Question

FinCorp’s free cash flow to the firm is reported as $205 million. The firm’s interest expense is $22 million. Assume the tax rate is 35% and the net debt of the firm increases by $3 million. What is the market value of equity if the FCFE is projected to grow at 3% indefinitely and the cost of equity is 12%? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)

Answer 1

$2,152.22

Step-by-step explanation:

Given that,

FinCorp’s free cash flow (FCFF) = $205 million

Firm’s interest expense, i = $22 million

Tax rate, t = 35%

Growth rate, g = 3%

Cost of equity, e = 12%

Net debt of the firm increases by $3 million

Interest expense (Net of tax) = -i × (1 - t)

= -$22 × (1 - 35%)

= -$22 × 0.65

= -$14.3

FCFE = FCFF + Debt + Interest expense (Net of tax)

= $205 million + $3 - $14.3

= $193.7

Therefore,

Market value of equity = FCFE ÷ (e - g)

= $193.7 ÷ (0.12 - 0.03)

= $2,152.22