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

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

The model is useful because it examines the relationship between a companys risk, operating profitability, and value of the firms operations.

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 model can be applied to companies that either pay or do not pay a dividendbut it cannot be applied to privately-held companies.

Consider the case of Red Rabbit Builders:

Next year, Red Rabbit is expected to earn an EBIT of $12,000,000, and to pay a federal-plus-state tax rate of 40%. It also expects to make $3,000,000 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 Red Rabbit will generate an annual free cash flow (FCF) of (rounded to the nearest whole dollar).

Next, based on your estimate of Red Rabbits next years FCF and making the stated assumptions, complete the following table:

	Red Rabbit can sustain this annual FCF forever,
	the company has a weighted average cost of capital of 13.86%,
	the company does not currently own any marketable securities,
	there are 15,000 shares of Red Rabbit 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 Red Rabbit	Value
Total Entity Value	$
Value of Common Equity	$
Intrinsic value (per share)	$