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Present value of FCFE

Office Equipment industry: Calculate required rate of return on equity using CAPM

7. At the end of the year 2004 the Office Equipment Industry had free cash flow to equity (FCFE) of $2.50 per share. The following annual growth rates in FCFE are projected
Year Growth Rate
2005 10%
2006 15%
2007 20%
2008 25%
2009 20%
2010 15%
2011 10%
2012 7%

From year 2013 onward growth in FCFE is expected to remain constant at 5% per year. The industry has a beta of 0.90 and the current industry price is $105. Currently the yield on 10-year Treasury notes is 5% and the equity risk premium is 4%

Calculate the present value now (year 2004) of FCFE during the period of increasing growth (that is for years 2005 to 2008)

Solution Preview

We first calculate the discounting rate using CAPM
Discounting rate = cost of equity = Rf + (Rm-Rf) beta
Rf = risk free rate = ...

Solution Summary

The solution explains how to calculate the present value of FCFE

$2.19