Question

Discounted Cash Flow Valuation
Presented below are data for Rom Com Truck:

	Forecast Year
	1	2	3	4	5	Terminal
No. of outstanding shares	500	500	500	500	500	500
Terminal year growth rate						4%
Cost of common equity	10%	10%	10%	10%	10%	10%
Net income	$79	$94	$111	$130	$150	$157
Beginning of year common equity	$649	$683	$720	$758	$797	$839
Free cash flow to common equity	$44	$58	$73	$90	$108	$115

Compute the value of a share of Rom Com common stock using the discounted cash flow method.

Do not round your computations until your final answer. Round final answer to two decimal places.

$????

Answer 1

A	B	C	D	E	F	G	H	I	J	K	L	M
2
3		To calculate the value of common stock, the free cash flow to equity should be discounted at cost of equity.
4		The present value of the free cash flow to equity will be the value of the common stock.
5
6			Forecast Year
7			0	1	2	3	4	5	Terminal
8		Free Cash Flow to common equity (FCFE)	0	$44	$58	$73	$90	$108	$115
9		Cost of Equity (r)	10%
10		Terminal growth rate (g)							4%
11		Terminal Value, FCFE6 /(r-g)						$1,916.67		=J8/(D9-J10)
12		Present Value of cash flows		$40.00	$47.93	$54.85	$61.47	$1,257.16		=(I8+I11)/((1+$D$9)^I7)
13		Value of Common Equity	$1,461.41	=SUM(E12:I12)
14
15		Hence the value of the common equity is	$1,461.41
16

Formula sheet

A	B	C	D	E	F	G	H	I	J	K	L	M
2
3		To calculate the value of common stock, the free cash flow to equity should be discounted at cost of equity.
4		The present value of the free cash flow to equity will be the value of the common stock.
5
6			Forecast Year
7			0	1	2	3	4	5	Terminal
8		Free Cash Flow to common equity (FCFE)	0	44	58	73	90	108	115
9		Cost of Equity (r)	0.1
10		Terminal growth rate (g)							0.04
11		Terminal Value, FCFE6 /(r-g)						=J8/(D9-J10)		=getformula(I11)
12		Present Value of cash flows		=E8/((1+$D$9)^E7)	=F8/((1+$D$9)^F7)	=G8/((1+$D$9)^G7)	=H8/((1+$D$9)^H7)	=(I8+I11)/((1+$D$9)^I7)		=getformula(I12)
13		Value of Common Equity	=SUM(E12:I12)	=getformula(D13)
14
15		Hence the value of the common equity is	=D13
16