Several methods can be used to compute the intrinsic value of a share of a companys 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 firms valuealso called its valueas the sum of the value of its operating activities (Vopop) and the value of firms nonoperating , where:

	Vopop is computed by the firms expected future free cash flows by its weighted average cost of capital.
	A firms 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? Check all that apply.

A companys FCFs are a function of how efficiently and effectively the firms managers use the companys operating assets and, in turn, the profitability of the companys primary business activities.

The FCF valuation model reflects the firms riskinessas it affects the companys intrinsic valuevia the WACC variable.

The model 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.

The model has limited applicability because it fails to adjust for a firms riskinessparticularly that created by managers decisions to use debt in the firms capital structure, or decisions regarding the payment of cash dividends.

Consider the case of Soggy Otter Manufacturing:

Next year, Soggy Otter is expected to earn an EBIT of $17,000,000, and to pay a federal-plus-state tax rate of 35%. It also expects to make $4,250,000 in new capital expenditures to support this level of business activity, as well as $40,000 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 Otters next years FCF and making the stated assumptions, complete the following table:

	Soggy Otter can sustain this annual FCF forever,
	the company has a weighted average cost of capital of 10.62%,
	the company does not currently own any marketable securities,
	there are 60,000 shares of Soggy Otter outstanding
	the companys value of debt is 45% of its total entity value, and
	the companys value of preferred shares is 25% of its total entity value.

Attributes of Soggy Otter	Value
Total Entity Value
Value of Common Equity
Intrinsic value (per share)