Asked by Syanindita Kirana Larashira on Jun 05, 2024
Verified
The required rate of return on equity is the most appropriate discount rate to use when applying a ______ valuation model.
A) FCFE
B) FCEF
C) DDM
D) FCEF or DDM
E) P/E
FCFE Valuation Model
Free Cash Flow to Equity (FCFE) Valuation Model estimates the value of a company by calculating the present value of its expected future cash flows available to shareholders, after deducting operational expenses, taxes, and reinvestment needs.
Required Rate of Return on Equity
The minimum rate of return that investors expect to receive on their equity investment in a company, taking into account the risk associated with the investment.
- Distinguish between the valuation models of Free Cash Flow to Equity (FCFE) and Free Cash Flow to Firm (FCFF) along with their respective discount rates.
- Assess the suitability of discount rates including WACC, required return on equity, and risk-free rate within valuation frameworks.
Verified Answer
HT
Hussein TareqJun 10, 2024
Final Answer :
A
Explanation :
The Free Cash Flow to Equity (FCFE) valuation model directly relates to the cash flows available to equity shareholders after accounting for all expenses, reinvestment, and debt payments. Therefore, the required rate of return on equity is the most appropriate discount rate to use for this model, as it reflects the return expectations of equity investors.
Learning Objectives
- Distinguish between the valuation models of Free Cash Flow to Equity (FCFE) and Free Cash Flow to Firm (FCFF) along with their respective discount rates.
- Assess the suitability of discount rates including WACC, required return on equity, and risk-free rate within valuation frameworks.