Daniel Hernandez

FREE CASH FLOW VALUATION

1. An analyst gathered the following information regarding Alpha Ltd.:

Net income = $378,000
Interest expense = $15,575
Depreciation expense = $28,100
Restructuring charges = $11,250
Amortization of long-term bond premiums = $5,780
Fixed capital investment = $78,625
Working capital investment = $31,280
Net borrowing = $51,250
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Given a tax rate of 40%, free cash flow to the firm is closest to:
A. $322,570
B. $307,895
C. $311,010

2. Selected information regarding Lompriya Ltd is given below:

Net income = $1,528,500
Interest expense = $255,550
Depreciation expense = $398,000
Amortization of long-term bond discounts = $18,290
Fixed capital investment = $588,525
Working capital investment = $251,180
Net borrowing = $125,600
Given a tax rate of 40%, free cash flow available to holders of common equity is closest to:
A. $1,384,015
B. $1,212,395
C. $1,230,685

3. An analyst gathered the following information regarding Tetris Corporation:

Net income = $650,000
Interest expense = $21,250
Depreciation expense = $32,500
Impairment of goodwill = $24,280
Amortization of long-term bond discounts = $6,255
Capital expenditures = $250,670
Proceeds from sale of long-term assets = $82,500
Working capital investment = $71,300

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Given a tax rate of 35%, free cash flow to the firm is closest to:
A. $487,378
B. $404,878
C. $475,868

4. Selected information regarding Sakura Ltd is given below:

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EBITDA = $1,550,950
Interest expense = $375,200
Fixed capital expenditures = $985,185
Depreciation expense = $350,400
Working capital investment = $220,650
Net borrowing = $195,280
Cra 64 #38 100

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Given a tax rate of 35%, free cash flow available to holders of common equity is closest to:
A. $120,203
B. -$123,680
C. $419,155

5. Selected information regarding Beta Ltd is given below:

Cash flow from operations = $1,822,970
Depreciation = 177,370
Interest expense = $148,375
Fixed capital investment = $451,620
Working capital investment = $237,280
Net borrowing = $328,150
Given a tax rate of 40%, free cash flow to the firm is closest to:
A. $1,637,745
B. $1,371,375
C. $1,460,375

6. Selected information regarding Sentino Investments is given below:

Earnings before interest and tax = $548,950
Interest expense = $115,250
Capital expenditures = $1,150,285
Proceeds from sale of long-term assets = $790,390
Depreciation expense = $280,355
Current assets (excluding cash) = $595,650

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Current liabilities (excluding short-term debt) = $291,250

Given a tax rate of 40%, free cash flow to the firm is closest to:
A. $165,010
B. -$54,570
C. -$222,963

7. Selected information regarding Gamma Corporation is given below:

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EBITDA = $1,248,950
Interest expense = $285,250
Fixed capital expenditures = $675,285
Depreciation expense = $250,455
Working capital investment = $180,655
Cra 64 #38 100

dan.djh@gmail.com

Given a tax rate of 35%, free cash flow to the firm is closest to:
A. $206,333
B. $43,537
C. $228,950

8. Selected information regarding Tempra Capital is given below:

Earnings before interest and tax = $950,125
Interest expense = $215,250
Fixed capital expenditures = $775,280
Depreciation expense = $290,155
Working capital investment = $321,255
Net borrowing = $540,290
Given a tax rate of 40%, free cash flow available to holders of common equity is closest to:
A. $554,885
B. $174,835
C. $742

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Use the following information to answer Questions 9 to 11:

Ashley wants to estimate the value of the stock of Tunlip Traders and gathers the following
information:

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FCFF at the end of 2010 = $800 million

Before-tax cost of debt = 5%
Required rate of return on equity = 12%
Target debt-to-equity ratio = 0.6
Number of common shares outstanding = 500 million
Expected long-term growth rate in FCFF = 4%
Tax rate = 35%
Book value of debt = $1.3 billion
Market value of debt = $1.5 billion
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9. The weighted average cost of capital (WACC) that Ashley should use is closest to:
A. 8.72%
B. 6.53%
C. 9.38%

