assume the latest FCFE per share is $1.20. The annual growth rates for the next 5...

assume the latest FCFE per share is $1.20. The annual growth rates for the next 5 years are 20%, 16%, 12%, 10%, and 8% respectively. After the year five, the annual growth rate is constant at 3%. T-bond yield is 2%. The beta is 1.4 and the market risk premium is 5%.

Price as of year 6 is..

Price as of today $...

Expert Solution

Ans a
	price in year 6 = FCFF at year 7 /(required rate - growth rate)

	required rate = Risk free rate + Market risk premium * beta
		=(2%+5%*1.4)
		9.00%
	FCFF 7 =	=1.2120%116%112%110%108%103%*103%
		2.36

	Price as of year 6 =	=2.36/(9%-3%)
	Price as of year 6 =	$ 39.33

Ans b	Price today = present value of future cash flow

	Year	FCFF	terminal value	Total Cash flow	PVIF @ 9%	present value
	1	$ 1.44		$ 1.44	0.9174	$ 1.32
	2	$ 1.67		$ 1.67	0.8417	$ 1.41
	3	$ 1.87		$ 1.87	0.7722	$ 1.44
	4	$ 2.06		$ 2.06	0.7084	$ 1.46
	5	$ 2.22		$ 2.22	0.6499	$ 1.44
	6	$ 2.29	$ 39.33	$ 41.62	0.5963	$ 24.82
	Price today =					$ 31.89

	therefore answer =	$ 31.89

jeff jeffy answered 1 year ago

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