Question #70
Reading: Reading 21 Free Cash Flow Valuation
PDF File: Reading 21 Free Cash Flow Valuation.pdf
Page: 34
Status: Unattempted
Part of Context Group: Q70-71
First in Group
Shared Context
Question
Based on Analyst #2's estimates, the sum of the terminal value plus the FCFE for year 6 is closest to:
Answer Choices:
A. €75.80
B. €60.70
C. €82.40
Explanation
Estimates for the future FCFE based on supplied growth rates are:
Year
0
1
2
3
4
5
6
7
Growth rate
12.5%
12.5%
12.5%
8.0%
6.5%
5.0%
3.0%
FCFE/share
€3.850
€4.331
€4.873
€5.482
€5.893
€6.335
€6.620
€6.818
Terminal value year 6 = 6.818/(12.0% − 3.0%) = €75.76
The nominal cash flow for year 6 is €75.76 + €6.62 = €82.38, which is the terminal cash
flow plus the FCFE value for the year.