Question #16
Reading: Reading 21 Free Cash Flow Valuation
PDF File: Reading 21 Free Cash Flow Valuation.pdf
Page: 6
Status: Incorrect
Correct Answer: A
Your Answer: B
Question
A firm has projected free cash flow to equity next year of $1.25 per share, $1.55 in two years, and a terminal value of $90.00 two years from now, as well. Given the firm's cost of equity of 12%, a weighted average cost of capital of 14%, and total outstanding debt of $30.00 per share, what is the current value of equity?
Answer Choices:
A. $71.74
B. $74.10
C. $41.54
Explanation
Value of equity = $1.25 / (1.12)1 + $1.55 / (1.12)2 + $90.00 / (1.12)2 = $74.10