Question

A company's most recent free cash flow to equity was $100 and is expected to grow at 4% thereafter. The company's cost of equity is 13%. Its WACC is 7.77%. What is its current intrinsic value

Answer 1

Current intrinsic value - equity = $1155.56

Step-by-step explanation:

FCFE or Free cashflow to equity is the free cash flow attributable to the equity holders. Using the constant growth model of FCFE we can calculate the intrinsic value of the equity or intrinsic value per share. The formula for the constant growth model is as follows,

Value of equity = FCFE0 * (1+g) / (r - g)

Where,

• FCFE0 is the most recent FCFE
• g is the growth rate in FCFE
• r is the required rate of return on equity

Current intrinsic value - equity = 100 * (1+0.04) / (0.13 - 0.04)

Current intrinsic value - equity = $1155.56