :
The simplified version of the discounted free cash flow valuation model with a zero-growth perpetuity is best applied to mature firms with stable cash flow patterns, as they are assumed to no longer experience significant growth in their future cash flows. Start-up and growth companies are not suitable for this model as they have the potential for higher growth in their future cash flows.
Learning Objectives
- Gain insight into the foundational principles of business appraisal and the function of cash flows.
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