10. The value of the firm at the end of 2010 is closest to:
A. $17,631 million
B. $32,869 million
C. $16,954 million

11. The intrinsic value per share of the companys stock at the end of 2010 is closest to:
A. $32.66
B. $30.91
C. $32.26

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Use the following information to answer Questions 12 and 13:

An analyst gathered the following information regarding Diago Investments:

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FCFF at the end of 2011 = $1.1 million

Interest expense = $525,000
Fixed capital expenditure = $650,000
Working capital expenditure = $280,000
Depreciation expense = $395,000
Net borrowing = $480,000
Number of common shares outstanding = 600,000
Weighted average cost of capital = 14%
Risk free rate of return = 5%
Equity market risk premium = 7%
Beta of the companys stock = 1.1
Expected long-term growth rate in FCFE = 6%
Tax rate = 40%
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12. FCFE per share at the end of 2011 is closest to:

A. $2.99
B. $2.11
C. $3.82

13. The value per share of the companys stock at the end of 2011 is closest to:
A. $33.36
B. $27.93
C. $31.47

14. An analyst wants to estimate the value of Simco Inc and gathers the following information:
Current year FCFF = $3.5 million
Expected growth rate in FCFF for the next 4 years = 12%
Long-term constant growth rate from Year 5 onwards = 5%
WACC during the high-growth phase = 15%
WACC during the mature phase = 11%
The value of the firm today is closest to:
A. $48.63 million
B. $77.81 million
C. $68.21 million

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Daniel Hernandez

15. Shamrock Ltds most recent FCFE per share amounted to $0.6. An analyst has the following
expectations regarding the companys growth in FCFE:

FCFE will grow at a rate of 40% for the next three years, during which investors
required rate of return will be 20%.
During the following two years, FCFE growth will decline by 15% per year towards
its stable long-term growth rate. During this time, investors required rate of return
will be 16%.
From Year 6 onwards, FCFE will grow at a stable long-term growth rate of 10%,
during which investors required rate of return will be 12%.

The intrinsic value of the companys stock today is closest to:

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A. $59
B. $58
C. $56
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16. An analyst gathers the following information regarding Monaco Capital Inc:
Value obtained from FCFF model = $800 million
Market value of cash and short-term investments = $90 million
Book value of land held as an investment = $80 million
Market value of land held as an investment = $120 million
Bonds and notes outstanding = $325 million
Number of shares outstanding = 200 million
The value per share of Monacos stock is closest to:
A. $3.23
B. $3.43
C. $4
17. In which of the following situations would an analyst most likely prefer using the FCFE
approach over the FCFF approach to valuing a company?
A. When the companys capital structure is relatively stable.
B. When the company is leveraged and its capital structure is changing.
C. When the company is leveraged and FCFE is negative.

18. Which of the following is most likely subtracted from net income to compute FCFF?
A. Impairment of intangible assets.
B. Amortization of long term bond premiums.
C. Restructuring expenses.

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19. Given that a company follows U.S. GAAP, which of the following items must be added to
CFO to compute FCFF?
A. After-tax interest expense.
B. Dividends paid.
C. Dividends received.

20. Assuming IFRS applies, in which of the following cases is an adjustment to CFO least likely
required in computing FCFF from CFO.

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A. If interest received is classified as an operating activity.

B. If interest paid is classified as an operating activity.
C. If dividends paid is classified as an operating activity.
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21. Consider the following statements:

Statement 1: Non-cash charges that appear after EBIT on the income statement must be added
back to EBIT when computing FCFF.
Statement 2: The book value of non-operating assets must be added to the value obtained
from the FCF model when computing the total value of a company.
Which of the following is most likely?
A. Only Statement 1 is correct.
B. Only Statement 2 is correct.
C. Both statements are incorrect.

