- CFA Exams
- CFA Exam: Level II 2021
- Study Session 11. Equity Valuation (3)
- Reading 28. Free Cash Flow Valuation
- Subject 5. Free cash flow model variations

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**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.

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**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. |