Question #68

of 137 In forecasting free cash flows it is common to assume that investment in working capital: A) is greater than fixed capital investment during a growth phase. B) will be financed using the target debt ratio. C) will equal fixed capital investment. The following information was collected from the financial statements of Hiller GmbH, a German consulting company, for the year ending December 31, 2013: Earnings per share = €4.50. Capital Expenditures per share = €3.00. Depreciation per share = €2.75. Increase in working capital per share = €0.75. Debt financing ratio = 30.0%. Cost of equity = 12.0%. Cost of debt = 6.0%. Tax rate = 30.0%. Outstanding shares = 100 million. New debt borrowing = €15.0 million. Debt repayment = €30.0 million. Interest expense = €7.1 million. The financial leverage for the firm is expected to be stable. Hiller uses IFRS accounting standards and records interest expense as cash flow from financing (CFF). Two analysts are valuing Hiller stock; both are basing their analysis on FCFE approaches. Analyst #1 remarks: "Hiller is a relatively mature company; a constant growth model is the better approach." Analyst #1 estimates FCFE based on the information above and a growth rate of 5.0%. Analyst #2 states: "Hiller just acquired a rival that should change their growth pattern. I think a three stage growth model based on industry growth patterns should be used." Analyst #2 estimates FCFE per share as €3.85. Growth rate estimates are listed below, and from year 7 and thereafter the estimated growth rate is 3.0%. Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7+ Growth rates 12.5% 12.5% 12.5% 8.0% 6.5% 5.0% 3.0%