CFA Practice Question

There are 201 practice questions for this study session.

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.
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