Question

If the earnings long term growth rate for JP Inc is assumed 4% and the required rate of return is 9% estimate the stock value of this firm at the end of year 2012. For the calculations in this question use FCFF=425

Answer 1

Solution:

The formula for calculation of Value of the firm as per the Corporate Valuation model is

Value of the firm = FCFF / ( r – g )

Where

FCFF = Free cash Flow to the firm ; r = required rate of return   ; g = Earnings long term growth rate

As per the information given in the question we have

FCFF = $ 425    ;    r = 9 % = 0.09   ; g = 4 % = 0.04   ;

Applying the above information in the formula we have the value of the firm as

= $ 425 / ( 0.09 – 0.04 )

= $ 425/ 0.05

= $ 8,500

Thus the stock value of this firm at the end of year 2012 = $ 8,500