22. Consider the following information:

Cash and cash equivalents at 31 December 2011 = $228,900
Cash and cash equivalents at 31 December 2012 = $268,550
Interest expense = $580,760
Net borrowings = $115,500
Share repurchases = $340,450
Given a tax rate of 40%, the firms FCFE at the end of 2012 is closest to:
A. $380,100
B. $613,056
C. $609,000

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Daniel Hernandez

23. Consider the following information:

Cash and cash equivalents at 31 December 2010 = $1.50 million
Cash and cash equivalents at 31 December 2011 = $1.85 million
Interest expense = $0.48 million
Net borrowings = $0.25 million
Cash dividends = $1.25 million
Given a tax rate of 40%, the firms FCFF at the end of 2011 is closest to:
A. $1,830,000
B. $1,638,000
C. $388,000
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24. Assuming a tax rate of 40%, a $100 increase in which of the following would increase FCFF
and FCFE by $60 each?
A. Cash operating expenses
B. EBIT
C. Accounts payable

25. Assuming a tax rate of 40%, a $100 increase in which of the following would not impact
FCFF and decrease FCFE by $60?
A. Notes payable
B. Interest expense
C. Accounts payable

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Daniel Hernandez

FREE CASH FLOW VALUATION

1. An analyst gathered the following information regarding Alpha Ltd.:

Net income = $378,000
Interest expense = $15,575
Depreciation expense = $28,100
Restructuring charges = $11,250
Amortization of long-term bond premiums = $5,780
Fixed capital investment = $78,625
Working capital investment = $31,280
Net borrowing = $51,250
Daniel Hernandez

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Given a tax rate of 40%, free cash flow to the firm is closest to:
A. $322,570
B. $307,895
C. $311,010
Answer: C
FCFF = NI + NCC + Int (1 Tax rate) FCInv WCInv
FCFF = 378,000 + (28,100 + 11,250 5,780) + [15,575 (1 0.4)] 78,625 31,280
FCFF = $311,010

2. Selected information regarding Lompriya Ltd is given below:

Net income = $1,528,500
Interest expense = $255,550
Depreciation expense = $398,000
Amortization of long-term bond discounts = $18,290
Fixed capital investment = $588,525
Working capital investment = $251,180
Net borrowing = $125,600
Given a tax rate of 40%, free cash flow available to holders of common equity is closest to:
A. $1,384,015
B. $1,212,395
C. $1,230,685
Answer: C
FCFE = NI + NCC FCInv WCInv + Net borrowing
FCFE = 1,528,500 + (398,000 + 18,290) 588,525 251,180 + 125,600
FCFE = $1,230,685

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3. An analyst gathered the following information regarding Tetris Corporation:

Net income = $650,000
Interest expense = $21,250
Depreciation expense = $32,500
Impairment of goodwill = $24,280
Amortization of long-term bond discounts = $6,255
Capital expenditures = $250,670
Proceeds from sale of long-term assets = $82,500
Working capital investment = $71,300
Daniel Hernandez

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Given a tax rate of 35%, free cash flow to the firm is closest to:
Cra 64 #38 100

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A. $487,378
B. $404,878
C. $475,868
Answer: A
FCFF = NI + NCC + Int (1 Tax rate) FCInv WCInv
Fixed capital expenditure = 250,670 82,500 = $168,170
FCFF = 650,000 + (32,500 + 24,280 + 6,255) + [21,250 (1 0.35)] 168,170 71,300
FCFF = $487,377.5

4. Selected information regarding Sakura Ltd is given below:

EBITDA = $1,550,950
Interest expense = $375,200
Fixed capital expenditures = $985,185
Depreciation expense = $350,400
Working capital investment = $220,650
Net borrowing = $195,280
Given a tax rate of 35%, free cash flow available to holders of common equity is closest to:
A. $120,203
B. -$123,680
C. $419,155
Answer: B
FCFE = EBITDA (1 Tax rate) Interest (1 Tax rate) + Depreciation (Tax rate) FCInv
WCInv + Net borrowing

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FCFE = [1,550,950 (1 0.35)] [375,200 (1 0.35)] + (350,400 0.35) 985,185

220,650 + 195,280
FCFE = -$123,677.5

5. Selected information regarding Beta Ltd is given below:

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Cash flow from operations = $1,822,970

Depreciation = 177,370
Interest expense = $148,375
Fixed capital investment = $451,620
Working capital investment = $237,280
Net borrowing = $328,150
Cra 64 #38 100

dan.djh@gmail.com

Given a tax rate of 40%, free cash flow to the firm is closest to:
A. $1,637,745
B. $1,371,375
C. $1,460,375
Answer: C
FCFF = CFO + Int (1 Tax rate) FCInv
FCFF = 1,822,970 + [148,375 (1 0.4)] 451,620
FCFF = $1,460,375

