1. The bulk of the present value in most discounted cash flow valuations comes from the terminal value. Therefore, it is reasonable to conclude that the assumptions about growth during the high-growth period do not affect value as much as assumptions about the terminal value.
a. True
b. False
Explain.
2. The dividend discount model cannot be used to value stock in a company with high growth that does not pay dividends.
a. True
b. False
Explain.
3. Most firms can be valued using FCFE and discount-dividend valuation models. Which of the following statements would you most agree with on the relationship between these two values?
a. The FCFE value will always be higher than the discount dividend value.
b. The FCFE value will usually be higher than the discount dividend value.
c. The discount dividend value will always be higher than the FCFE value.
d. The discount dividend value will generally be equal to the FCFE value.
4. A standard critique of the use of cost of capital in firm valuation is that it assumes that leverage stays stable over time (through the weights in the cost of capital). Is this a fair critique?