Question

Based on the below information, the value of equity is closest to:
A stock analyst collected the following information about ABC Inc.:
- The firm required rate of return on equity is 17% and its WACC is estimated at 14%.
- Based a thorough forecast, the analyst estimates for the free cash flows to the firm for the next two years are 820,000 and 970,000 respectively. His estimates for the free cash flows to equity are however: 550,000 and 660,000 for the next two years respectively.
- Both FCFFs and FCFEs are expected to grow at a constant rate of 5% after the second year.

Question 6 options:

	1) $4,157,896.20
	2) $4,446,720.31
	3) $4,953,621.87
	4) $5,170,940.17

Answer 1

Correct answer: 4) $5,170,940.17

Return of equity (r) = 17%

Constant growth rate after 2nd year (g) = 5%

Thus, Value of Equity(VE) can be calculated with following equation:

by solving,

Hope it will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.