Question #116 - Reading 22 Market-Based Valuation - Price and Enterprise Value Multiples

Reading: Reading 22 Market-Based Valuation - Price and Enterprise Value Multiples

PDF File: Reading 22 Market-Based Valuation - Price and Enterprise Value Multiples.pdf

Page: 41

Status: Unattempted

Shared Context

- The growth assumption Pedroia uses in calculating his "Best Case Scenario" valuation are most suitable if Iliot is: A) a stable firm in a mature industry with a required return on equity of 4%. B) a stable firm in a mature industry with a required return on equity of 14%. C) a growing firm in an infant industry with a required return on equity of 14%.

Question

Calculate the value of equity to the nearest $1 million using a FCFE model and the cash flows / assumptions that Pedroia uses in his "FCF Valuation Using Forecasted Cash Flows" valuation.

Answer Choices:

A. $1,457 million

B. $2,171 million

C. $1,620 million

Explanation

PV of initial cash flows discounted at 12%: CF0 nil C01 65 C02 68 C03 72 C04 75 I = 12% PV = 211.16 Terminal value at 2013 = 28 × 70 = 1,960 PV = 1,960 / (1.12)4 = 1,245.62 Value = 1,245.62 + 211.16 = 1,456.78

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