Question #99

of 137 Which of the following types of companies is the two-stage free cash flow to equity (FCFE) model best suited for? Companies: A) growing at a rate similar to or less than the nominal growth rate of the economy. B) with patents or firms in an industry with significant barriers to entry. C) in high growth industries that will face increasing competitive pressures over time, leading to a gradual decline in growth to a stable level. Harrisburg Tire Company (HTC) forecasts the following for 2013: Earnings (net income) = $600M. Dividends = $120M. Interest expense = $400M. Tax rate = 40.0%. Depreciation = $500M. Capital spending = $800M. Total assets = $10B (book value and market value). Debt = $4B (book value and market value). Equity = $6B (book value and market value). Target debt to asset ratio = 0.40. Shares outstanding = 2.0 billion The firm's working capital needs are negligible, and HTC plans to continue to operate with the current capital structure. The tire industry demand is highly dependent on demand for new automobiles. Individual companies in the industry don't have much influence on the design of automobiles and have very little ability to affect their business environment. The demand for new automobiles is highly cyclical but demand forecast errors tend to be low.