Reading 42: Free Cash Flow Valuation- LOS k～ Q19-23 following, prepared, average, capital, growth

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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%.

Scenario 2 FCFF	Year 0 (last year)	Year 1	Year 2	Year 3	Year 4
EBIT	$15.00	$17.25	$19.84	$22.81	$23.27
Capital Expenditures	6.00	6.90	7.94	9.13
Depreciation	4.00	4.60	5.29	6.08
Change in Working Capital	2.00	2.10	2.20	2.40	2.40
FCFF		5.95	7.06	8.25	11.56

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?

Quality Builders Free Cash Flow to the Firm Year 0
EBIT	$500
Depreciation	$200
Capital Spending	$300
Working Capital Additions	$30
Tax Rate	40%
Assumed Constant Growth Rate in Free Cash Flow	5%
Weighted-average Cost of Capital	11%

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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