CFA Level I · CFA Level I Exam · Discounted Cash Flow (DCF) and Growth Models
A firm's free cash flow to equity (FCFE) is expected to be 5.00 million next year and to grow at 3% per year indefinitely. The cost of equity is 9%, and the firm has 2 million shares outstanding. The value per share is closest to:
Value per share is about 41.67. Capitalizing FCFE of 5.00 million at the cost of equity less growth, 6%, gives total equity value of 83.33 million, and dividing by 2 million shares yields 41.67 per share.
- A27.78
- B41.67Correct
- C83.33
Explanation
Equity value = 5.00/(0.09 - 0.03) = 83.33 million. Dividing by 2 million shares gives 41.67 per share. The 83.33 option omits the per-share step; 27.78 is 5/0.09 divided by 2.
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