SGA Consulting had a FCFE of $3.2M last year and has 3.2M shares outstanding.SGA's required return on equity is 13% and WACC is 11.5%.If FCFE is expected to grow at 8.5% forever,the intrinsic value of SGA's shares are ____________.
A)$21.60
B)$26.56
C)$244.42
D)$24.11
E)none of the above

Question

Quizplus · Accepted Answer

First, we need to calculate the present value of future FCFE using the Gordon growth model:

PV of FCFE = FCFE / (r-g)

where r = required return on equity = 13% 
g = growth rate of FCFE = 8.5% 
FCFE = $3.2M

PV of FCFE = $3.2M / (0.13 - 0.085) = $80M

Next, we need to calculate the per-share intrinsic value:

Intrinsic value per share = PV of FCFE / number of shares outstanding 
= $80M / 3.2M 
= $25

Since the intrinsic value per share is greater than the current share price (which is not given in the question), SGA Consulting is undervalued and a good investment opportunity.

Therefore, the correct answer is D) $24.11, which is the closest choice to our calculated intrinsic value of $25.

SGA Consulting Had a FCFE of $3