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Basic Question 16 of 16
The best description of the measure of cash flow to use when estimating the total value of a firm is the operating free cash flow ______.
B. prior to interest payments on debt but after deducting funds needed for capital expenditures
C. after adjustment for payments to debt holders but before dividend payments to common stockholders
A. prior to interest payments on debt
B. prior to interest payments on debt but after deducting funds needed for capital expenditures
C. after adjustment for payments to debt holders but before dividend payments to common stockholders
User Contributed Comments 3
| User | Comment |
|---|---|
| lvjunzhang | why not C? |
| ascruggs92 | CapEx is typically a necessary investment to keep the business running. For example, if oil companies didn't acquire new land and equipment to drill, it would eventually run out of oil to drill and/or it's rigs would break, then they would go out of business. For this reason it wouldn't make sense to count it in free cash flow (measure of cash flow used in estimating firm value) because it is a constant and necessary cash outflow that will not be available to equity holders. To put it simply - think of CapEx spending as the initial cash outflow used in the NPV for a project. |
| khalifa92 | FCFE = CFO - FCInv + Net borrowing |
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Learning Outcome Statements
explain the rationale for using present value models to value equity and describe the dividend discount and free-cash-flow-to-equity models
calculate and interpret the intrinsic value of an equity security based on the Gordon (constant) growth dividend discount model or a two-stage dividend discount model, as appropriate
identify characteristics of companies for which the constant growth or a multistage dividend discount model is appropriate
explain advantages and disadvantages of each category of valuation model
CFA® 2025 Level I Curriculum, Volume 3, Module 8.