ZuoTi.Pro
Question

Company A’s current free cash flow is $2 dollars and forecasts its FCFF to grow at...

Company A’s current free cash flow is $2 dollars and forecasts its FCFF to grow at 0% for 2 years, then 10% for 2 years, then at 5% forever.

The firm is consisted of 100% equity and has no debt. If the company’s beta is 1.5, the risk free rate is 2% and the market return is 10%.

What will be the equity value of the firm today using DCF model?

business   finance   
0 0
Add a comment Improve this question Transcribed image text
Next > < Previous
Sort answers by oldest

Homework Answers

Answer #1

As per CAPM, required return on Equity = Risk free rate + beta*(Market return – risk free rate)

= 2% + 1.5*(10%-2%)

= 14%

Equity value of firm is equal to present value of all future cash flows

= 2/1.14 + 2/(1.14)^2 + 2(1.10)/(1.14)^3 + 2(1.10)^2/(1.14)^4 + 2(1.10)^2(1.05)/(1.14)^4 (14%-5%)

= $22.9275

i.e. $22.93

0 0
Add a comment
Know the answer?
Add Answer to:
Company A’s current free cash flow is $2 dollars and forecasts its FCFF to grow at...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions

  • Motor Homes Inc. (MHI) is presently enjoying abnormally high growth because of a surge in the...

    Motor Homes Inc. (MHI) is presently enjoying abnormally high growth because of a surge in the demand for motor homes. The company expects free cash flow to grow at a rate of 20% for the next 4 years, after which there will be no growth (g = 0) in FCFF. The company’s last FCFF, FCFF0, was $1.50. The firm is consisted of 100% equity and has no debt. MHI’s beta is 1.5, the market risk premium is 6%, and the...

  • Motor Homes Inc. (MHI) is presently enjoying abnormally high growth because of a surge in the...

    Motor Homes Inc. (MHI) is presently enjoying abnormally high growth because of a surge in the demand for motor homes. The company expects free cash flow to grow at a rate of 20% for the next 4 years, after which there will be no growth (g = 0) in FCFF. The company’s last FCFF, FCFF0, was $1.50. The firm is consisted of 100% equity and has no debt. MHI’s beta is 1.5, the market risk premium is 6%, and the...

  • ompany A just reported free cash flows of $24 million and expects FCF to grow at...

    ompany A just reported free cash flows of $24 million and expects FCF to grow at a constant rate of 5% forever. The company has $100 million in short-term investments, $200 million debt, $50 million preferred stock, and 10 million shares of common stock outstanding. Their cost of debt is 11% and they are located in a country with no corporate taxes. If the expected risk free rate is 2%, the expected return on the S&P 500 is 8%, and...

  • You are a consultant to a firm evaluating an expansion of its current business. The cash-flow...

    You are a consultant to a firm evaluating an expansion of its current business. The cash-flow forecasts (in millions of dollars) for the project are as follows: Years Cash Flow 0 - 100 1 - 10 + 18 On the basis of the behavior of the firm’s stock, you believe that the beta of the firm is 1.45. Assume that the rate of return available on risk-free investments is 6% and that the expected rate of return on the market...

  • You are a consultant to a firm evaluating an expansion of its current business. The cash-flow...

    You are a consultant to a firm evaluating an expansion of its current business. The cash-flow forecasts (in millions of dollars) for the project are as follows: Years Cash Flow 0 – 100 1 - 10 + 18 On the basis of the behavior of the firm’s stock, you believe that the beta of the firm is 1.45. Assume that the rate of return available on risk-free investments is 6% and that the expected rate of return on the market...

  • please calculate the terminal value ? DISCOUNTED FCFF 300,250 9,731,271 10,015,098 10,535,301 Discounted FCFF Terminal value...

    please calculate the terminal value ? DISCOUNTED FCFF 300,250 9,731,271 10,015,098 10,535,301 Discounted FCFF Terminal value Discounted terminal value Equity allocation Debt allocation Market risk premium Expected market return Risk-free rate Beta After-tax cost of debt Cost of equity WACC Terminal FCFF growth rate Current implied DCF (Enterprise value) 35% 65% 5% 5.5% 0.5% 1.7 5.97% 9.0% 7.03% Free cash flow to firm (FCFF) EARNINGS AFTER TAX ADJUSTMENT 5,622,614 6,098,206 6,263,179 6,497,376 EBIT Tax adjustment Earnings after tax 7,235,692 1,613,078...

  • You are a consultant to a firm evaluating an expansion of its current business. The cash-flow...

    You are a consultant to a firm evaluating an expansion of its current business. The cash-flow forecasts (in millions of dollars) for the project are as follows: Years Cash Flow 0 -100 1 - 10 +16 On the basis of the behavior of the firm's stock, you believe that the beta of the firm is 1.33. Assume that the rate of return available on risk-free investments is 6% and that the expected rate of return on the market portfolio is...

  • Please show with all steps Free Cash Flow Model 2012 $14,869.00 Free Cash Flow FCF Growth...

    Please show with all steps Free Cash Flow Model 2012 $14,869.00 Free Cash Flow FCF Growth 2013 $13,345.00 - 10.25% 2014 $12,685.00 -4.95% 2015 $13,104.00 3.30% 2016 $12,934.00 -1.30% 2017 Growth Rate $12,951.00 0.13% -2.72% Geometric Average -2.61% Arithmetic Average Equity Beta Debt/Equity Tax Rate Risk-Free Rate Market Risk Premium 0.8 2.26 21% 2.00% 10.00% Asset Beta Required Rate of Return using CAPM 0.2872 4.87% Value of Firm using Free Cash Flow Model with Geometric Average: Value of Firm using...

  • 3. A company forecasts free cash flow in one year to be -$80 million and free...

    3. A company forecasts free cash flow in one year to be -$80 million and free cash flow in two years to be $200 After the second year, free cash flow will grow at a constant rate of 6 percent per year forever. If the overall cost of capital is 14 percent, what is: a. The horizon value? b. The current value of operations? . The value of company's operations is $400 million. The company's balance sheet shows $20 million...

  • The current Free cash flow to the firm is $185 million. The interest expense to the...

    The current Free cash flow to the firm is $185 million. The interest expense to the firm is $20 million. If the tax rate is 40% and the net debt of the firm increased by $15 million, what is the estimated value of the firm if the FCFE grows at 5% and the cost of equity is 10 % ? $2,168 million В. A. $2.397 million $3,760 million $3,948 million C. D. Cache Creek Manufacturing Company is expected to pay...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT