The primary objective of the corporate management team is to maximize shareholder wealth. The company$$s board of directors and the shareholders evaluate and review managerial actions based on the growth in the value of the firm.

Based on your understanding of what determines a firm$$s value, review the following:

What does the value of a firm depend on$?$

Option A The ability to generate cash flow that is available to distribute to the company$$s investors, including creditors and shareholders

Option B The ability to generate cash flow that is available to distribute to the company$$s shareholders only

Which of the options is most accurate?

Option B

Option A

When determining the value of a firm, which of the following statements is true?

A financial asset is considered to have value only if it is acquired at its market value.

A financial asset is considered to have value only if it is acquired at its book price.

A financial asset is considered to have value only if it has the ability to generate positive cash flows.

Managers strive to increase the value of a firm. An increase in the intrinsic value of the firm$$s shares is a good measure of the increase in the value of the firm. Intrinsic value of a firm$$s share price is determined by calculating the present values of its free cash flows $($FCF$)$ discounted at a rate called the weighted average cost of capital $($WACC$).$

Tyler is a team member in corporate finance at a digital content production company. He is required to forecast the FCF that the company will be able to generate in the next three years. Tyler takes into account only the following equation in his calculation: