CFA Level 2 – Equity Session 12 – Reading 43 Free Cash Flow Valuation

CFA Level 2 – Equity, Session 12-Reading 43

Free Cash Flow Valuation – LOS b

(Practice Questions, Sample Questions)

1. An analyst is performing an equity valuation for a minority equity position in a dividend paying multinational. The appropriate model for this analysis is most likely:

A) FCFE approach.
B) The Dividend Discount approach. [The dividend discount model is most appropriate for valuing a minority equity position in a dividend-paying company. The free cash flow approach looks to the source of dividends from the perspective of an owner that has control rather than directly at dividends.

]
C) FCFF approach
2. The ownership perspective implicit in the dividend valuation approach is of:

A) control.
B) a common stockholder. [Dividends are most relevant to the stockholders who receive them and who have little control over their amount.]
C) a preferred stockholder
3. The ownership perspective implicit in the free cash flow to equity valuation approach is of:

A) a preferred stockholder.
B) control. [Dividend policy can be changed by the buyer of a firm.

Thus, the free cash flow perspective looks to the source of dividends in a position of control rather than directly at dividends.]
C) a minority position
4. A control perspective is most consistent with which of the following valuation approaches?

A) Dividends.
B) Free cash flow (FCF). [Dividend policy can be changed by the buyer of a firm. Thus, the FCF perspective looks to the source of dividends in a position of control rather than directly at dividends. The price to enterprise value approach does not focus on cash flows.

]
C) Price to enterprise value.

Remember! This is just a sample.

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