Chartered Financial Analyst (CFA) Practice Exam Level 2

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What does the DCF model primarily consider when evaluating a firm?

Firm liquidity and cash reserves
Firm dividend history
Market volatility and risks
Potential market share growth

The correct answer is: Firm dividend history

The discounted cash flow (DCF) model primarily focuses on estimating the intrinsic value of a firm based on its future cash flows. In particular, it evaluates the present value of expected cash flows that a firm will generate over time. While dividend history can provide some insights into a firm's ability to generate cash, the DCF model does not specifically rely on this factor for its analysis. Instead, it considers the firm's anticipated free cash flows, which are crucial for understanding the firm's profitability and financial performance. Other options like firm liquidity and cash reserves, market volatility and risks, and potential market share growth may play a role in a comprehensive analysis of a firm but are not the primary focus of the DCF model. The essence of the DCF approach is rooted in cash flow projections rather than dividends alone, making the other choices less relevant in the context of what the DCF model primarily considers.