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:

Dominant Firms

Companies that possess a major share of the market and typically have considerable power to influence market conditions and prices.

Low Entry Barriers

Characteristics of a market or industry that make it easy for new companies to start operations and compete.

Homogeneous Oligopoly

A market structure characterized by a few firms producing identical or very similar products, leading to significant inter-firm competition.

Identical Products

Products that are exactly the same in every feature, often used in economic models of perfect competition.