Question #100
Reading: Reading 21 Free Cash Flow Valuation
PDF File: Reading 21 Free Cash Flow Valuation.pdf
Page: 47
Status: Unattempted
Part of Context Group: Q100-102
First in Group
Shared Context
Question
The 2013 forecasted free cash flow to equity is:
Answer Choices:
A. $300M
B. $340M
C. $420M
Explanation
Since working capital needs are negligible, the free cash flow to equity is:
FCFE = Net income − [1 − DR)] × [FCInv − Depreciation] − [(1 − DR) × WCInv]
FCFE = 600M − [1 − 0.4] × (800M − 500M) = 420M
where:
DR = target debt to asset ratio