Question

A stock analyst collected the following information about ABC Inc.: - The firm required rate of return on equity is 17% and its WACC is estimated at 14%. - Based a thorough forecast, the analyst estimates for the free cash flows to the firm for the next two years are 820,000 and 970,000 respectively. His estimates for the free cash flows to equity are however: 550,000 and 660,000 for the next two years respectively. - Both FCFFs and FCFEs are expected to grow at a constant rate of 5% after the second year. The value of equity is closest to:

Answer 1

Answer:

$5,170,940.17

Explanation:

Calculation to determine what The value of equity is closest to:

Using this formula

Value of equity = FCFE1/(1+ke)^1+ FCFE2/(1+ke)^2+

FCFE2(1+g)/ke-g *1/(1+ke)^2

Where,

FCFE= Free cash flow of equity

ke = cost of equity

g = growth rate

Let plug in the formula

Value of equity= $550,000/(1+0.17)^1 + $660,000/(1+0.17)^2 +$660,000 2/(1+0.05)/0.17-0.05* 1/(1+0.17)^2

Value of equity= $470,085.47 + $482,138.94 + $4,218,715.76

Value of equity= $5,170,940.17

Therefore The value of equity is closest to:$5,170,940.17