When using the Present Value of Operating Free Cash Flow model,the firm's operating free cash flow to the firm is discounted by the firm's:
A) Cost of equity
B) Cost of debt
C) Required rate of return
D) Weighted Average Cost of Capital
E) Beta-adjusted cost of equity

Question

Quizplus · Accepted Answer

The Present Value of Operating Free Cash Flow model requires the discounting of the firm's operating free cash flow to the firm by the firm's Weighted Average Cost of Capital (WACC). The WACC takes into account both the cost of equity and the cost of debt, as well as the proportion of each type of financing used by the firm. Therefore, D is the best choice as it incorporates all relevant costs of capital.

When Using the Present Value of Operating Free Cash Flow