Question

Consider the free cash flow approach to stock valuation. Wonderfalls Manufacturing Company is expected to have before-tax cash flow from operations of $500,000 in the coming year. The firm's corporate tax rate is 30%. It is expected that $200,000 of operating cash flow will be invested in new fixed assets. Depreciation for the year will be $100,000. After the coming year, cash flows are expected to grow at 6% per year. The appropriate market capitalization rate for unleveraged cash flow is 15% per year. The firm has no outstanding debt. The projected free cash flow of Wonderfalls Manufacturing Company for the coming year is: Select one: $150,000. $180,000. $300,000. $380,000

Answer 1

$180,000

Step-by-step explanation:

The computation of the free cash flow is shown below:

= Before-tax cash flow from operations - depreciation - tax expense + depreciation - invested amount

where,

Tax expense = (Before-tax cash flow from operations - depreciation) × corporate tax rate

= ($500,000 - $100,000) × 30%

= $120,000

And, the other items values would remain the same

Now put these values to the above formula

So, the value would be equal to

= $500,000 - $100,000 -$120,000 + $100,000 - $200,000

= $180,000