Reading 47: Free Cash Flow Valuation - LOS k ～ Q26-30

答案和详解如下：

26.If FCInv equals Fixed Capital Investment and WCInv equals Working Capital Investment, which statement about free cash flow and its components is FALSE?

A)   WCInv is the change in the working capital accounts, excluding cash and short-term borrowings.

B)   FCFF = (EBITDA x (1-tax rate)) + (Depreciation x tax rate) – FCInv – WCInv.

C)   FCFE = (EBIT x (1-tax rate)) + Depreciation – FCInv – WCInv.

D)   FCFE = FCFF – (Interest expense x (1-tax rate)) + Net borrowing.

The correct answer was C)

The correct version of this equation is:
FCFF = (EBIT x (1-tax rate)) + Depreciation – FCInv – WCInv

27.What is the cost of capital that Nguyen used for her valuation of Country Point?

A)   17%.

B)   15%.

C)   18%.

D)   20%.

The correct answer was C)

Since there is no debt allocated to Country Point, the cost of capital will equal the cost of equity. Nguyen said that she used a cost of equity equal to Country Point’s Return on Equity (ROE) at year-end, rounded to the nearest percentage point. Since the net income at the end of 2004 was $10 million and the allocated common equity was $55.6 million, the return of equity is (10 million / 55.6 million =) 18%.

28.Given Nguyen’s estimate of Country Point’s terminal value in 2008, what is the growth assumption she must have used for free cash flow after 2008?

A)   7%.

B)   9%.

C)   3%.

D)   12%.

The correct answer was A)

We know the terminal value in 2008 is $223.7 million. We can calculate the free cash flow in 2008 to be ($30 million net income + $5 million depreciation - $12 million capital expenditures =) $23 million (see the table in question 1). Thus, we can solve for the estimated growth rate: 

Terminal value = [CF@2008 x (growth rate plus one)] / (discount rate – growth rate) 
223.7 million = ($23 million x (growth rate plus one)) / (0.18 – growth rate) 
223.7 million x (0.18 – growth rate) = 23 million x (growth rate plus one)
40.266 – (223.7 x (growth rate)) = 23 million + (23 x growth rate)
17.266 = 246.7 x (growth rate)
0.07 = growth rate

Nguyen’s growth rate assumption is 7% per year.

29.The value of beta for Country Point is:

A)   1.27.

B)   1.00.

C)   1.09.

D)   0.80.

The correct answer was C)

The risk free rate is (8%- 2%) = 6%. We are told that the market risk premium is 11%, and we calculated the cost of equity (required return) to be (10 million / 55.6 million =) 18%. Since we know the risk-free rate, the market risk premium, and the discount rate, we can use the capital asset pricing model to solve for beta:

Required rate of return = 0.18 = 0.06 + (b × 0.11)
0.18 – 0.06 = b × 0.11
0.12 = b × 0.11
b = 1.09

30.What is the estimated value of Country Point in a proposed spin-off?

A)   $178.3 million.

B)   $147.5 million.

C)   $144.5 million.

D)   $162.6 million.

The correct answer was D)

Using the discounted cash flow approach on the levels of cash flow we calculated (see the table in question 1):

Firm value = $13 /1.181 + $16/1.182 + $21/1.183 + $23/1.184 + $223.7/1.184 
=$11.0 + $11.5 + $12.8 + $11.9 +$115.4
= $162.6 million