Question

Costco Wholesale Corp. has FCFE of $2.00 billion in the most recent year. The cash flows are expected to grow at the annual rate of 3%. Costco has the weighted average cost of capital of 9% and the cost of equity of 12%. The book value of debt is $20.72 billion and the market value of debt is $24.44. Given these assumptions, which of the following is closest to the current firm value of Costco?
a. $47.3 billion
b. $43.6 billion
c. $58.8 billion
d. $46.7 billion

Answer 1

Answer:

a. $47.3 billion

Explanation:

The computation of the current value of the firm is as follows;

Value of Equity = FCFE × (1+ g ) ÷ (ke - g)

= $2 billion × (1 + 0.03) ÷ (0.12 - 0.03)

= $22.89 billion

Now  

Current Value of Firm = Market Value of equity + market Value of Debt

= $22.89 billion + $24.44 billion

= $47.3 billion

Hence, the current value of the firm is $47.3 billion

hence, the correct option is A.