Exhibit 12.7
Use the Information Below for the Following Problem(S)
You are using the free cash flow to equity (FCFE) technique to analyze U.S. equity market. The beginning FCFE is $90 and the required rate of return is 10%. Free cash flows are expected to grow at a 10% rate for the next two years and then grow at a constant rate of 7% forever.
-Refer to Exhibit 12.7.What is the estimated value of the U.S.market today using the FCFE approach?
A) 2,852
B) 2,918
C) 3,210
D) 3,390
E) 3,884

Question

Quizplus · Accepted Answer

$$\begin{aligned}
\mathrm { Mkt } V \mathrm { al } & = \frac { 90 ( 1.10 ) } { ( 1.10 ) } + \frac { 90 ( 1.10 ) ^ { 2 } } { ( 1.10 ) ^ { 2 } } + \frac { \frac { 90 ( 1.10 ) ^ { 2 } ( 1.07 ) } { ( .10 - .07 ) } } { ( 1.10 ) ^ { 2 } } \
& = 90 + 90 + \frac { 3,884.1 } { ( 1.10 ) ^ { 2 } } = 180 + 3,210 = 3,390
\end{aligned}$$

Exhibit 12.7 Use the Information Below for the Following Problem(S)