6. Selected information regarding Sentino Investments is given below:

Earnings before interest and tax = $548,950
Interest expense = $115,250
Capital expenditures = $1,150,285
Proceeds from sale of long-term assets = $790,390
Depreciation expense = $280,355
Current assets (excluding cash) = $595,650
Current liabilities (excluding short-term debt) = $291,250
Given a tax rate of 40%, free cash flow to the firm is closest to:
A. $165,010
B. -$54,570
C. -$222,963
Answer: B
FCFF = EBIT (1 Tax rate) + Depreciation FCInv WCInv

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FCInv = 1,150,285 790,390 = $359,895

WCInv = 595,650 291,250 = $304,400
FCFF = [548,950 (1 0.4)] + 280,355 359,895 304,400
FCFF = -$54,570

7. Selected information regarding Gamma Corporation is given below:

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EBITDA = $1,248,950
Interest expense = $285,250
Fixed capital expenditures = $675,285
Depreciation expense = $250,455
Working capital investment = $180,655
Cra 64 #38 100

dan.djh@gmail.com

Given a tax rate of 35%, free cash flow to the firm is closest to:
A. $206,333
B. $43,537
C. $228,950
Answer: B
FCFF = EBITDA (1 Tax rate) + Depreciation (Tax rate) FCInv WCInv
FCFF = [1,248,950 (1 0.35)] + (250,455 0.35) 675,285 180,655
FCFF = $43,536.75

8. Selected information regarding Tempra Capital is given below:

Earnings before interest and tax = $950,125
Interest expense = $215,250
Fixed capital expenditures = $775,280
Depreciation expense = $290,155
Working capital investment = $321,255
Net borrowing = $540,290
Given a tax rate of 40%, free cash flow available to holders of common equity is closest to:
A. $554,885
B. $174,835
C. $742
Answer: B
FCFE = EBIT (1 Tax rate) Interest (1 Tax rate) + Depreciation FCInv WCInv + Net
borrowing
FCFE = [950,125 (1 0.4)] [215,250 (1 0.4)] + 290,155 775,280 321,255 + 540,290

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FCFE = $174,835

Use the following information to answer Questions 9 to 11:

Ashley wants to estimate the value of the stock of Tunlip Traders and gathers the following
information:

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FCFF at the end of 2010 = $800 million

Before-tax cost of debt = 5%
Required rate of return on equity = 12%
Target debt-to-equity ratio = 0.6
Number of common shares outstanding = 500 million
Expected long-term growth rate in FCFF = 4%
Tax rate = 35%
Book value of debt = $1.3 billion
Market value of debt = $1.5 billion
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9. The weighted average cost of capital (WACC) that Ashley should use is closest to:
A. 8.72%
B. 6.53%
C. 9.38%
Answer: A
WACC = {0.6/1.6 [0.05 (1 0.35)]} + (1/1.6 0.12) = 8.7188%

10. The value of the firm at the end of 2010 is closest to:
A. $17,631 million
B. $32,869 million
C. $16,954 million
Answer: A
Value of the firm = FCFF 2011 / (r g) = ($800m 1.04) / (0.0872 0.04) = $17,631.79m

11. The intrinsic value per share of the companys stock at the end of 2010 is closest to:
A. $32.66
B. $30.91
C. $32.26
Answer: C

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Value of equity = Value of the firm Value of debt

Value of equity = $17,631.79m $1,500m = $16,131.79 million
Value per share = $16,127.12 / 500 = $32.26

Use the following information to answer Questions 12 and 13:

An analyst gathered the following information regarding Diago Investments:

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FCFF at the end of 2011 = $1.1 million

Interest expense = $525,000
Fixed capital expenditure = $650,000
Working capital expenditure = $280,000
Depreciation expense = $395,000
Net borrowing = $480,000
Number of common shares outstanding = 600,000
Weighted average cost of capital = 14%
Risk free rate of return = 5%
Equity market risk premium = 7%
Beta of the companys stock = 1.1
Expected long-term growth rate in FCFE = 6%
Tax rate = 40%
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12. FCFE per share at the end of 2011 is closest to:

