LOS f: Discuss approaches for forecasting FCFF and FCFE.

Q1. A common approach to forecasting free cash flows is to:

A)   project net income and expected capital expenditures.

B)   project earnings before interest and taxes (EBIT) and expected capital expenditures.

C)   calculate historical free cash flow and apply an expected growth rate.

Q2. The following table provides background information on a per share basis for TOY Inc. in the year 0:

TOY Inc.'s target debt ratio is 30% and has a required rate of return of 12%. Earnings, capital expenditures, depreciation, and working capital are all expected to grow by 5% a year in the future. Assume that capital expenditures and working capital are financed at the target debt ratio.

In year 0, what is the free cashflow to equity (FCFE) for TOY Inc.?

A)   $3.39.

B)   $4.31.

C)   $2.70.

Q3. In forecasting free cash flows it is common to assume that investment in working capital:

A)   is greater than fixed capital investment during a growth phase.

B)   will equal fixed capital investment.

C)   will be financed using the target debt ratio.

Q4. In forecasting free cash flows it is common to assume that:

A)   the firm has no non-cash expenses.

B)   historical and future free cash flow will be the same.

C)   the firm adheres to a target capital structure.

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