- 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
- FCFE = $1.65 per share.
- Target debt ratio = 30%.
- Expected return on the market =15%.
- Risk-free rate is 5%.
- Beta = 1.1
- Growth rate of FCFE = 6%.
Calculate the equity value.
Correct Answer: r = 0.05 + (1.10 x 0.10) = 0.16 = 16%.
Equity value = ($1.65 x 1.06) / (0.16 - 0.06) = $17.49.
Equity value = ($1.65 x 1.06) / (0.16 - 0.06) = $17.49.
User Contributed Comments 4
| User | Comment |
|---|---|
| katybo | risk premium? |
| duoluo | r = RFR + beta*(Return on Market - RFR) = 16% |
| aravinda | Here is how I remember Market premium = E(Rm) Market Risk premium = { E(Rm) - RFR } Equity Risk Premium =same as above= {E(Rm) - RFR} Risk Premium = Beta { E(Rm) - RFR } |
| UcheSam | Expected return on the market is no the same as risk premium. |