Free Cash Flow and Corporate Valuation Model

1510 Words Aug 13th, 2013 7 Pages
Assignment Chapter 15

True/False
Indicate whether the statement is true or false.

_F___ 1. The corporate valuation model cannot be used unless a company doesn 't pay dividends.

_T___ 2. Free cash flows should be discounted at the firm 's weighted average cost of capital to find the value of its operations.

_F___ 3. Value-based management focuses on sales growth, profitability, capital requirements, the weighted average cost of capital, and the dividend growth rate.

_F___ 4. Two important issues in corporate governance are (1) the rules that cover the board 's ability to fire the CEO and (2) the rules that cover the CEO 's ability to remove members of the board.

_F___ 5. If a company 's expected return on
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If the weighted average cost of capital is 15%, what is the firm 's value of operations, in millions? a. | $948 | b. | $998 | c. | $1,050 | d. | $1,103 | e. | $1,158 |

____ 16. Suppose Leonard, Nixon, & Shull Corporation 's projected free cash flow for next year is $100,000, and FCF is expected to grow at a constant rate of 6%. If the company 's weighted average cost of capital is 11%, what is the value of its operations? a. | $1,714,750 | b. | $1,805,000 | c. | $1,900,000 | d. | $2,000,000 | e. | $2,100,000 |

____ 17. Zhdanov Inc. forecasts that its free cash flow in the coming year, i.e., at t = 1, will be –$10 million, but its FCF at t = 2 will be $20 million. After Year 2, FCF is expected to grow at a constant rate of 4% forever. If the weighted average cost of capital is 14%, what is the firm 's value of operations, in millions? a. | $158 | b. | $167 | c. | $175 | d. | $184 | e. | $193 |

____ 18. Leak Inc. forecasts the free cash flows (in millions) shown below. If the weighted average cost of capital is 11% and FCF is expected to grow at a rate of 5% after Year 2, what is the Year 0 value of operations, in millions? Assume that the ROIC is expected to remain constant in Year 2 and beyond (and do not make any half-year adjustments).

Year: | 1 | 2 | Free cash flow: | –$50 | $100 |

a. | $1,456 | b. | $1,529 | c. | $1,606 | d. | $1,686 | e. | $1,770 |

____ 19. A

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