quick equity question.

C

cfasf1

New member
Joined
May 15, 2007
Messages
0
Reaction score
0
The estimate of value from FCFE models will always be different than the value obtained using DDM, if:
A) FCFE is higher than dividends.
B) FCFE is equal to dividends.
C) FCFE is greater than dividends, and the excess is not invested in zero NPV projects.
D) FCFE is higher than dividends, and the excess is invested in zero NPV projects.
 
My guess is C
D is basically the same as B
C and D are subsets of A
Since B is wrong, so D and A has to be wrong as well.
 
what a weird question. My guess would be C as it sounds less insane than the others :).
 
You are supposed to get the same value using FCFE model and the DDM so A and B are out.
D says you are not growing, so they should still be the same.
C says you can either invest in positive NPV projects of negative NPV projects. This should cause a difference.
Answer = C
 
I say C because if you invest in 0 NPV projects then you will not increase or decrease the value of the firm so DDM and FCFE would be the same.
If you invested the extra FCFE in either + or - NPV projects then the value of the firm would be different than you would obtain under DDM.
 
good work team. i didn’t think it was a horrible question, but it certainly made me think about it for a while, the way it was asked.
C) FCFE is greater than dividends, and the excess is not invested in zero NPV projects.
The estimate of value from FCFE models will always be different from the value obtained using DDM, if the FCFE is greater than dividends, and the excess cash is not invested in zero NPV projects.
 
You must log in or register to reply here.
Back
Top