Which formula calculates total value of the firm using FCFF in a stable growth scenario?

Which formula calculates total value of the firm using FCFF in a stable growth scenario?

• A. FCFF / (WACC – Growth rate)
• B. EBIT / Debt
• C. Revenue – Expenses
• D. Net Income / Total Assets

Answer: (A)

The formula that calculates the total value of a firm using Free Cash Flow to the Firm (FCFF) in a stable growth scenario is indeed FCFF / (WACC – Growth rate). This approach is based on the concept of present value of future cash flows, which is fundamental in valuation when a company is expected to grow at a stable rate indefinitely. In this formula, FCFF represents the free cash flows generated by the firm that are available to all providers of capital, including debt holders and equity investors. The Weighted Average Cost of Capital (WACC) serves as the discount rate and reflects the average rate of return the company is expected to pay its security holders to finance its assets. The growth rate accounts for the expected stable growth of the cash flows beyond the forecast period. As cash flows grow perpetually at a steady rate after a certain point, this formula allows investors to determine the present value of an infinite series of cash flows that grow at a constant rate. This makes it particularly useful for mature companies that have established stable growth patterns. The other options do not pertain to the valuation of a firm in the context of FCFF or a stable growth scenario. They either relate to aspects of financial ratios or specific measurements not directly applicable to firm

The formula that calculates the total value of a firm using Free Cash Flow to the Firm (FCFF) in a stable growth scenario is indeed FCFF / (WACC – Growth rate). This approach is based on the concept of present value of future cash flows, which is fundamental in valuation when a company is expected to grow at a stable rate indefinitely.

In this formula, FCFF represents the free cash flows generated by the firm that are available to all providers of capital, including debt holders and equity investors. The Weighted Average Cost of Capital (WACC) serves as the discount rate and reflects the average rate of return the company is expected to pay its security holders to finance its assets. The growth rate accounts for the expected stable growth of the cash flows beyond the forecast period.

As cash flows grow perpetually at a steady rate after a certain point, this formula allows investors to determine the present value of an infinite series of cash flows that grow at a constant rate. This makes it particularly useful for mature companies that have established stable growth patterns.

The other options do not pertain to the valuation of a firm in the context of FCFF or a stable growth scenario. They either relate to aspects of financial ratios or specific measurements not directly applicable to firm