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
From year 2019 onward growth in FCFE is expected to remain constant at 5% per year. The stock has a beta of 1.3 and the current market price is $55. Currently the yield on 10 year T-notes is 5% and the equity risk premium is 4%
1. Calculate the required rate of return on equity
2. Calculate the present value now (end of year 2010) of FCFE during the period of increasing growth (year 2011-2014).
3. Calculate the present value now of FCFE during the period of declining growth (2015 - 2018)
4. Calculate the present value now of FCFE during the period of constant growth (2019 and later)
5. Calculate the intrinsic value of the stock now at the end of year 2010.
The problem deals with calculating the required rate of return on equity and the present value of free cash flows to equity.