Question
Suppose you are evaluating AirPower Co., a renewable energy startup that does not pay dividends, and you want to determine the value of their shares
Suppose you are evaluating AirPower Co., a renewable energy startup that does not pay dividends, and you want to determine the value of their shares using a free cash flow model. To do this, you analyze their financial statements for several things: (1) present value of free cash flows, (2) liabilities, and (3) number of outstanding shares. After some analysis, you determine that the present value of AirPower Co.s free cash flows, liabilities, and number of outstanding shares are $160 million, $45 million, and 25 million, respectively, and that the cash flows will show no growth in the future. Using this information, and the free cash flow model, AirPower Co.s value per share is:
$4.14
$4.60
$5.01
$5.38
Which of the following are limitations to the free cash flows model? Check all that apply.
It can result in inaccurate valuations when the firms noncash expenses are incorrectly estimated.
It assumes that the dividend growth rate will never be lower than the required rate of return.
It assumes that the dividend growth rate will never be higher than the required rate of return.
It can result in inaccurate valuations when the firms forecasted earnings are incorrectly estimated.
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