CFA Practice Question

There are 201 practice questions for this study session.

CFA Practice Question

After evaluating Dell Software's financial statements, you conclude that the company has FCFF of $2.8 million. You expect its FCFF to grow forever at 8%. Additional information:

  • DS's WACC: 12%.
  • Required rate of return on its equity: 15%.
  • Outstanding debt: $25 million.

The total value of DS' equity is ______.
Correct Answer: The firm value is the present value of FCFF discounted at the weighted-average cost of capital, or

Firm = FCFF1/(WACC - g) = [FCFF0(1 + g)]/(WACC - g) = (2.8 x 1.08) / (0.12 - 0.08) = $75.6 million.

The market value of the equity is the value of the firm minus the value of debt: Equity = 75.6 - 25 = $50.6 million.

User Contributed Comments 4

User Comment
danlan2 WACC is for FCFF, required rate of return is for dividend.
ssradja don't forget to calculate next period FCFF
Lavay Required return is also for FCFE.
Manasseh Required rate of return is not needed to answer this question
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