EquityKing says to EquityLoser: 1. The free cash flow models would be appropriate because free cash flow is not impacted by the firm’s dividend payout policy but any stock issuance in the future can have a significant impact on cash flow available to common stockholders. 2. I would further caution that an increase in leverage will lead to a decrease in FCFE in the year debt is issued, thereby potentially reducing the value per share. A. Equity king is right about 1 but wrong about 2. B: Equity king is right about 2 but wrong about 1. C. Equity king is wrong about both. D. Equity king is right about both.
answer is c
Statement 1 would be wrong coz div / share repurchase / issue have no effect on FCFE / FCFF
Statement 2 would be wrong coz higher leverage will increase net borrowings and add to FCFE…However if it was Equity Value that you were computing, you would subract MV (Debt) hence leading to a reduction.