Question

If a company's free cash flows are expected to grow at a constant rate of 5% a year, which of the following statements is CORRECT? The stock is in equilibrium. a. The company's WACC must be equal to or less than 5%. b. The company's stock's dividend yield is 5%. c. The expected return on the company's stock is 5% a year. d. The value of operations is expected to decline in the future. e. The company's value of operations one year from now is expected to be 5% above the current price.

Answer 1

Answer:

The correct option is e. The company's value of operations one year from now is expected to be 5% above the current price.

Explanation:

Free cash flow (FCF) refers to the cash that a company generates after taking into consideration cash outflows needed to support operations and maintain the capital assets of the company.

When the free cash flow of a company is expected to grow at a certain constant rate, the implication is that the the value of operations of that company one year from the current period is expected to be higher than the current price.

Based on the explanation above, the correct option is e. The company's value of operations one year from now is expected to be 5% above the current price.