Question

Assume that we expect the free cash flows to equity at Home Depot to grow for the next 10 years at rates much higher than the growth rate for the economy. To estimate the free cash flows to equity for the next 10 years, we make the following assumptions: - The net income of $1,614 million will grow 15% a year each year for the next 10 years. – The firm will reinvest 75% of the net income back into new investments each year, and its net debt issued each year will be 10% of the reinvestment. – To estimate the terminal price, we assume that net income will grow 6% a year forever after year 10. Since lower growth will require less reinvestment, we will assume that the reinvestment rate after year 10 will be 40% of net income; net debt issued will remain 10% of reinvestment

Answer 1

Answer

FCFE = Net Income – Reinvestment – Net Debt Paid(Issued)

               = $6530(1.06) - $6530(1.06)(0.40) –(-277)

               = $4430 million

Terminal Price = FCFE /(Ke-g)

                              = $4430 / (0.0978-0.06)

                              =$ 117,186 miilion

Value of FCFE:-

Years	Net Income	Reinvesment Needs	Net Debt Issued	FCFE	PV of FCFE
1	$1856	$1392	($139)	$603	$549
2	2135	1601	(160)	694	576
3	2455	1841	(184)	798	603
4	2823	2117	212	917	632
5	3246	2435	243	1055	662
6	3733	2800	280	1213	693
7	4293	3220	322	1395	726
8	4937	3703	370	1605	761
9	5678	4258	426	1845	797
10	6530	4897	490	2122	835
Sum of PV of FCFE					$6833