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 _______.
A)$150,000
B)$180,000
C)$300,000
D)$380,000
E)none of the above

Question

Quizplus · Accepted Answer

Free cash flow (FCF) is calculated using the following formula:

FCF = EBIT (1 - Tax Rate) + Depreciation - Capital Expenditures

Where EBIT is earnings before interest and taxes.

Using the information provided in the question, we can calculate FCF for Utica Manufacturing Company as follows:

EBIT = Cash Flow from Operations - Depreciation
EBIT = $500,000 - $100,000 = $400,000

FCF = $400,000 (1 - 0.30) + $100,000 - $200,000
FCF = $180,000

Therefore, the projected free cash flow of Utica Manufacturing Company for the coming year is $180,000. Option B is the correct answer.

Consider the Free Cash Flow Approach to Stock Valuation