A. $2.99
B. $2.11
C. $3.82
Answer: B
FCFE = FCFF Interest (1 Tax rate) + Net borrowing
FCFE = 1,100,000 [525,000 (1 0.4)] + 480,000 = $1,265,000
FCFE per share = $1,265,000 / 600,000 = $2.1083

13. The value per share of the companys stock at the end of 2011 is closest to:
A. $33.36
B. $27.93
C. $31.47
Answer: A
Required rate of return on equity = 0.05 + (0.07 1.1) = 12.70%

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Value of equity at the end of 2011 = FCFE 2012 / (r g)

Value of equity at the end of 2011 = (2.1083 1.06) / (0.1270 0.06) = $33.36 per share

14. An analyst wants to estimate the value of Simco Inc and gathers the following information:
Current year FCFF = $3.5 million
Expected growth rate in FCFF for the next 4 years = 12%
Long-term constant growth rate from Year 5 onwards = 5%
WACC during the high-growth phase = 15%
WACC during the mature phase = 11%
The value of the firm today is closest to:
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A. $48.63 million
B. $77.81 million
C. $68.21 million
Answer: C
FCFF 1
FCFF 2
FCFF 3
FCFF 4
FCFF 5

= $3.5m 1.12 = $3.92m

= $3.5m 1.122 = $4.3904m
= $3.5m 1.123 = $4.9172m
= $3.5m 1.124 = $5.5073m
= $5.5073m 1.05 = $5.7827m

Terminal value at the end of Year 4 = $5.7827 / (0.11 0.05) = $96.3783 million
Value of the firm today can be calculated as:
[CF] [2ND] [CE|C]
[ENTER] []
3.92 [ENTER] [] []
4.3904 [ENTER] [] []
4.9172 [ENTER] [] []
101.8856 [ENTER] [NPV]
15 [ENTER] [] [CPT]
NPV = $68.21 million

15. Shamrock Ltds most recent FCFE per share amounted to $0.6. An analyst has the following
expectations regarding the companys growth in FCFE:

FCFE will grow at a rate of 40% for the next three years, during which investors
required rate of return will be 20%.

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During the following two years, FCFE growth will decline by 15% per year towards
its stable long-term growth rate. During this time, investors required rate of return
will be 16%.
From Year 6 onwards, FCFE will grow at a stable long-term growth rate of 10%,
during which investors required rate of return will be 12%.

The intrinsic value of the companys stock today is closest to:

A. $59
B. $58
C. $56
Answer: B
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Years
FCFE ($)

High growth period

Transitional period

Stable
growth

g = 40%

g declines by 15% per

year

g = 10%

0.60

0.84

1.18

1.65

2.06

2.26

2.49

Terminal value
in Year 5

124.51

Discount factors
Present values
Sum of present
values

0.8333

0.6944

0.5787

0.4989

0.4301

0.70

0.82

0.95

1.03

54.52

58.02

16. An analyst gathers the following information regarding Monaco Capital Inc:
Value obtained from FCFF model = $800 million
Market value of cash and short-term investments = $90 million
Book value of land held as an investment = $80 million
Market value of land held as an investment = $120 million
Bonds and notes outstanding = $325 million
Number of shares outstanding = 200 million
The value per share of Monacos stock is closest to:
A. $3.23
B. $3.43
C. $4
Answer: B

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Market value of non-operating assets = $90m + $120m = $210 million

Total value of the firm = Value of operating assets + Value of non-operating assets
Total value of the firm = $800m + $210m = $1,010 million
Equity value = Total value Value of debt
Equity value = $1,010m $325m = $685 million
Stock price = $685m / 200m = $3.425 per share
17. In which of the following situations would an analyst most likely prefer using the FCFE
approach over the FCFF approach to valuing a company?
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A. When the companys capital structure is relatively stable.

B. When the company is leveraged and its capital structure is changing.
C. When the company is leveraged and FCFE is negative.
Answer: A
The FCFE approach would be preferred when the companys capital structure is relatively
stable.

18. Which of the following is most likely subtracted from net income to compute FCFF?
A. Impairment of intangible assets.
B. Amortization of long term bond premiums.
C. Restructuring expenses.
Answer: B
Impairment charges on intangible assets and restructuring expenses are added back to net
income to compute FCFF. Amortization of any bond premium is subtracted.

