Concept Checks

12.1: No
In firm valuation, the assumptions about leverage have to be made to compute the cost of capital.

12.2: False
You can still normalize earnings and use an average growth rate across the economic cycle.

12.3: Biogen
There are more significant barriers to entry (the patent, for instance) for Biogen.

12.4: All of the above
Historical growth does look at the past, analyst estimates are sometimes biased and fundamental growth rates often just reflect current year inputs.

12.5: False
The terminal value will be heavily influenced by assumptions about growth during the high growth period.

12.6: False
The terminal value will reflect the expected dividend payout when the firm reaches stable growth.

12.7: The FCFE value will usually be higher than the DDM value
Most firms pay out less in dividends than they have available in FCFE.

12.8: No
You can allow leverage to change over time in a firm valuation.

12.9: Undervalue the firm
You have taken away the benefits of growth but left the company saddled with all of the costs of high growth (high reinvestment, high risk)

12.10: Higher than $60,219 million
Without net cap ex, the free cashflow to the firm will be much higher and so will the terminal value.

12.11: All of the above
A firm's PE is affected by all of these factors.

12.12: The higher of the two values, since it is my job to get the highest price I can for my client
Of course, the investors I place these IPOs with are also my customers, creating a conflict of interest.