3. Fundamentals of the free cash flow corporate valuation model 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-aiso called its value-as the sum of the value of its operating activities (VOD) and the value of firm's nonoperating , where: - Vop is computed by the firm's expected future free cash flows by its weighted average cost of capital. - A firm's nonoperating assets include its highly marketable securties 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? Check all that apply. A company's FCFs are a function of (1) how quickly the company grows its sales and assets, (2) managers control the firm's costs, and (3) choose to finance the company's activities. The FCF valuation model reflects the firm's riskiness-as it affects the company's intrinsic value-via the WACC variable. The model can only be used to value companies-but not their component divisions or other smaller operating units. The modet is useful because it provides its decision-makers with insights into the quality of their decision-making, as measured by the intrinsic value of their company. Consider the case of Soggy Otter Manufacturing: Next year, Soggy Otter is expected to earn an EBIT of $11,000,000, and to pay a federal-plus-state tax rate of 30%. It also expects to make $2,750,000 in new capital expenditures to support this level of business activity, as well as $15,000 in additional net operating working capital (NOWC). Given these expectations, it is reasonable to conclude that next year \$oggy 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: 3. Fundamentals of the free cash flow corporate valuation model 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-aiso called its value-as the sum of the value of its operating activities (VOD) and the value of firm's nonoperating , where: - Vop is computed by the firm's expected future free cash flows by its weighted average cost of capital. - A firm's nonoperating assets include its highly marketable securties 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? Check all that apply. A company's FCFs are a function of (1) how quickly the company grows its sales and assets, (2) managers control the firm's costs, and (3) choose to finance the company's activities. The FCF valuation model reflects the firm's riskiness-as it affects the company's intrinsic value-via the WACC variable. The model can only be used to value companies-but not their component divisions or other smaller operating units. The modet is useful because it provides its decision-makers with insights into the quality of their decision-making, as measured by the intrinsic value of their company. Consider the case of Soggy Otter Manufacturing: Next year, Soggy Otter is expected to earn an EBIT of $11,000,000, and to pay a federal-plus-state tax rate of 30%. It also expects to make $2,750,000 in new capital expenditures to support this level of business activity, as well as $15,000 in additional net operating working capital (NOWC). Given these expectations, it is reasonable to conclude that next year \$oggy 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