Using the capitalized cash flow method (CCM), calculate the fair market value of

Question

Using the capitalized cash flow method (CCM), calculate the fair market value of 100 per­cent of the equity of a hypothetical company, given the following information:
·         Current year’s reported free cash flow to equity = $1,400,000
·         Current year’s normalized free cash flow to equity = $1,800,000
·         Long-term interest-bearing debt = $2,000,000
·         Weighted average cost of capital = 15 percent
·         Equity discount rate = 18 percent
·         Long-term growth rate of FCFE = 5.5 percent

Select one:

a. 14.19

b. 15.19

c. 16.19

d. 17.19

Explanation / Answer

Ans is B 15.19

Solution

The estimated value of equity equals the normalized free cash flow to equity estimate for next period divided by the capitalization rate for equity.

Free cash flow to equity =$1.8 million

Equity discount rate = 18%

Long term growth rate = 5.5%

The fair market value =[$1.8 million *(1+0.055)] / (0.18-0.055) = $1.899 million/0.125 = $15.19 million

Related Questions

Navigate

• Browse (All)
• Browse U
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.