Q19. An analyst has prepared the following scenarios for Schneider, Inc.:

Scenario 1 Assumptions

• Tax Rate is 40%.
• Weighted average cost of capital (WACC) = 12%.
• Constant growth rate in free cash flow = 3%.
• Last year, free cash flow to the firm (FCFF) = $30.
• Target debt ratio = 10%.

Scenario 2 Assumptions

• Tax Rate is 40%.
• Expenses before interest and taxes (EBIT), capital expenditures, and depreciation will grow at 15% for the next three years.
• After three years, the growth in EBIT will be 2%, and capital expenditure and depreciation will offset each other.
• Weighted average cost of capital (WACC) during high growth stage = 20%.
• Weighted average cost of capital (WACC) during stable growth stage = 12%.
• Target debt ratio = 10%.

Given the assumptions contained in Scenario 2, what is the value of the firm?

A)   $81.54.

B)   $70.39.

C)   $96.92.

Q20. Using the stable growth free cash flow to the firm (FCFF) model, what is the value of Quality Builders under the assumptions contained in the table below?

A)   $6,475.00.

B)   $2,975.00.

C)   $2,833.33.

Q21. The following information was collected from the financial statements of Bankers Industrial Corp. for the year ended December 31, 2000.

• Earnings before interest and taxes (EBIT) = $6 million.
• Capital expenditures = $1.25 million.
• Depreciation expense = $0.63 million.
• Working capital additions = $0.59 million.
• Cost of debt = 10.5%.
• Cost of equity = 16%.
• Growth rate = 7%.

Bankers is currently operating at their target debt ratio of 40%. The firm’s tax rate is 40%.

The free cash flow to the firm (FCFF) for the current year is:

A)   $3.57 million.

B)   $2.39 million.

C)   $2.31 million.

Q22. The appropriate discount rate used in valuing Bankers using FCFF will be:

A)   16.00%.

B)   6.30%.

C)   12.12%.

Q23. The estimated value of the firm is:

A)   $37.61 million.

B)   $46.68 million.

C)   $49.95 million.

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