\" This Course Suppose a firm\'s free cash flows are expected to be $91614 at th

Question

" This Course Suppose a firm's free cash flows are expected to be $91614 at the end of the current period and are expected to grow three percent each period thereafter. If the cost of capital is 10.3 percent per period and the market value of debt is $519107, calculate the fair market value of the equity capital i.e market capitalization Answer Check Suppose a firm's free cash flows are expected to be $33933 at the end of the current period and are expected to grow three percent each period thereafter. If the cost of capital is 12.2 percent per period and the market value of debt is $123768, calculate the fair market value of the equity capital i.e market capitalization Answer

Explanation / Answer

value of firm = cash flow next year/(cost of capital - growth rate)

= 91614/(10.3%-3%)

= 1254986.30

value of equity = value of firm - value of debt

= 1254986.30 - 519107

= 735879.30

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