The alternative continuing-value measure CVt = (NOPLATt₊₁)/WACC depends on the assumption that:
A)Excess profits will be competed away.
B)WACC is greater than the inflation rate.
C)NOPLATt₊₁ represents a value from the peak of the business cycle.
D)NOPLATt₊₁ represents a value from the trough of the business cycle.

Question

Quizplus · Accepted Answer

The alternative continuing-value measure CVt assumes that excess profits will be competed away, which means that the company cannot sustain its current level of profitability indefinitely. Therefore, the NOPLATt₊₁/WACC measure is used to estimate the value of the company's future cash flows after the first few years, assuming that the company's excess profits will gradually decrease over time. The measure does not depend on whether NOPLATt₊₁ represents a value from the peak or trough of the business cycle, or whether WACC is greater than the inflation rate.

The Alternative Continuing-Value Measure CVt = (NOPLATt₊₁)/WACC Depends on the Assumption