Question

the graphics company has fcfe of $850. fcfe is expected to grow by 4% next year and thereafter. the cost of equity is 10% and the wacc is 7.5%. the level of debt is $4000. calculate the intrinsic value.

Answer 1

The intrinsic value of the graphics company is $18,166.67 million, calculated using the Free Cash Flow to Equity model and considering a growth rate of 4%, a cost of equity of 10%, and an existing debt level of $4,000.

Step-by-step explanation:

To calculate the intrinsic value of the graphics company using the Free Cash Flow to Equity (FCFE) model, we will discount the future cash flows back to the present value. Here is the calculation:

1. First, we determine the perpetual growth rate of FCFE, which is 4%.
2. Next, we have the FCFE of $850.
3. Using the provided cost of equity of 10%, we can calculate the intrinsic value using the formula for a growing perpetuity: Value = FCFE / (Cost of Equity - Growth Rate).
4. Plugging in the numbers: Value = 850 / (0.10 - 0.04) = 850 / 0.06 = $14,166.67.
5. The calculated value represents the equity value of the firm. Since the level of debt is $4,000, we would add this to the equity value for the total intrinsic valuation of the company: $14,166.67 + $4,000 = $18,166.67 million.

The intrinsic value of the graphics company is $18,166.67 million.