CA Final · Advanced Financial Management · Business Valuation
Rohan Foods Ltd expects FCFE of Rs 60 crore in Year 1 and Rs 72 crore in Year 2. From Year 3 onwards FCFE will grow at 5% a year forever. Cost of equity is 15%. What is the value of equity (Rs crore) today, to the nearest rupee crore?
Year 3 FCFE is 75.6 crore, so terminal value at end of Year 2 is 756 crore. Discounting 60 at one year and 828 at two years at 15% gives about 678 crore.
- A600
- B634Correct
- C720
- D585
Explanation
Year 3 FCFE = 72 x 1.05 = 75.6. Terminal value at end of Year 2 = 75.6 / (0.15 - 0.05) = 756. PV = 60/1.15 + (72 + 756)/1.3225 = 52.17 + 626.09 = 678.26. This gives about 678, which is not among the options, so the key is invalid.
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