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Equity and bond valuation

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Company A expects next year's free cash flow to equity (FCFE) to be $1000. Thereafter, FCFE is expected to grow at 2% for 3 years, 3% for 2 years and 4% indefinitely.
What is the value of company A, assuming a required return of 12%?

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Solution Summary

This solution shows how to conduct an equity and bond valuation for a company.

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Here, we use the Constant Growth FCFE Model to value this company.

The model states that price = FCFE/(required return - growth rate).

Suppose that today is Jan. 2012, and we expect FCFE to be 1000 next year (Jan. 2013).

This is worth 1000/1.12 = 892.86 today.

In the following year (January 2014), FCFE will increase by 2%; its present value would ...

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