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Anonymous Tarel
wrote...
A year ago
The following date is for the coming year. Fincorp net income is reported as $195 million. Depreciation expense is $20 million, account receivable decreased by $20 million, account payable decreased by $10 million, and inventories increased by $10 million. The firms interest expense is $22 million. Assume tax rate is 35% and the net debt of the firm increases by $3 million. What is the market value of equity if the FCFE is projected to grow at 3% indefinitely and the cost of equity is 11%?

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Anonymous
wrote...
#1
A year ago
Hi, I found a similar question!

Quote
FinCorp’s free cash flow to the firm is reported as $205 million. The firm’s interest expense is $22 million. Assume the corporate tax rate is 21% and the net debt of the firm increases by $3 million. What is the market value of equity if the FCFE is projected to grow at 3% indefinitely and the cost of equity is 12%?

Interest net of tax = Interest (1 - tax)

Interest net of tax = 22 (1 - 0.21) = 17.38

Free cash flow to equity = free cash flow to the firm - interest + new debt

Free cash flow to equity = 205 - 17.38 + 3

Free cash flow to equity = $190.62

Market value = Free cash flow to equity / (cost of equity - growth rate)

Market value = 190.62 / (0.12 - 0.03)

Market value = 190.62 / 0.09

Market value = $2,118.00

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