Impact of Growth Rate on Equity Valuation

Very Easy Equity Valuation Applications Free Cash Flow Valuation

Maria is evaluating a publicly traded company to determine its intrinsic value using the Free Cash Flow (FCF) valuation method. She learns that the company has a steady growth rate in its free cash flows and a required return of 10%.

To compute the value of the equity using the FCF method, Maria uses the following formula:

Value of Equity = Free Cash Flow / (Discount Rate - Growth Rate)

The value of the equity increases when the growth rate increases.

The value of the equity is not affected by changes in the discount rate.

The value of the equity decreases if the discount rate increases.

Hint

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