Phosfranc Inc. is valuing the equity of a company using the free cash flow from equity, FCFE, approach and has estimated that the FCFE in the next three years will be $6.25, $7.70, and $8.36 million respectively. Beginning in year 4, the company expects the cash flows to increase at a rate of 4 percent per year for the indefinite future. It is estimated that the cost of equity is 12 percent. What is the value of equity in this company? (Do not round intermediate computations. Round final answer to the nearest million.)

Question

Quizplus · Accepted Answer

The value of equity is calculated by discounting the FCFE for the first three years and then calculating the terminal value at the end of year 3 using the Gordon Growth Model. The terminal value is then discounted back to present value. The sum of these present values gives the total equity value.