Epsilon Consultants has the following projected free cash flows to equity and other information.It has no non-operating assets.Calculate Epsilon's intrinsic value of equity using the FCFE model. $$\begin{array} { l c c r }
& \text { Year 1 } & \text { Year 2 } & \text { Year 3 } \
\text { FCFE } & \$ 1,000 & \$ 1,200 & \$ 1,260 \
\text { Long-term FCFE growth } & 5 \% & & \
\text { Required return on } \
\text { equity }& 9 \% & &

\end{array}$$
A) $28,440
B) $31,284
C) $34,413
D) $37,854
E) $41,640

Question

Epsilon Consultants has the following projected free cash flows to equity and other information.It has no non-operating assets.Calculate Epsilon's intrinsic value of equity using the FCFE model. $$\begin{array} { l c c r } 
& \text { Year 1 } & \text { Year 2 } & \text { Year 3 } \
\text { FCFE } & \$ 1,000 & \$ 1,200 & \$ 1,260 \
\text { Long-term FCFE growth } & 5 \% & & \
\text { Required return on } \
\text { equity }& 9 \% & &

\end{array}$$  
A) $28,440
B) $31,284
C) $34,413
D) $37,854
E) $41,640

Quizplus · Accepted Answer

The correct answer is A.The intrinsic value of equity using the FCFE model is calculated as the sum of the present value of all future FCFE. The present value of each FCFE is calculated as the FCFE divided by the required return on equity minus the long-term FCFE growth rate.In this case, the intrinsic value of equity is calculated as follows:PV of FCFE in Year 1 = $1,000 / (0.09 - 0.05) = $14,286PV of FCFE in Year 2 = $1,200 / (0.09 - 0.05) = $17,143PV of FCFE in Year 3 = $1,260 / (0.09 - 0.05) = $18,000Intrinsic value of equity = $14,286 + $17,143 + $18,000 = $49,429

Epsilon Consultants Has the Following Projected Free Cash Flows to Equity