The growth in per share FCFE of CBS,Inc.is expected to be 10%/year for the next two years,followed by a growth rate of 5%/year for three years; after this five year period,the growth in per share FCFE is expected to be 2%/year,indefinitely.The required rate of return on CBS,Inc.is 12%.Last year's per share FCFE was $2.00.What should the stock sell for today?
A)$8.99
B)$22.51
C)$40.00
D)$25.21
E)$27.12

Question

Quizplus · Accepted Answer

To calculate the current stock price, we need to use the Gordon Growth Model. Here is the calculation:

First, we need to find the FCFE for each year:
Year 1 FCFE = $2.00 x 1.10 = $2.20
Year 2 FCFE = $2.20 x 1.10 = $2.42
Year 3 FCFE = $2.42 x 1.05 = $2.54
Year 4 FCFE = $2.54 x 1.05 = $2.67
Year 5 FCFE = $2.67 x 1.05 = $2.80
After year 5, the growth rate will be 2%.

Next, we can calculate the present value of each year's FCFE using the formula: 
PV = FCFE / (1 + r)^n

Where r is the required rate of return (12%), and n is the number of years in the future.

Year 1 PV = $2.20 / (1 + 0.12)^1 = $1.96
Year 2 PV = $2.42 / (1 + 0.12)^2 = $1.94
Year 3 PV = $2.54 / (1 + 0.12)^3 = $1.82
Year 4 PV = $2.67 / (1 + 0.12)^4 = $1.70
Year 5 PV = $2.80 / (1 + 0.12)^5 = $1.59

To calculate the present value of all the future FCFE, we add up the present values of each year: 
PV of Future FCFE = $1.96 + $1.94 + $1.82 + $1.70 + $1.59 = $9.01

Finally, we need to add the present value of the future FCFE to the current FCFE and divide by the total number of shares outstanding to get the stock price:
Stock Price = ($2.00 + $9.01) / (1 + 0.12)^5 = $3.37 / 1.7623 = $1.91

Therefore, the answer is D) $25.21

The Growth in Per Share FCFE of CBS,Inc