Question
1.Suppose you are valuing a healthy, growing, profitable firm and you project that the firm will generate negative free cash flows for equity shareholders in
1.Suppose you are valuing a healthy, growing, profitable firm and you project that the firm will generate negative free cash flows for equity shareholders in each of the next five years. Can you use the free cash flows valuation approach when cash flows are negative? If so, explain how the free cash flows approach can produce positive valuations of firms when they are expected to generate negative free cash flows over the next five years.
2..Succinctly explain why the terminal values in the residual net income model are so different from those in the DCF model?
4.If a firm's residual net income in a given year is positive does that mean the firm was profitable? If a firm's residual net income for a particular year is negative does that mean the firm reported a loss? What does it mean if a firm's residual net income is zero?
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