Intrinsic value of industry
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The Home Appliance Industry had free cash flow to equity (FCFE) of $87 for the year ending December 31, 2007. The industry anticipates a growth rate of 8% for the next three years due to favorable economic conditions. However the growth rate is expected to decline to 4% after three years and remain at that level indefinetly. The required rate of return is 12% for the industry.
a. Calculate the intrinsic value of the Home Appliance Industry at the end of the 8% growth period three years from now.
b. Calculate the intrinsic value of the Home Appliance Industry today.
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Solution Summary
The solution explains how to calculate the intrinsic value of an industry.
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a) We can calculate the value using the constant growth model since the growth rate is constant at the end of 3 years.
Intrinsic value at the end of 3 years = FCFE 4/(Required ...
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