Question

Which of the following is the appropriate way to calculate the price of a share of a given company using the free cash flow valuation​ model?

A. P0​ = ​(V0​ + Cash0 - Debt0​) ​/ (Shares Outstanding0​)
B. P0​ = Div1​/(rE - g​)
C. P0​ = PV​(Future Free Cash Flow of​ Firm) /​ (Shares Outstanding0​)
D. P0​ = ​[Div1 ​/ ​(rE - g​)] ​/ (Shares Outstanding0​)

Answer 1

Answer: Under the free cash flow valuation​ model, free cash flows in future are projected. These are discounted by the adjusted capital cost i.e. (debt and equity).

Therefore, the appropriate way to calculate the price of a share of a given company using the free cash flow valuation​ model is given as :

`P_(0) = \frac{V_(0)+Cash_(0)-Debt{0}}{(Outstanding Share)_(0)}`

Here, the correct option is (a). i.e.
`P_(0) = \frac{V_(0)+Cash_(0)-Debt{0}}{(Outstanding Share)_(0)}`