What is one disadvantage associated with valuation using FCFF?

The correct answer highlights a significant challenge in financial analysis: the difficulties in estimating future cash flows when using Free Cash Flow to Firm (FCFF) as a valuation metric.

This approach relies on projecting a company's cash flows over a future period and then discounting those cash flows to present value using the Weighted Average Cost of Capital (WACC). Estimating future cash flows involves making assumptions about revenue growth, operating margins, capital expenditures, and overall market conditions. These variables are subject to a great deal of uncertainty, and any inaccuracies in the estimates can lead to vastly different valuations.

For instance, if a company's market position is expected to change due to economic fluctuations or competitive pressures, future cash flow projections may be overly optimistic or pessimistic. Similarly, technological advancements or shifts in consumer behavior can significantly impact cash flows. Therefore, the difficulty in accurately projecting these cash flows introduces a level of risk and reduces the reliability of the valuation outcome.

While the other choices present valid points regarding valuation challenges, they do not address this core issue of estimating future cash flows, which is fundamental to the efficacy of FCFF valuation. Simplicity of calculation and ease of determining WACC might apply to other methodologies, and the ability to apply these techniques to private firms