Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Managers strive to increase the value of a firm. An increase in the intrinsic value of the firms stocks is a good measure of the

Managers strive to increase the value of a firm. An increase in the intrinsic value of the firms stocks is a good measure of the increase in the value of the firm. Intrinsic value of a firms stock price is determined by calculating the present values of its free cash flows (FCF) discounted at a rate called the weighted average cost of capital (WACC).

Tyler is a team member in Corporate Finance at a digital-content production company. He is required to forecast the free cash flows that the company will be able to generate in the next three years. Tyler takes into account only the following equation in his calculation:

FCF = Sales Revenues Operating Costs Operating Taxes

Will his calculation be an appropriate estimate of the FCF?

1)Yes

2)No

Why or why not? Check all that apply.

1)Because his calculation fails to recognize the increase in sales revenues

2)Because his calculation fails to include the increase in the working capital required to grow sales

3)Because his calculation fails to include the costs of the firms interest and dividend payments

4)Because his calculation fails to include both the working capital and capital expenditures necessary to sustain the companys operations

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Fundamentals Of Futures And Options Markets

Authors: John C. Hull

5th Edition

0131445650, 9780131445659

More Books

Students also viewed these Finance questions