Question

Costa Lotta, CFA, is an equity analyst looking at valuing a new technology company that is experiencing high growth rates and has significant fixed capital investment. Which of the following valuation methods is most likely to be appropriate for this company?

a) Dividend discount model.
b) Free cash flow valuation.
c) Residual income valuation.
d) Price-to-earnings ratio valuation.

Answer 1

Free cash flow valuation is the most appropriate valuation method for a technology company experiencing high growth rates and significant fixed capital investment.

Step-by-step explanation:

The most appropriate valuation method for a technology company experiencing high growth rates and significant fixed capital investment is Free cash flow valuation.

Free cash flow valuation is a method used to determine the value of a company by analyzing the cash flow it generates after deducting capital expenditures and working capital investments. This method is suitable for companies with high growth rates as it takes into account the future cash flows and investments.

The other valuation methods mentioned, such as Dividend discount model, Residual income valuation, and Price-to-earnings ratio valuation, are more suitable for companies that have stable cash flows and are not experiencing high growth rates.