Question #132
Reading: Reading 21 Free Cash Flow Valuation
PDF File: Reading 21 Free Cash Flow Valuation.pdf
Page: 65
Status: Unattempted
Question
The following table provides forecasts for next year on a per share basis for TOY Inc.: Item Forecast Earnings $5.00 Capital Expenditures $2.40 Depreciation $1.80 Change in Working Capital $1.70 TOY Inc.'s target debt ratio is 30% and has a required rate of return of 12%. Earnings, capital expenditures, depreciation, and working capital are all expected to grow by 5% a year in the future. Assume that capital expenditures and working capital are financed at the target debt ratio. What is the forecasted free cashflow to equity (FCFE) for TOY Inc.?
Answer Choices:
A. $4.31
B. $2.70
C. $3.39
Explanation
FCFE = Earnings per share − (Capital Expenditures − Depreciation) (1 − Debt Ratio) −
Change in working capital (1 − Debt Ratio) = 5.00 − (2.40 − 1.80)(1 − 0.3) − (1.7)(1 − 0.3) =
3.39.