Share
Explore BrainMass

Flow to Equity (FTE) Approach

The flow to equity (FTE) or free cash flow approach is an alternative capital budgeting approach. The FTE approach simply requires that the cash flows from the project to the equity holders of the levered firm be discounted at the cost of equity capital. There are three steps to the FTE approach:

     1. Calculating the levered cash flow
     2. Calculating the discount rate for levered equity
     3. NPV analysis

1. Calculating the levered cash flow (LCF): The levered cash flow is the cash flows of the project after cash costs, cash paid on interest, and cash paid in taxes. It can also be calculated by adjusting the firm's unlevered cash flows (UCF) by the amount of the after tax interest payment to debtholders. 



Where, 
rB = the interest rate 
B = the amount of the project financed by debt
T= the tax rate 


2. Calculating the discount rate for levered equity: The discount rate for levered equity is simply the rate of expected return that can be observed by the stock's price in the market. However, if the leverage of the firm is going to change because of a scale enhancing project, we use the discount rate of the unlevered equity, and adjust it for the new debt:equity ratio of the firm. 



Where,
rs = the levered rate of return 
ro = the unlevered rate of return
B/S = the debt to equity ratio

3. NPV analysis: To find the present value of the cash flows to equity, we simply discount the levered cash flows by the expected return of the levered equity. To find net present value, the present value of the initial cash outflows are subtracted. 

Unlevered vs. Levered Return to Equity

If it is not given in the question, w
e can find the expected return to an unlevered firm by taking the observed beta of the levered firm (Bequity), and finding the corresponding beta for the firm if it was all equity (Basset). We can then plot the asset beta on the security market line to find the expected return of the firm if it was all equity.



Equity Shares Investments

Describe the various methods of accounting for an investment in equity shares of another company. Identify the sole criterion for applying the equity method of accounting and guidance in assessing whether the criterion is met. Explain the rationale and reporting implications of the fair-value option for investments otherwi

Equity position

What avenues are available for for-profit and not-for-profit health care providers to increase their equity position?

Calculate Return on Equity for a stock

What return on equity do investors expect for a firm with a $17 stock price, a dividend in year one of $2.00, a beta of 1.6, and a constant growth rate of 2%? 1. 13.76% 2. 26.00% 3. 11.75% 4. 16.33% 5. 17.21%

FCFE Calculate the required rate of return on equity

At the end of year 2010 the ABC Corporation had free cash flow to equity of $250,000 and 200,000 shares outstanding. The company projects the following annual growth rate in FCFE Year Growth Rate 2011 10% 2012 15% 2013 20% 2014 25% 2015 20% 2016 15% 2017 10% 2018 7% From year 2019 onward growth in FCFE i

Changes in Stockholders' equity

Listed are the equity sections of balance sheets for years 2008 and 2009 as reported by Mountain Air Ski Resorts, Inc. The overall value of stockholders' equity has risen from $2,000,000 to $7,500,000. Use the statements to discover how and why this happened. Mountain Air Ski Resorts, Inc. Balance Sheets (partial) Stockh

Equity in the classroom

I need some direction here. Anyone have some suggestions? Define equity in education, assess inequities in the school setting and compare personal and societal views towards diversity. Keep in mind the changes that have taken place in the field of special education, as well as the driving forces behind those changes. Wh

Accounting questions: working with equity

I need help answering the following questions. (Hint: Use the accounting equation.) a. Fong's Medical Supplies has assets equal to $123,000 and liabilities equal to $53,000 at year-end. What is the total equity for Fong's business at year-end? b. At the beginning of the year, Beyonce Company's assets are $200,000 and its eq

Equity Method problems for Ace, Goldman, Fanner, Smith, Barker

6. Ace purchases 40 percent of Basket! Company on January 1 for $500,000. Although Ace did not use it, this acquisition gave Ace the ability to apply significant influence to Baskett's operating and financing policies. Baskett reports assets on that date of $1,400,000 with liabilities of $500,000. One building with a seven-ye

