Question

5. Determinants of intrinsic value Aa Aa Which of the following is a determinant of a firm's free cash flows? Firm's business risk O Sales revenues O Cost of debt The following table presents some of the current year's financial data for the Fantastique Fantom Costume Company. Complete the table by computing Fantastique Fantom's free cash flows and fundamental value (rounded to the nearest whole dollar) based solely on this year's information: Variable Value Sales revenue $400,000 Operating costs and taxes $45,000 Required investments in operating capital $20,000 Weighted average cost of capital 15% Annual free cash flow Fundamental value $291,304 Assuming all other things being equal, if Fantastique Fantom's free cash flows decrease, the firm's will

Answer 1

5) i) Determinants of free cash flows = Sales revenues

ii) Calculations of annual free cash flow & fundamental value :

a) Annual free cash flow = Sales revenue - Operating costs) taxes - Required investments in operating capital

Annual free cash flow = $4,00,000 - $45,000 - $20,000

Annual free cash flow = $3,35,000

b) Fundamental value = Annual free cash flow / Weighted average cost of capital (WACC)

Here, WACC = 15% or 0.15

So,

Fundamental value = $3,35,000 / 0.15

Fundamental value = $23,33,333

iii) Assuming all other things being equal, if Fantastique Fantom's free cash flow decrease, the firm's fundamental value will decrease.