19. Given that a company follows U.S. GAAP, which of the following items must be added to
CFO to compute FCFF?
A. After-tax interest expense.
B. Dividends paid.
C. Dividends received.
Answer: A
Dividends received are classified as CFO. Since they are available to the firms providers of
capital, no related adjusted to CFO is required to compute FCFF.

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Dividends paid are classified as CFF. Since they have not been deducted from CFO, no
related adjusted to CFO is required to compute FCFF.
After-tax interest expense is deducted in computing CFO. Therefore, it must be added back to
CFO to compute cash available to all providers of capital.

20. Assuming IFRS applies, in which of the following cases is an adjustment to CFO least likely
required in computing FCFF from CFO.
A. If interest received is classified as an operating activity.
B. If interest paid is classified as an operating activity.
C. If dividends paid is classified as an operating activity.
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Answer: A
Interest received can be classified as CFO or CFI. Only if it is classified as CFI should it be
added to CFO to compute FCFF.
Interest paid can be classified as CFO or CFF. Only if it is classified as CFO should after-tax
interest paid be added back to CFO to compute FCFF.
If dividends paid are classified as CFO, they must be added back to CFO to compute cash
available to all providers of capital.

21. Consider the following statements:

Statement 1: Non-cash charges that appear after EBIT on the income statement must be added
back to EBIT when computing FCFF.
Statement 2: The book value of non-operating assets must be added to the value obtained
from the FCF model when computing the total value of a company.
Which of the following is most likely?
A. Only Statement 1 is correct.
B. Only Statement 2 is correct.
C. Both statements are incorrect.
Answer: C
Only non-cash items that appear above EBIT (e.g. depreciation) on the income statement
need to be added back to EBIT to compute FCFF.
The market value of non-operating assets must be added to the value obtained from the FCF
model when computing the value of a company.

22. Consider the following information:

Cash and cash equivalents at 31 December 2011 = $228,900

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Cash and cash equivalents at 31 December 2012 = $268,550

Interest expense = $580,760
Net borrowings = $115,500
Share repurchases = $340,450
Given a tax rate of 40%, the firms FCFE at the end of 2012 is closest to:
A. $380,100
B. $613,056
C. $609,000
Answer: A
Daniel Hernandez

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Cra 64 #38 100

FCFE = Increases in cash balances + Cash dividends + Share repurchases New equity
issues
FCFE = ($268,550 $228,900) + 0 + $340,450 0 = $380,100
dan.djh@gmail.com

23. Consider the following information:

Cash and cash equivalents at 31 December 2010 = $1.50 million
Cash and cash equivalents at 31 December 2011 = $1.85 million
Interest expense = $0.48 million
Net borrowings = $0.25 million
Cash dividends = $1.25 million
Given a tax rate of 40%, the firms FCFF at the end of 2011 is closest to:
A. $1,830,000
B. $1,638,000
C. $388,000
Answer: B
FCFF = Increases in cash balances + After-tax interest expense + Repayment of principal
New borrowings + Cash dividends + Share repurchases New equity issues
FCFF = ($1.85m $1.50m) + [$0.48m (1 0.4)] $0.25m + $1.25m
FCFF = $1.638 million
24. Assuming a tax rate of 40%, a $100 increase in which of the following would increase FCFF
and FCFE by $60 each?
A. Cash operating expenses
B. EBIT
C. Accounts payable
Answer: B

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Daniel Hernandez
TCPDF and FPDI

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A $100 increase in EBIT will increase FCFF and FCFE by $60.

A $100 increase in cash operating expenses will decrease FCFF and FCFE by $60.
A $100 increase in accounts payable will increase FCFF and FCFE by $100.

25. Assuming a tax rate of 40%, a $100 increase in which of the following would not impact
FCFF and decrease FCFE by $60?
A. Notes payable
B. Interest expense
C. Accounts payable
Daniel Hernandez

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Cra 64 #38 100

dan.djh@gmail.com

Answer: B
A $100 increase in notes payable will have no impact on FCFF but increase FCFE by $100.
A $100 increase in interest expense will have no impact on FCFF but decrease FCFE by $60.
A $100 increase in accounts payable will increase FCFF and FCFE by $100.

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