Question

The firm you are following as an analyst has FCFE of 500 million dollars for this year. It's before-tax cost of debt is 5 percent...

1. The firm, you are following as an analysist, has FCFE of 500 million dollars for this year. Its before- tax cost of debt is 5 percent, and its required rate of return for equity is 11 percent. The company expects a target capital structure consisting of 20 percent debt financing and 80 percent equity financing. The tax rate is 20 percent, and FCFE is expected to grow forever at 5.0 percent. The firm has 180 million outstanding common shares. What is the value of equity per share using the FCFE valuation model? 2. You are doing a valuation of Firm Z. You collected the following information from financial statements. Firm Z has CFO of 250 million, depreciation of 80 million, interest expense of 50 million, investment in working capital of 60 million, investment in fixed capital of 240 million and net borrowing of 180 million. Calculate FCFF 3. The last year's sales is $3,000 and the expected sales growth is $300. The firm has an EBIT of $500, a tax rate of 30%. It purchased $700 fixed assets and had a depreciation of 600. The change in working capital is $100 and after using pro forma income statement, you found that net income margin would be 10% and the firm is expected to hold 40% debt ration in the foreseeable period. Forecast FCFF 4. Describe and elaborate at least two issues in the Free Cash Flow to Firm (FCFF) model based on some examples

Answer 1

1]

value of equity of firm = current year FCFE * (1 + constant growth rate) / (cost of equity - constant growth rate)

value of equity of firm = $500,000,000 * (1 + 5%) / (11% - 5%)

value of equity of firm = $8,750,000,000

value of equity per share = value of equity of firm / shares outstanding

value of equity per share = $8,750,000,000 / 180,000,000

value of equity per share = $48.61