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Suppose you have found a lower value for the price of a share of XYZ using the multiples-based method than the DCF method. Given this discrepancy, you are looking for errors you could have made in your forecasts using the DCF method.

9. Suppose you have found a lower value for the price of a share of XYZ using the multiples-based method than the DCF method. Given this discrepancy, you are looking for errors you could have made in your forecasts using the DCF method.

Which of the following possible estimation errors could explain the discrepancy between the share prices you found using the DCF and multiples-based valuation methods?

(When evaluating each of the following statements, assume all other variables are held constant.)

 

  • You underestimated the Free Cash Flow (FCF) in Year t+3.
  • You overestimated the constant yearly growth rate of Free Cash Flows (FCFs) from Year t+3 onward.
  • You underestimated the Weighted Average Cost of Capital (WACC).
  • You underestimated the constant yearly growth rate of Free Cash Flows (FCFs) from Year t+3 onward.
  • You overestimated the Weighted Average Cost of Capital (WACC).