FINA537 Equity Valuation
Assignments for Practice (No need to submit)
Question 1
Discounted cash flow valuation is based upon the notion that the value of an asset is the
present value of the expected cash flows on that asset, discounted at a rate that reflects
the riskiness of those cash flows. Specify whether the following statements about
discounted cash flow valuation are true or false, assuming that all variables are constant
except for the variable discussed below:
A. As the discount rate increases, the value of an asset increases.
B. As the expected growth rate in cash flows increases, the value of an asset increases.
C. As the life of an asset is lengthened, the value of that asset increases.
D. As the uncertainty about the expected cash flows increases, the value of an asset
increases.
E. An asset with an infinite life (i.e., it is expected to last forever) will have an infinite
value.
Question 2
An analyst complains that the Gordon Growth Model yields absurd results. He presents
several problems that he has had with the model. Respond to each of these comments.
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 Spring '09
 LUXIAOLEI
 Net Present Value, Valuation, shut down, cash flows increases

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