Consider the Free Cash Flow Approach to Stock Valuation

question 116

Multiple Choice

Consider the free cash flow approach to stock valuation. F&G Manufacturing Company is expected to have before-tax cash flow from operations of $750,000 in the coming year. The firm's corporate tax rate is 40%. It is expected that $250,000 of operating cash flow will be invested in new fixed assets. Depreciation for the year will be $125,000. After the coming year, cash flows are expected to grow at 7% per year. The appropriate market capitalization rate for unleveraged cash flow is 13% per year. The firm has no outstanding debt. The total value of the equity of F&G Manufacturing Company should be

• A) $1,615,156.50.
• B) $2,479,168.95.
• C) $3,333,333.33.
• D) $4,166,666.67.

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Definitions:

Per-Unit Tax

A tax that is levied on a product based on a fixed amount per unit, affecting the supply curve by elevating production costs.

Tax Burden

The measure of the total amount of taxes imposed by a government on individuals, businesses, and other entities, often expressed as a percentage of GDP.

Product Structure

An organizational framework that groups together all the elements involved in producing a specific product or product line.

Organizational Structures

The framework within which organizational tasks are divided, resources are allocated, and departments are coordinated.