Question

8. Determinants of intrinsic value Aa A Which of the following is a determinant of a firm's cost of capital? O Cost of debt Education of managers Sales revenues The following table presents some of the current year's financial data for the Happy Giraffe Construction Company. Complete the table by computing Happy Giraffe's free cash flows and fundamental value (rounded to the nearest whole dollar) based solely on this year's information: Value $400,000 $45,000 $20,000 1590 $335,000 $2,233,333 Variable Sales revenue Operating costs and taxes Required investments in operating capital Weighted average cost of capital Annual free cash flow Fundamental value Assuming all other things being equal, if Happy Giraffe's costs of equity decreases, the firm's will fundamental value operating costs and taxes

please answer

Answer 1

Free Cash Flow	335,000
Cost of equity	15%
Fundamental value	335000/15%
Fundamental value	2,233,333
If cost of equity goes down	335000/12%
Revised Fundamenal value	2,791,667
Since Fundamental value is direct function of cost of equity and it is capitalization of
current free cash flow for future at cost of equity and hence if cost of equity goes down
it will increase the fundamental value