3. Fundamentals of the free cash flow corporate valuation model Aa Aa E Several methods can be used to compute the intrinsic value of a share of a company's common stock. One method uses the free cash flow (FCF) valuation model, while the another method uses the dividend discount model. The FCF valuation model computes a firm's value-also called its the value of its operating activities (Vop) and the value of firm's nonoperating value-as the sum of , where: the firm's expected future free cash flows by its weighted average Vop is computed by cost of capital. A firm's nonoperating assets include its highly marketable securities in which a firm invests its temporarily available excess cash, and its investments in other businesses. Which of the following statements about the FCF valuation model are true? O A company's FCFs are a function of how effectively managers control the firm's costs, manage its operating and nonoperating assets, and generate sales revenues. The model has limited applicability because it fails to adjust for a firm's riskiness-particularly that created by managers' decisions to use debt in the firm's capital structure, or decisions regarding the payment of cash dividends. The FCF valuation model recognizes that a firm's value is a function of its risk-including its use of debt and equity financing and the markets in which it operates. The model is useful because it examines the relationship between a company's risk, operating profitability, and value of the firm's operations. Consider the case of Soggy Otter Manufacturing: Next year, Soggy Otter is expected to earn an EBIT of $14,000,000, and to pay a federal-plus-state tax rate of 30%. It also expects to make $3,500,000 in new capital expenditures to support this level of business activity, as well as $20,000 in additional net operating working capital (NOWC). Given these expectations, it is reasonable to conclude that next year Soggy Otter will generate an annual free cash flow (FCF) of (rounded to the nearest whole dollar). Next, based on your estimate of Soggy Otter's next year's FCF and making the stated assumptions, complete the following table: Value Attributes of Soggy Otter Total Entity Value Value of Common Equity Intrinsic value (per share) Soggy Otter can sustain this annual FCF forever, the company has a weighted average cost of capital of 6.30%, the market value of debt and preferred stock are $44,857,143 and $24,920,635 respectively, the company does not currently own any marketable securities, and there are 30,000 shares of Soggy Otter outstanding. $99,682,540 $-4,272,108,857 $47,218,045 $31,400,000