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19 November, 17:36

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%?

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Answers (2)
  1. 19 November, 17:58
    0
    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
  2. 19 November, 18:02
    0
    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
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