The free cash flow model:
I. can be used to value a company with negative earnings.
II. is based on a firm having positive cash flows.
III. requires that a firm pay a dividend.
IV. directly estimates a value of a firm's equity.
A)I only
B)I and II only
C)I and III only
D)I, II, and III only
E)I, II, III, and IV

Question

Quizplus · Accepted Answer

The free cash flow model can be used to value a company with negative earnings (I) and is based on a firm having positive cash flows (II), but it does not require the firm to pay a dividend (III) and does not directly estimate a value of a firm's equity (IV). Therefore, choices I and II are correct, and choices III and IV are incorrect. This leads to the selection of option B.

The Free Cash Flow Model