Homework Answers
This is done to maintain the consistency between the numerator and denominator. In case of free cash flow to equity, we are concerned about value to equity holder only, so we use cost of equity while in case of free cash to firm, we need to determine value for all capital provides such as debt holders, equity holders and preference share holders etc. so we need to use weighted average cost of capital.
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22. (1 point) Why would you use a different discount rate when calculating intrinsic value with...
1) Which of the following adjustments would you make after calculating the value of the firm...
1) Which of the following adjustments would you make after calculating the value of the firm to get to the value of equity? A) Subtract the value of debt B) Subtract the expected liabilities form any lawsuits C) Subtract capital expenditures on new projects D) Subtract any unfunded pension and health care obligations 2) The value of the firm when using dividends as the cash flow will often be different from the value using FCFE as the cash flows. Which...
Why do Investors and Companies Care about Intrinsic Value? The intrinsic value of a firm is...
Why do Investors and Companies Care about Intrinsic Value? The intrinsic value of a firm is determined by the size, timing, and risk of its expected future free cash flows (FCF). There are two models used to estimate intrinsic values: the discounted dividend model and the corporate valuation model. The discounted cash flow (or DCF) approach describes a method of valuing a project, company, or asset using the concepts of the time value of money. All future cash flows are...
Which one of the following factors is not considered in calculating the firm’s cost of equity? risk free rate of retu...
Which one of the following factors is not considered in calculating the firm’s cost of equity? risk free rate of return beta interest rate on corporate debt expected return on equities difference between expected return on stocks and the risk free rate of return Which one of the following factors is not considered in calculating the firm’s cost of capital? cost of equity interest rate on debt the firm’s marginal tax rate book value of debt and equity the firm’s...
* Compute the intrinsic Equity Value (on a per share basis) of Company Y using the...
* Compute the intrinsic Equity Value (on a per share basis) of Company Y using the Free Cash Flow to Equity (FCFE) method based on the following set of information: --Company Y is forecast to generate $1MM in FCFE for the next 3 years, and thereafter expects the to grow at a 5% rate into perpetuity. The applied market capitalization rate for the unleveraged cash flow is 12% per year. The firm currently has a float of 600,000 shares outstanding.
Question 7 (Mandatory) (1 point) When firms use multiple sources of capital, they need to calculate...
Question 7 (Mandatory) (1 point) When firms use multiple sources of capital, they need to calculate the appropriate discount rate for valuing their firm's cash flows as: O a weighted average of the capital components costs. O they apply to each asset as they are purchased with their respective forms of debt or equity. O a sum of the capital components costs. O a simple average of the capital components costs. Question 8 (Mandatory) (1 point) Which of the following...
Use the corporate, or free cash flow, model to estimate Petry Corporation's intrinsic value. The firm's...
Use the corporate, or free cash flow, model to estimate Petry Corporation's intrinsic value. The firm's WACC is 10.00%, its end-of-year free cash flow (FCF1) is expected to be $65.0 million, the FCFs are expected to grow at a constant rate of 5.00% a year in the future, the company has $200 million of long-term debt and preferred stock, and it has 25 million shares of common stock outstanding. Assume the firm has zero non-operating assets. What is the firm's...
The CFO of Johnson Industries is calculating the discount rate for the future cash flows of...
The CFO of Johnson Industries is calculating the discount rate for the future cash flows of a project. The CFO would like to make a calculation of NPV for the project. If the firm has a cost of debt capital of 6% and a cost of equity capital of 10%, which of the following is most likely about the weighted average cost of capital (WACC) for the firm? A) The WACC is 6% B) The WACC is between 6% and...
You have been tasked with determining a fair stock price for Shire Brewing, a local craft...
You have been tasked with determining a fair stock price for Shire Brewing, a local craft beer manufacturer that will soon be going public for $22 per share. You are interested in investing in this company, but only if it is fairly priced (or undervalued). You have decided to use the free cash flow approach to determine the intrinsic price per share and have compiled the following data: Free Cash Flow Data Other Data Year (t) FCF Growth rate of...
A) What is the present value of this cash flow at 8% discount rate? B) What...
A) What is the present value of this cash flow at 8% discount
rate?
B) What is the present value of this cash flow at 14% discount
rate?
C) What is the present value of this cash flow at 27% discount
rate?
Different cash flow. Given the following cash inflow, what is the present value of this cash flow at 8%, 14%, and 27% discount rates? Year 1 Year 2: Years 3 through 7: Year 8: $1,000 $5,000 $0 $25,000
* Compute the intrinsic Equity Value (on a per share basis) of Company Y using the Free Cash Flow to Equity (FCFE) method based on the following set of information: --Company Y is forecast to generate $1MM in FCFE for the next 3 years, and thereafter expects the to grow at a 5% rate into perpetuity. The applied market capitalization rate for the unleveraged cash flow is 12% per year. The firm currently has a float of 600,000 shares outstanding.
Question 7 (Mandatory) (1 point) When firms use multiple sources of capital, they need to calculate the appropriate discount rate for valuing their firm's cash flows as: O a weighted average of the capital components costs. O they apply to each asset as they are purchased with their respective forms of debt or equity. O a sum of the capital components costs. O a simple average of the capital components costs. Question 8 (Mandatory) (1 point) Which of the following...
The CFO of Johnson Industries is calculating the discount rate for the future cash flows of a project. The CFO would like to make a calculation of NPV for the project. If the firm has a cost of debt capital of 6% and a cost of equity capital of 10%, which of the following is most likely about the weighted average cost of capital (WACC) for the firm? A) The WACC is 6% B) The WACC is between 6% and...
A) What is the present value of this cash flow at 8% discount
rate?
B) What is the present value of this cash flow at 14% discount
rate?
C) What is the present value of this cash flow at 27% discount
rate?
Different cash flow. Given the following cash inflow, what is the present value of this cash flow at 8%, 14%, and 27% discount rates? Year 1 Year 2: Years 3 through 7: Year 8: $1,000 $5,000 $0 $25,000
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