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Question: ABC Co. has FCFF of $700 million. The weighted average cost of capital is 10.2%....

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ABC Co. has FCFF of $700 million. The weighted average cost of capital is 10.2%. FCFF is expected to grow forever at 5.0 percent. ABC Co. has debt outstanding with a market value of $2.2 billion and has 200 million outstanding common shares.

1. What is the value of ABC Co. equity using the FCFF valuation approach?
2. What is the value per share using this FCFF approach?

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Homework Answers

Answer #1

Answer to Part 1.
Current FCFF = $700 Million
Growth Rate = 5.0%
Expected FCFF = $700 Million * (1 + 0.05)
Expected FCFF = $735 Million

Value of Firm = Expected FCFF / (WACC – Growth rate)
Value of Firm = $735 Million /(0.102 – 0.05)
Value of Firm = $735 Million / 0.052
Value of Firm = $14,134.62 Million

Value of Equity = Value of Firm – Value of Debt
Value of Equity = $14,134.62 Million - $2,200 Million
Value of Equity = $11,934.62 Million

Answer to Part 2.
Value per Share = Value of Equity / Common Shares Outstanding
Value per Share = $11,934.62 Million / 200 Million
Value per Share = $59.67

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