- CFA Exams
- CFA Level I Exam
- Topic 5. Equity Valuation
- Learning Module 22. Free Cash Flow Valuation
- Subject 5. Free cash flow model variations
CFA Practice Question
Consider the following information about a firm:
- Target debt ratio: 40%.
- Cost of equity: 0.18.
- Cost of debt: 8%.
- Tax rate: 35%.
The FCFF over the next three years and the terminal value of these cash flows at the end of year three are forecasted as shown below:
What is the value of the firm?
Correct Answer: WACC = 0.18 x 0.6 + 0.08 x (1 - 0.35) x 0.4 = 12.88%.
Value = 100/1.12881 + 200/1.12882 + 300/1.12883 + 2400/1.12883 = $2122.76.
User Contributed Comments 2
| User | Comment |
|---|---|
| past1sttime | if the debt ratio is 40% then the debt % would be .2857 and equity is 1-.2857. |
| Nando1 | Don't get confused on the target debt ratio. This is already in reference to assets so no ajustment is needed....If they gave the debt/equity ratio then your ajustment above would be correct. |