Question

The free cash flow to the firm is reported as $198 million. The interest expense to...

The free cash flow to the firm is reported as $198 million. The interest expense to the firm is $15 million. If the tax rate is 35% and the net debt of the firm increased by $20 million, what is the approximate market value of the firm if the FCFE grows at 3% and the cost of equity is 14%?

$3,098 billion

$2,585 billion

$1,950 billion

$2,497 billion

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Answer #1

Hello

The Correct Answer is OPTION C : $1,950 Billion

FCFE = 198 - 15(1 - .35) + 20 = 208.25
Value = (208.25 × 1.03)/(.14 - .03) = 1,950

Free Cash Flows for Equity = Free Cash Flows of the Firm + Debt - Interest(1-tax)
Free Cash Flows for Equity = 198 + 20- 15(1 - 0.35)
Free Cash Flows for Equity = 208.25

Market Value of the firm = FCFE(1+growth rate) / ( cost of equity - growth of FCFE )

Hence, the value of the firm = $1950b

I hope this solves your query.

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