Question

The growth in per share FCFE of FOX, Inc. is expected to be 10%/year for the next three years, followed by a growth rate of 5%/year for two years; after this five year period, the growth in per share FCFE is expected to be 3%/year, indefinitely. The required rate of return on FOX, Inc. is 12%. Last year's per share FCFE was $1.8. What should the stock sell for today?

Answer 1

Answer: $25.46

Explanation:

Year 1 FCFE = 1.8 * (1 + 10%) = $1.98

Year 2 FCFE = 1.98 * 1.1 = $2.18

Year 3 FCFE = 2.178 * 1.1 = $2.40

Year 4 FCFE = 2.3958 * 1.05 = $2.52

Year 5 FCFE= 2.51559 * 1.05 = ‭2.64

Terminal Value = (2.64 * 1.03) / (12% - 3%)

= $30.21

Now discount all these cashflows to find the value:

= (1.98 / 1.12) + (2.18 / 1.12²) + (2.40 / 1.12³) + (2.52 / 1.12⁴) + (2.64 / 1.12⁵) + (30.21 / 1.12⁵)

= $25.46