Question

Zero had a fcfe of $4.5m last year and has 2.25m shares outstanding. zero's required return on equity is 10%, and wacc is 8.2%. if fcfe is expected to grow at 8% forever, the intrinsic value of zero's shares is:____

Answer 1

The intrinsic value of Zero's shares is calculated using the Gordon Growth Model, taking into account the FCFE, growth rate, required return on equity, and number of shares outstanding. The resulting intrinsic value per share is $100.

Step-by-step explanation:

To calculate the intrinsic value of Zero's shares given the Free Cash Flow to Equity (FCFE), shares outstanding, required return on equity, the Weighted Average Cost of Capital (WACC), and a constant growth rate, we use the Gordon Growth Model. The formula to determine the value per share is: Value per Share = FCFE / (Required Return on Equity - Growth Rate). With an FCFE of $4.5 million, a required return on equity of 10%, an 8% growth rate, and 2.25 million shares outstanding, the intrinsic value per share is calculated as follows:

Intrinsic Value per Share = $4,500,000 / (0.10 - 0.08) = $4,500,000 / 0.02 = $225,000,000

Then to find the value per share, divide the total intrinsic value by the number of shares: Value per Share = $225,000,000 / 2,250,000 = $100 per share.