Question #76

Reading: Reading 21 Free Cash Flow Valuation

PDF File: Reading 21 Free Cash Flow Valuation.pdf

Page: 37

Status: Unattempted

Part of Context Group: Q75-76
Shared Context
- If FCInv equals Fixed Capital Investment and WCInv equals Working Capital Investment, which statement about FCF and its components is least accurate? A) FCFE = (EBIT × (1 − tax rate)) + Depreciation − FCInv − WCInv. B) FCFF = (EBITDA × (1 − tax rate)) + (Depreciation × tax rate) − FCInv − WCInv. C) WCInv is the change in the working capital accounts, excluding cash and short-term borrowings.
Question
The value of beta for Country Point is:
Answer Choices:
A. 1.27
B. 1.00
C. 1.09
Explanation
The risk free rate is (8% − 2%) = 6%. We are told that the market risk premium is 11%, and we calculated the cost of equity (required return) to be (10 million / 55.6 million =) 18%. Since we know the risk-free rate, the market risk premium, and the discount rate, we can use the capital asset pricing model to solve for beta: Required rate of return = 0.18 = 0.06 + (b × 0.11) 0.18 − 0.06 = b × 0.11 0.12 = b × 0.11 b = 1.09
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