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Question 1

McLaughlin's FCFF for 2007 was closest to:

A. $460 million.

B. $474 million.

C. $485 million.

D. $545 million.

 
Correct answer = C

"Free Cash Flow Estimation," John D. Stowe, Thomas R. Robinson, Jerald E. Pinto, and Dennis W. McLeavey
2008 Modular Level II, Vol. 4, pp. 354-357
Study Session 12-47-d, e
discuss the appropriate adjustments to net income, earnings before interest and taxes (EBIT), earnings before interest, taxes, depreciation, and amortization (EBITDA), or cash flow from operations (CFO) to calculate FCFF and FCFE;
calculate FCFF and FCFE given a company's financial statements prepared according to U.S. Generally Accepted Accounting Principles or International Accounting Standards
FCFF = NI + NCC + Int(1 - Tax Rate) - WCInv - FCInv
FCFF = 626 + 243 + 186(1 - 0.32) - (80 - 105) - 535 = 485.48 = $485 million 

Question 2

McLaughlin's 2007 FCFE was less than its 2007 FCFF by an amount closest to:

A. $74 million.

B. $126 million.

C. $326 million.

D. $386 million.

 
Correct answer = C

"Free Cash Flow Estimation," John D. Stowe, Thomas R. Robinson, Jerald E. Pinto, and Dennis W. McLeavey
2008 Modular Level II, Vol. 4, pp. 363-368
Study Session 12-47-d, e
discuss the appropriate adjustments to net income, earnings before interest and taxes (EBIT), earnings before interest, taxes, depreciation, and amortization (EBITDA), or cash flow from operations (CFO) to calculate FCFF and FCFE;
calculate FCFF and FCFE given a company's financial statements prepared according to U.S. Generally Accepted Accounting Principles or International Accounting Standards
FCFE = FCFF - Int(1 - Tax Rate) + Net Borrowing.
FCFE = FCFF - 186(1 - 0.32) + (2,249 - 2,449) = FCFF - 126.48 - 200 = FCFF - 326.48
FCFE is approximately $326 million less than FCFF.
An alternate approach is to calculate FCFF and FCFE separately and difference them.
FCFF = NI + NCC + Int(1 - Tax Rate) - WCInv - FCInv
FCFF = 626 + 243 + 186(1 - 0.32) - (80 - 105) - 535 = 485.48 = $485 million
FCFE = NI + NCC - FCInv - WCInv + Net Borrowing
FCFE = 626 + 243 - 535 - (80 - 105) + (2,249 - 2,449) = $159 million
FCFF - FCFE = 485.48 - 159 = $326.48 million (FCFE is $326 million less) 

Question 3

Using Chan's base case valuation assumptions and the FCFF valuation approach, the year-end 2007 value per share of McLaughlin common stock should be closest to:

A. $18.25.

B. $23.73.

C. $24.89.

D. $29.20.

 
Correct answer = B

"Free Cash Flow Estimation," John D. Stowe, Thomas R. Robinson, Jerald E. Pinto, and Dennis W. McLeavey
2008 Modular Level II, Vol. 4, pp. 352-353
Study Session 12-47-k
calculate the value of a company using the single-stage, two-stage, and three-stage FCFF and FCFE models
The value of the firm is:


Equity value = Firm value - Market value of debt = 12,000 - 2,249 = $9,751 million.
Value per share = Equity value / Number of shares = 9,751 million / 411 million = 23.7251 = $23.73 per share