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 total value of the equity of Utica Manufacturing Company should be
A. $1,000,000.
B. $2,000,000.
C. $3,000,000.
D. $4,000,000.
B. $2,000,000.
Projected free cash flow = $180,000; V0 = 180,000/(.15 .06) = $2,000,000.
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