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Basic Question 2 of 4
Select the false statement(s).
II. FCFE is a more comprehensive model than DDM as it provides a better estimate of value.
III. DDMs consider expected dividends as cash flow to shareholders while FCFE models consider available cash flows for dividend distribution as cash flows to shareholders.
IV. FCFE should be used only when a company does not pay dividends or its dividends differ significantly from its underlying earnings. Otherwise a DDM should be used.
I. FCFE models are useful to value control ownership since dividends can be changed substantially by the investor.
II. FCFE is a more comprehensive model than DDM as it provides a better estimate of value.
III. DDMs consider expected dividends as cash flow to shareholders while FCFE models consider available cash flows for dividend distribution as cash flows to shareholders.
IV. FCFE should be used only when a company does not pay dividends or its dividends differ significantly from its underlying earnings. Otherwise a DDM should be used.
User Contributed Comments 2
| User | Comment |
|---|---|
| alejandroc | I disagree with 2. Why is DDM a less comprehensive measure? Both are valid, depending on the control or non-control perspective. |
| akirchner1 | The DDM model uses a strict definition of cash flow to equity, that is, the dividends of a company. The FCFE model recognizes a company's investments and financing policies in addition to its dividend policies. |
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Learning Outcome Statements
explain the appropriate adjustments to net income, earnings before interest and taxes (EBIT), earnings before interest, taxes, depreciation, and amortization (EBITDA), and cash flow from operations (CFO) to calculate FCFF and FCFE;
calculate FCFF and FCFE;
CFA® 2025 Level II Curriculum, Volume 4, Module 22.