- CFA Exams
- CFA Level I Exam
- Topic 5. Equity Valuation
- Learning Module 24. Free Cash Flow Valuation
- Subject 1. FCFF and FCFE valuation approaches
CFA Practice Question
After evaluating Dell Software's financial statements, you conclude that the company has FCFE of $1.5 million, which is expected to grow forever at 8%. Additional information:
- DS' WACC: 12%.
- Required rate of return on its equity: 15%.
- Outstanding debt: $25 million.
The total value of DS' equity is ______.
A. $23.14 million.
B. $24.22 million.
C. $21.43 million.
Explanation: The presented value of FCFE should be discounted at the required rate of return on equity:
PV = FCFE1 / (r - g) = [FCFE0 (1 + g)] / (r - g) = (1.5 x 1.08) / (0.15 - 0.08) = $23.14 million.
User Contributed Comments 2
| User | Comment |
|---|---|
| RNAN | Was the information on the Outstanding debt and WACC just red herring (misleading) information? |
| volkovv | Yep. But we should expect plenty of irrelevant info on the exam. |