Question

Attention: Due to a bug in Google Chrome, this page may not function correctly. Click here to learn more. Aa Aa 8. Determinants of intrinsic value Which of the following is a determinant of a firm's cost of capital? O Sales revenues O Cost of equity O Education of managers The following table presents some of the current year's financial data for the Green Zebra Media Company. Complete the table by computing Green Zebra'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 15% 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 Green Zebra's sales revenues increase, the firm's will fundamental value weighted average cost of capital

Answer 1

Cost of equity is a determinant of firm's cost of capital.

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

Annual free cash flow = $400,000 - $45,000 - $20,000

Annual free cash flow = $335,000

Fundamental value = Annual free cash flow / (1 + WACC)

Fundamental value = $335,000 / (1 + 15%)

Fundamental value = $335,000 * 0.8696

Fundamental value = $291,304

Assuming all other things equal, if Green Zebra's sales revenues increase, the firm's fundamental value will increase.