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 projected free cash flow of Utica Manufacturing Company for the coming year is ________.

Question

Quizplus · Accepted Answer

The free cash flow is calculated as: Operating cash flow - Taxes - Investment in fixed assets. Taxes are calculated on the operating cash flow minus depreciation. So, $500,000 - $100,000 = $400,000 taxable income. Taxes = 30% of $400,000 = $120,000. Free cash flow = $500,000 - $120,000 - $200,000 = $180,000.

Consider the Free Cash Flow Approach to Stock Valuation