CFA Practice Question

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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.
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