Wacc
9.27%
6. The current FCFF for Barlow Energy is closest to:
7. The total value of Barlow Energy using a single-stage FCFF model is closest to:
8. The value of Barlow Energy's equity using a single-stage FCFF model is closest to:
9. The current FCFE using the information for Barlow Energy is closest to:
10. The value of Barlow Energy's equity using a single-stage model and the current FCFE is closest to:
11. Which of the following is the best estimate of the cash flows available to the firm's investors before any financing decisions?
B. EBITDA x (1 - tax rate) + (Dep x tax rate) - FCInv - WCInv.
C. EBITDA x (1 - tax rare) + (Dep x tax rate) - FCInv - WCInv + lnt x (1 - tax rate).
12. The adjustments to cash flow from operations necessary to obtain free cash flow to the firm (FCFF) are:
A. add noncash charges, subtract fixed capital investment, and subtract working capital investment.
B. add after-tax interest expense and subtract fixed capital investment.
C. add net borrowing and subtract fixed capital investment.
Study Session 12
Cross-Reference to CFA Institute Assigned Reading #42 - Free Cash Flow Valuation Use the following information to answer Questions 13 and 14.
Rachel Keimmel, CFA, is researching the MWC Corporation, a U.S.-based automobile parrs manufacturing firm. MWC has recently entered into a long-term agreement with a German automobile company to be the sole supplier of an innovative suspension system that will be used with a newly designed, moderarely priced sports car. Keimmel believes that this new agreement will favorably impact MWC's stock price. To support her belief, Keimmel reviewed MWC's financial statements and sales forecasts and reached the following conclusions:
• MWC's earnings and FCFE growth will be 1 5% per year for two years, then stabilize ar 8% per year.
• MWC will maintain its current dividend payout ratio.
• Government bonds yield 6.4%, and the market equity risk premium is 5-5%.
• The most recent dividend paid to MWC shareholders was $2.30.
Keimmel also has MWC's current cash flow statement, which follows.
MWC Incorporated Statement of Cash Flows, December 31, 2007 ($ Thousands)
Cash Flow From Operating Activities Net income Depreciation Changes in Working Capital
(Increase) Decrease in receivables (Increase) Decrease in inventories Increase (Decrease) in payables Increase (Decrease) in other current liabilities Net change in working capital Net cash from operating activities
29,960 8,400
33,960
Cash Flow From Investing Activities
Purchase of fixed assets (PP&E) Net cash from investing activities
Cash Flow From Financing Activities Change in debt outstanding Payment of cash dividends Net cash from financing activities Net change in cash and cash equivalents Beginning-of-period cash End-of-period cash
1,240 8,760
10,000
13. The value of MWC s common stock using the two-stage dividend discount model is closest to:
14. The value ofMWCs common stock using the two-stage FCFE approach is closest to:
1 5- The Hoffman Card Co. earned £1.50 per share last year. Investment in fixed capital was £0.80 per share, and depreciation was £0.30. Investment in working capital was £0.20 per share. Hoffman expects earnings to grow at 15% per year for the next five years and that investment in fixed capital, depreciation, and investment in working capital will grow at the same rate. After five years, the growth in earnings and working capital requirements will decline to a stable 5% per year, and investment in fixed capital and depreciation will offset each other (i.e., they will be equal). Hoffman's target debt ratio is 30%. The shareholders require a return of 17% on their investment during the high-growth stage and a return of 10% on rheir investment during the stable stage. The FCFE in year 6 and the value per share of Hoffman's common stock are closest to: FCFE in year 6 Share value
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