Question

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FinCorp reports $205 million in free cash flow to the firm (FCFF). The firm's interest expense is $22 million. Assume the tax rate is 35% and the net debt of the firm increases by $3 million. What is the market value of equity if FCFE is projected to grow at 3% indefinitely and the cost of equity is 12%? O $0 < equity values $500 mil $500 mil< equity value $1 bil $1 bil< equity values $1.5 bil $1.5 bil< equity values $2.0 bil $2.0 bil< equity value

Answer 1

the answer is E $2.0 BIL < EQUITY VALUE

2152.22 million or 2.15 billion

Explanation:

The computation of market value equity is given below :-

Free cash flow = $205 million

So,The interest expenses will be calculated

= 22 × (1-35%)

= 22 × 0.65

= -14.3

Net Debt = $3 million

Free cash flow to equity = free cash flow + interest expenses + net debt

= $205 million - 14.3 + $3 million

= $193.7 million

Cost of equity = 12%

Growth = 3%

So the value is (Net Debt) ÷ (cost of equity - growth)

= 2152.22 million