$$ Soggy Otter can sustain this annual FCF forever,

$$ the company has a weighted average cost of capital of $10\mathrm{.}62\%,$

$$ the company does not currently own any marketable securities$,$

$$ there are $15,000$ shares of Soggy Otter outstanding

$$ the company$$s value of debt is $45\%$ of its total entity value, and

$$ the company$$s value of preferred shares is $25\%$ of its total entity value.

Which of the following statements about the FCF valuation model are true? Check all that apply.

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.

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 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 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 $35\%.$ It also expects to make

$$2,750,000$ in new capital expenditures to support this level of business activity, as well as $$10,000$ 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

$$4,390,000vv($rounded to the nearest whole dollar$).$

Next, based on your estimate of Soggy Otter's next year's FCF and making the stated assumptions, complete the following table:

Soggy Otter can sustain this annual FCF forever,

the company has a weighted average cost of capital of $10\mathrm{.}62\%,$

the company does not currently own any marketable securities$,$

there are $15,000$ shares of Soggy Otter outstanding

the company's value of debt is $45\%$ of its total entity value, and

the company's 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$)$