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Question:
Pat McCoy, CFA, is analyzing a technology firm that has experienced annual earnings growth of 12%. McCoy does not expect the firm to begin paying dividends on its common shares in the foreseeable future. To estimate the value of this firm’s common shares, McCoy should most appropriately use a:
A
free cash flow model.
explanation
Free cash flow-based valuation techniques are appropriate for valuing shares of a firm that does not pay dividends. The Gordon growth model and two-stage dividend discount model are appropriate for valuing shares of dividend-paying firms.
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