Consider the Free Cash Flow Approach to Stock Valuation

question 23

Multiple Choice

Consider the free cash flow approach to stock valuation. Utica Manufacturing Company is expected to have before-tax cash flow from operations of $500,000 in the coming year. The firm's corporate tax rate is 30%. It is expected that $200,000 of operating cash flow will be invested in new fixed assets. Depreciation for the year will be $100,000. After the coming year, cash flows are expected to grow at 6% per year. The appropriate market capitalization rate for unleveraged cash flow is 15% per year. The firm has no outstanding debt. The total value of the equity of Utica Manufacturing Company should be

• A) $1,000,000.
• B) $2,000,000.
• C) $3,000,000.
• D) $4,000,000.

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Definitions:

Ovum

A female gamete or egg cell that, when fertilized by a sperm, begins the process of developing into a new organism.

Sperm

Male reproductive cells or gametes in sexually reproducing organisms that combine with the female gamete, leading to fertilization and the development of a new organism.

Teratogen

Any factor that can cause a birth defect.

Birth Defect

A physical or biochemical abnormality that is present at birth and that may cause physical or mental disability.