1.Marc Gnocci, CFA, is considering the inclusion of the common stock of Konteco Incorporated in several of his clients’ accounts. Konteco provides centralized telephone systems in remote areas of underdeveloped nations. As a result of a recent economic downturn, the price of Konteco’s stock price has declined dramatically. However, given the current economic outlook and Konteco’s long-range earnings forecast, Gnocci believes that Konteco is currently trading below its intrinsic value and has a required return of 15%. In order to determine if Konteco is indeed underpriced, and to prepare a recommendation for his clients, Gnocci has assembled the information presented in the following tables. Gnocci has decided to estimate the current value of Konteco’s stock using the FCFE approach. He believes that Konteco’s FCFE will grow at 20% for three years after 2006, then stabilize at 3% from 2010 onward. Gnocci assumes that Konteco’s capital expenditures, depreciation, and working capital will change in direct proportion to FCFE.

Konteco Incorporated

Income Statements for Year Ending December 31, 2006

(£ Millions)

Konteco’s FCFE per share in 2006 is closest to:

A)   –£1.90.

B)   £2.89.

C)   £1.04.

D)   £5.63.

2.Free cash flow to the firm models (FCFF) represent the value of the firm’s future cash flow that is:

A)   not distributed to shareholders in the form of dividends.

B)   not required for capital expenditures to maintain the operation of the firm.

C)   ultimately available to the shareholders.

D)   left after payments to bondholders.

3.Which of the following statements about the use of free cash flows in valuation is TRUE?

A)   Free cash flow to the firm is calculated before taxes.

B)   Any measure of free cash flow is cash available to stockholders.

C)   It is more challenging to use than dividends.

D)   Depreciation is ignored because it is not a cash flow.

4.Which of the following statements about the definition of free cash flow to equity is TRUE? It is:

A)   cash flow from operations less capital expenditures.

B)   cash available to all capital suppliers.

C)   cash flow from operations less capital expenditures less inflows/outflows from debtholders.

D)   net income minus depreciation.

5.Which of the following statements about the definition of free cash flow to the firm is TRUE? It is:

A)   CFO - FCInv - inflows/outflows from debtholders.

B)   CFO + [Int × (1 - tax rate)] - FCInv.

C)   cash available to stockholders.

D)   NI - depreciation.

答案和详解如下：

1.Marc Gnocci, CFA, is considering the inclusion of the common stock of Konteco Incorporated in several of his clients’ accounts. Konteco provides centralized telephone systems in remote areas of underdeveloped nations. As a result of a recent economic downturn, the price of Konteco’s stock price has declined dramatically. However, given the current economic outlook and Konteco’s long-range earnings forecast, Gnocci believes that Konteco is currently trading below its intrinsic value and has a required return of 15%. In order to determine if Konteco is indeed underpriced, and to prepare a recommendation for his clients, Gnocci has assembled the information presented in the following tables. Gnocci has decided to estimate the current value of Konteco’s stock using the FCFE approach. He believes that Konteco’s FCFE will grow at 20% for three years after 2006, then stabilize at 3% from 2010 onward. Gnocci assumes that Konteco’s capital expenditures, depreciation, and working capital will change in direct proportion to FCFE.

Konteco Incorporated

Income Statements for Year Ending December 31, 2006

(£ Millions)

< >>	2006	2005
Net sales	530	500
Costs (excluding depreciation)	381.6	360.0
Depreciation	39.8	37.5
Total operating costs	421.4	397.5
Earnings before interest and tax	108.6	102.5
Interest expense	(16.0)	(13.9)
Earnings before taxes	92.6	88.6
Taxes (40%)	(37.0)	(35.4)
Net income before preferred dividends	55.6	53.2
Preferred dividends	(7.4)	(6.0)
Net income available for common dividends	48.2	47.2
Common dividends	29.7	40.8
Additions to retained earnings	18.5	6.4
Number of shares	10	10
Dividends per share	2.97	4.08

Additional Information for 2006
Fixed capital investment	62.3
Working capital investment	10.5
Net borrowing	13.7

Konteco’s FCFE per share in 2006 is closest to:

A)   –£1.90.

B)   £2.89.

C)   £1.04.

D)   £5.63.

The correct answer was B)

FCFE is the cash available to common shareholders after funding capital requirements, working capital needs, and debt financing requirements.

Konteco’s 2006 FCFE per share is calculated as (all numbers are in millions of £):

Net income	=	48.2
+ depreciation	=	39.8
– capital expenditures	=	62.3
– investment in working capital	=	10.5
+ net borrowing	=	13.7
FCFE	=	28.9
÷ number of common shares	=	10
FCFE2006 per share	=	£2.89

2.Free cash flow to the firm models (FCFF) represent the value of the firm’s future cash flow that is:

A)   not distributed to shareholders in the form of dividends.

B)   not required for capital expenditures to maintain the operation of the firm.

C)   ultimately available to the shareholders.

D)   left after payments to bondholders.

The correct answer was B)

FCFF models estimate the value of the firm based on the cash flow generated by the firm’s operations that is not required to be reinvested to maintain the operations of the firm.

3.Which of the following statements about the use of free cash flows in valuation is TRUE?

A)   Free cash flow to the firm is calculated before taxes.

B)   Any measure of free cash flow is cash available to stockholders.

C)   It is more challenging to use than dividends.

D)   Depreciation is ignored because it is not a cash flow.

The correct answer was C)

Free cash flow is harder to use than dividends because cash flows from operations must be integrated with those from financing and investing. Free cash flows are after tax. Only free cash flow to equity is available to stockholders. Depreciation is considered because it overstates expenses on a cash basis.

4.Which of the following statements about the definition of free cash flow to equity is TRUE? It is:

A)   cash flow from operations less capital expenditures.

B)   cash available to all capital suppliers.

C)   cash flow from operations less capital expenditures less inflows/outflows from debtholders.

D)   net income minus depreciation.

The correct answer was C)

Free cash flow to equity is the cash available to stockholders after funding capital requirements, working capital needs, and debt financing requirements. It is cash flow from operations less capital expenditures less payments to (and plus inflows from) debtholders.

5.Which of the following statements about the definition of free cash flow to the firm is TRUE? It is:

A)   CFO - FCInv - inflows/outflows from debtholders.

B)   CFO + [Int × (1 - tax rate)] - FCInv.

C)   cash available to stockholders.

D)   NI - depreciation.

The correct answer was B)

Free cash flow to the firm is the cash available to all of the firm’s investors, including stockholders, bondholders, and preferred stockholders. It is cash flow from operations plus after-tax interest expense minus capital expenditures.