The Pekay Company has an FCFE of $800. The FCFE is expected to grow by 7 percent next year. The cost of capital is 7 percent, and the level of debt is $4000. The number of shares outstanding is 700. Calculate the firm's share price.

Question

Quizplus · Accepted Answer

To calculate the share price, we can use the formula:

Share price = (FCFE / number of shares) + (growth rate * FCFE / cost of capital - growth rate) - (total debt / number of shares)

Plugging in the values:

Share price = ($800 / 700) + (7% * $800 / 7% - 7%) - ($4000 / 700)
Share price = ($1.14) + ($10.67) - ($5.71)
Share price = $6.10

Adding this to the current stock price of Pekay Company would give us the total share price.

Assuming the current stock price of Pekay is $34.66, the total share price would be $40.76 (i.e. $34.66 + $6.10).

Therefore, the best choice is D) $40.76.

The Pekay Company Has an FCFE of $800