Company M’s cash flows from operations before interest and taxes was $2 million in the year just ended, and it expects that this will grow by 5% per year forever. To make this happen, the firm will have to invest an amount equal to 20% of pretax cash flow each year. The tax rate is 35%. Depreciation was $200,000 in the year just ended and expected to grow at the same rate as the operating cash flow. The market capitalization rate for an unleveraged cash flow is 12% per year, and the firm currently has debt of $4 million outstanding. This firm has 10 million common shares in float. Use the free cash flow approach to value the firm’s share price
Company M’s cash flows from operations before interest and taxes was $2 million in the year just ended, and it expects that this will grow by 5% per year forever. To make this happen, the firm will have to invest an amount equal to 20% of pretax cash flow each year. The tax rate is 35%. Depreciation was $200,000 in the year just ended and expected to grow at the same rate as the operating cash flow. The market capitalization rate for an unleveraged cash flow is 12% per year, and the firm currently has debt of $4 million outstanding. This firm has 10 million common shares in float. Use the free cash flow approach to value the firm’s share price
Chapter4: Financial Planning And Forecasting
Section: Chapter Questions
Problem 10P
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Company M’s cash flows from operations before interest and taxes was $2 million in the year just ended, and it expects that this will grow by 5% per year forever. To make this happen, the firm will have to invest an amount equal to 20% of pretax cash flow each year. The tax rate is 35%.
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