Question #21
Reading: Reading 21 Free Cash Flow Valuation
PDF File: Reading 21 Free Cash Flow Valuation.pdf
Page: 9
Status: Correct
Correct Answer: A
Question
Which of the following statements is least accurate? A firm's free cash flows to equity (FCFE) is the cash available to stockholders after funding:
Answer Choices:
A. capital expenditure requirements
B. debt principal repayments
C. dividend payments
Explanation
A firm's FCFE is the cash available to stockholders after funding capital expenditures and
debt principal repayments.
(Module 21.5, LOS 21.f)
TOY, Inc. is a company that manufactures dolls, games, and other items to entertain children.
The following table provides background information for TOY, Inc. on a per share basis in the year 0:
Current Information
Year 0
Earnings
$5.00
Capital Expenditures
$2.40
Depreciation
$1.80
Change in Working Capital
$1.70
Cost of equity
12.0%
Target debt ratio
30.0%
Market value of stock
$56.00
Shares outstanding
5.0 million
Interest expense
$7.2 million
Cash & short-term investments
$40.0 million
Tax rate
37.5%
Earnings, capital expenditures, depreciation, and working capital are all expected to grow by 5.0% per year in the
future.