Valuation models use the relationship between share value, future cash flows, and the cost of capital to estimate these quantities for a given firm. Realistically, for a publicly traded firm, what can we reliably use such models to determine? I. the firm's future cash flows
II. the firm's cost of capital
III. the firm's stock price
A)I only
B)II only
C)III only
D)I and II

Question

Quizplus · Accepted Answer

Valuation models can be used to estimate both the future cash flows and the cost of capital for a given firm. However, the stock price is ultimately determined by the market and can be influenced by a variety of factors beyond the scope of a valuation model. Therefore, while a valuation model can provide insights into the potential value of a stock, it should not be relied on as the sole determinant of a stock's actual price.

Valuation Models Use the Relationship Between Share Value, Future Cash