Intrinsic valuation approaches such as a free cash flow to equity model (the model we used to illustrate intrinsic valuation in our course) primarily use balance sheet information to derive growth expectations.

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Question restatement: The claim is that intrinsic valuation approaches, such as the free cash flow to equity (FCFE) model used to illustrate intrinsic valuation in the course, primarily rely on balance sheet information to derive growth expectations.
Option 1: True. Why this would be considered incorrect: Proponents of FCFE-based valuation typically forecast FCFE using a combination of operating performance (revenues, margins, taxes), investment in working capital and capital expenditures, and financing decisions (net borrowing). While balance sheet items (like net debt, equity, and capital structure) feed into the FCFE calculation, growth expectations are not derived primarily from balance sheet data. Growth is usually driven by prospective cash flows, profitability, reinvestment needs, and external financing assumptions, not simply from static balance sheet numbers. Overreliance on balance sheet inputs could misrepresent how a firm creates cash for equity holders since it ignores the dynamic aspects of operations and investment.
Option 2: False. Why this would be considered correct: FCFE valuation does rely on information that spans income statement, cash flow statement, and balance sheet. The growth expectations in an FCFE framework are informed by projected operating performance (which affects FCFE via net income and non-cash adjustments), investment in fixed and working capital (capital expenditures and changes in working capital), and financing (net new borrowing or repayment). While balance sheet data are relevant inputs (e.g., debt levels, equity, and working capital positions that influence cash flow needs), they are not the sole or primary source for deriving growth expectations. Growth is more robustly tied to anticipated cash generation and investment needs rather than a pure snapshot of balance sheet figures.
Option 1 and Option 2 contrasted: The emphasis on balance sheet information as the primary driver of growth in FCFE is a mischaracterization of the FCFE valuation approach. In practice, practitioners blend information from multiple statements and projections, with cash flow generation and reinvestment plans playing a central role in determining growth prospects.
In summary, the statement is misleading because FCFE-based intrinsic valuation uses a broader set of inputs—operating performance, investment needs, and financing decisions—not solely balance sheet data—to derive growth expectations. The accurate view recognizes the interconnected roles of income statement dynamics, cash flows, and balance sheet structure in shaping FCFE projections.

ACCT10001_2025_SM2 Exam: Accounting Reports and Analysis (ACCT10001_2025_SM2)- Requires Respondus LockDown Browser

Intrinsic valuation approaches such as a free cash flow to equity model (the model we used to illustrate intrinsic valuation in our course) primarily use balance sheet information to derive growth expectations.

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