Did anyone print this question by any chance? I just have quick question about the fourth question. It used 12% growth rate for the FCFE. Where did that 12% come from? Thanks!
I posted a part of the question below
Alahtab uses the Gordon growth model to estimate CRN’s intrinsic value. He uses the firm’s sustainable growth rate for 2013 as a measure of dividend growth. Using the capital asset pricing model (CAPM), he arrives at 11% as the required rate of return on the stock.
Jatin disagrees with Alahtab’s preference for the Gordon growth model. He thinks that CRN’s stock should be valued using sophisticated techniques that correctly account for the huge increase in revenues expected over the next four to five years. In particular, he suggests a couple of two-stage valuation models- the H-model and the free cash flow to equity (FCFE) model. Upon a closer examination of the data and expectations of high growth from the increased tourism and transportation on the revitalized Cuyahoga River, Jatin suggests that Alahtab incorporate the following as inputs into his H-model and FCFE model computations:
· A growth rate of 20% per year over the next four years (2014 through 2017) and a 6% constant growth rate beyond 2017
· An estimate of FCFE of $0.96 per share for 2014
· The addition of a small-firm risk premium of 2% to the rate of return on the stock
· A tax rate of 35%
4 of 6
Using Jatin’s 2014 estimate for FCFE per share and his other suggested inputs for growth and required return on the stock, the intrinsic value of CRN’s stock as of 2013 is closest to:
$21.27.
$17.37.
$19.15.
Incorrect.
2014
2015
2016
2017
FCFE per share for the year
$0.96
(Jatin’s est.)
$0.96(1.2)
= $1.15
$0.96(1.2)2
= $1.38
$0.96(1.2)3 = $1.66
Present value (2013) of FCFE and total value2014
$0.96/$1.13 = $0.85
$1.15/$1.132
= $0.90
$1.38/$1.133
= $0.96
$1.66/$1.134=$1.02;
25.13/1.63=$15.42
V0 as of 2013
$0.85 + $0.90 + $0.96 + $1.02 + $15.42 = $19.15