Cash Flows Under Alternative Financing Scenarios

Tom Scott is the owner, president and primary salesperson for Scott Manufacturing. Because of this, the company's profits are driven by the amount of work Tom does. If he works 40 hours a week, the company's EBIT is $450,000 and if he works 50 hour weeks, company EBIT is $550,000 per year. Company is currently worth $2.7 mill

RETURN ON EQUITY

FIRM A AND FIRM B HAVE DEBT-TOTAL ASSET RATIOS OF 60 PERCENT AND 40 PERCENT AND RETURNS ON TOTAL ASSETS OF 20 PERCENT AND 30 PERCENT, RESPECTIVELY. WHICH FIRM HAS GREATER RETURN ON EQUITY?

Mountain Air Ski: Changes in stockholders' equity

See attached file. P2-11 Changes in stockholders' equity Listed are the equity sections of balance sheets for years 2008 and 2009 as reported by Mountain Air Ski Resorts, Inc. The overall value of stockholders' equity has risen from $2,000,000 to $7,500.000. Use the statements to discover how and why this happened. Moun

Compchips Inc equity valuation: expected return, value of equity, per share price

Equity Valuation Compchips Inc. is in the process of completing a restructuring effort. The after tax earnings in the current year are $10M (or $4.00 earnings per share), all of which was paid out as a dividend already. For the coming year earnings are expected to fall by 25%. Of these, 75% are expected to be paid out as a di

Power Point-- The steps taken will produce a flow chart that is intact and aligned

Flow charts are an important tool for Riordan and many organizations. The flow charts will allow the company control and with the control quality comes compliance. This flow chart will streamline the business through the information technology department to enhance the system and enhance the manufacturing portion of the busine

Bowers Investments: Owners Equity/Intercorporate Equity

Bowers Investments bought 1,000 shares of IDA, Inc. common stock on Jan 1, Year 1, for $5,000 and 1,000 share of JOE, Inc. common stock on July 1, Year 1, for $6,000. IDA declared $500 in dividends, and JOE declared $600 in dividends on December 31, Year 1. At the end of Year 1, the market value of the IDA stock was $4,500 and

Recalculate ratios

Recalculate ratios 5-11 from using the numbers from the Pro Forma statement below. 5) Times interest earned 6) Debt-to-equity ratio 7) Net profit margin 8) Return on equity 9) Total asset turnover 10) Return on assets 11) Price-earnings ratio Boeing Pro Forma Income Statement Revenue 2007 % of

Estimating Free Cash Flow, Return, Financial Leverage etc.

11-1 Meltzer Electronics estimates that its total financing needs for the coming year will be $34.5 million. During the coming fiscal year, the firm's required financing payments on its debt-and-equity financing will toal $12.9 million. The firm's financial manager estimates that operating cash flows for the coming year will tot

RNOA and Value of Equity

2. Quanta, Inc. reported an after-tax profit margin of 3.50%, an asset turnover of 4.00 on net operating assets of $20.0 billion, and net financial obligations of $7.0 billion on January 31, 2000. Analysts expect that the sales of Quanta, Inc. will grow 8% on average in the future. Analysts also expect a. If the profit margi

Changes in Stockholder Equity

Attached are the equity sections of the balance sheets for the years 2008 and 2009 reported by MASR Inc. The overall value of stockholder equity has risen from $2,000,000 to $7,500,000. Use the attached statement to discover why this happened: The company paid dividends of $200,000 during fiscal 2009. a)What was MA's net inc

Calculate Free Cash Flow for a Pure Equity Firm

Free Cash Flow for a Pure Equity Firm The following information is from the financial report of a pure equity company (one with no net debt). In millions of dollars. Common shareholders' equity, December 31, 2005 174.8 Common dividends, paid December 2006 8.3 Issue of common shares on Decembe