Reading 42: Free Cash Flow Valuation- LOS k～ Q11-18

growth, during, present, periods

Q11. The value of stock under the two-stage FCFE model will be equal to:

A) present value (PV) of FCFE during the extraordinary growth period plus the terminal value.

B) present value (PV) of FCFE during the extraordinary growth and transitional periods plus the PV of terminal value.

C) present value (PV) of FCFE during the extraordinary growth period plus the PV of terminal value.

Q12. A firm's free cash flow to equity (FCFE) in the most recent year is $50M and is expected to grow at 5% per year forever. If its shareholders require a return of 12%, the value of the firm's equity using the single-stage FCFE model is:

A) $417M.

B) $750M.

C) $714M.

Q13. The following table provides background information on a per share basis for TOY, Inc., in the year 0:

Current Information	Year 0
Earnings	$5.00
Capital Expenditures	$2.40
Depreciation	$1.80
Change in Working Capital	$1.70

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.

In year 1, what is the forecasted free cash flow to equity (FCFE) for TOY, Inc.?

A) $3.56.

B) $4.53.

C) $4.31.

Q14. What is the value of TOY, Inc.'s, stock given the above assumptions?

A) $50.86.

B) $61.57.

C) $64.71.

Q15. The following information was collected from the financial statements of the Hiller Corp. for the year ending December 31, 2000:

Earnings per share = $4.50.
Capital Expenditures per share = $3.00.
Depreciation per share = $2.75.
Increase in working capital per share = $0.75.
Debt financing ratio = 30%.
Cost of equity = 12%.

The financial leverage for the firm is expected to be stable.

The FCFE for the base-year will be:

A) $3.80.

B) $3.00.

C) $4.85.

Q16. If earnings, capital expenditures, depreciation and working capital are all expected to grow constantly at 5%, the value per share using stable-growth FCFE model will be:

A) $72.75.

B) $54.29.

C) $57.00.

Q17. 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 (FCF) = 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.
WACC during high growth stage = 20%.
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