Question

Consider the free cash flow approach to stock valuation. Utica Manufacturing Company is expected to have before-tax cash flow from operations of $500,000 in the coming year. The firm's corporate tax rate is 30%. It is expected that $200,000 of operating cash flow will be invested in new fixed assets. Depreciation for the year will be $100,000. After the coming year, cash flows are expected to grow at 6% per year. The appropriate market capitalization rate for unleveraged cash flow is 15% per year. The firm has no outstanding debt. The projected free cash flow of Utica Manufacturing Company for the coming year is _______.

Answer 1

Answer:

$180,000

Explanation:

Calculation for what The projected free cash flow of Utica Manufacturing Company for the coming year is

First step is to calculate After-tax unleveraged income

Before-tax cash flow from operations $500,000

Less Depreciation $100,000

Taxable income$400,000

($500,000-$100,000)

Less Taxes $120,000

(30%*400,000)

After-tax unleveraged income$280,000

($400,000-$120,000)

Now let calculate The PROJECTED FREE CASH FLOW

After-tax unlevered income + depreciation $380,000

($100,000+$280,000)

Less New investment $200,000

Free cash flow$180,000

($380,000-$200,000)

Therefore The projected free cash flow of Utica Manufacturing Company for the coming year is $180,000