Exhibit 12.7 Use the Information Below for the Following Problem(S)

question 82

Multiple Choice

Exhibit 12.7
Use the Information Below for the Following Problem(S)
You are using the free cash flow to equity (FCFE) technique to analyze U.S. equity market. The beginning FCFE is $90 and the required rate of return is 10%. Free cash flows are expected to grow at a 10% rate for the next two years and then grow at a constant rate of 7% forever.
-Refer to Exhibit 12.7.What is the estimated value of the U.S.market today using the FCFE approach?

• A) 2,852
• B) 2,918
• C) 3,210
• D) 3,390
• E) 3,884

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Definitions:

Cost of Debt

The cost of debt is the effective interest rate a company pays on its debts, including loans and bonds, accounting for tax benefits.

Equity Financed

Refers to raising capital for a company through the sale of shares in the company to investors.

Tax Rate

The portion of one's income or a company's earnings attributed to taxes.

Current Rate

The present value of a financial instrument or the latest interest rate on a loan or investment.