fcff for changing capital structures (volatile).
ohhh… Then this question makes sense. Since they say this ‘relatively constant proportions of equity and debt financing’ - So it has to be FCFE.
Why not residual income? Is there a hint in the vignette for why residual income would not be a proper choice? Because RI is the only formula that EXPLICITLY requires the capital structure in able to compute it. Actually, I haven’t taken the exam yet, so I’m peacing out of this thread to not get free points - will check back in a week after I’ve taken the exam.
Because it was a FCFC/FCFE vignette ;-p - So I ddn’t even reach option 3. Got confused between FCFE and FCFF and got the wrong ans.
Hey Skill – I’m confused. Why do you need the cap structure to compute RI. I believe if you start with NI you use cost of equity…and only if you start w/ EBIT you use WACC. ?
Planner, I might be confusing RI with residual dividend model, and now that you mention it, I am. And swap, knowing that it was a FCF question, I’m changing my answer to “B”…