Question #101
Reading: Reading 21 Free Cash Flow Valuation
PDF File: Reading 21 Free Cash Flow Valuation.pdf
Page: 47
Status: Unattempted
Part of Context Group: Q101-102
First in Group
Shared Context
Question
If the total market value of equity is $6.0 billion and the growth rate is 8.0%, the cost of equity based on the stable growth FCFE model is closest to:
Answer Choices:
A. 7.0%
B. 15.0%
C. 14.0%
Explanation
Value of equity = FCFE1/(Cost of equity – growth rate); so $6,000 = [$420/(Cost of equity −
0.08)]
(Cost of equity − 0.08) × $6,000 = $420
Cost of equity − 0.08 = 0.07
Cost of equity = 0.15 = 15.0%