Question #135
Reading: Reading 21 Free Cash Flow Valuation
PDF File: Reading 21 Free Cash Flow Valuation.pdf
Page: 66
Status: Unattempted
Question
A firm's free cash flow to the firm (FCFF) in the most recent year is $80M and is expected to grow at 3% per year forever. If the firm has $100M in debt financing and its weighted average cost of capital is 10%. The value of the firm's equity using the single-stage FCFF model is:
Answer Choices:
A. $1,177M
B. $1,077M
C. $1,043M
Explanation
The value of the firm's equity is equal to the value of the firm minus the value of the debt.
Firm value = $80M × 1.03 / (0.10 − 0.03) = $1,177M, so equity value is $1,177M − $100M =
$1,077M.