Question

SGA Consulting had a FCFE of $3.2M according to the just released financial statement and has 3.2M shares outstanding. SGA's required return on equity is 13%, and WACC is 11.5%. If FCFE is expected to grow at 8.5% forever, the intrinsic value of SGA's shares is

Answer 1

Answer:

The value of Equity is $77.16 million and the value per share is $24.11

Explanation:

The FCFE or free cash flow to equity can be used to calculate the intrinsic value of a company using the discounted cash flow approach. As the growth rate in FCFE is constant, the terminal value of the future FCFEs can be calculated as follows,

Value of Equity =  FCFE * (1+g)  /  r - g

Value of Equity = 3.2 * (1+0.085)  /  (0.13 - 0.085)

Value of Equity = $77.16 million

The intrinsic value per share =  77.16 / 3.2  = $24.11 per share