Question

Fincorp’s free cash flow to the firm is reported as $205 million. 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 the fcfe is projected to grow at 3% indefinitely and the cost of equity is 12%?

Answer 1

Answer:

The market value of equity is $2,152.22

Explanation:

FCFE = 205 - 22*(1 - 35) + 3

         = 193.70

market value = 193.70/(0.12 - 0.03)

                      = $2,152.22

Therefore, The market value of equity is $2,152.22

Answer 2

Answer:

2152.22 million

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