Exhibit 14 From Year 2019 Onward Growth in FCFE Is Expected to

question 72

Multiple Choice

Exhibit 14.7
Use the Information Below for the Following Problem(S)
At the end of the year 2010 the BRK Corporation had free cash flow to equity (FCFE) of $250,000 and shares outstanding of 200,000. The company projects the following annual growth rates in FCFE:
$$\begin{array} { c c } \text { Year } & \text { Grapth Rata } \\\hline 2011 & 10 \% \\2012 & 15 \% \\2013 & 20 \% \\2014 & 25 \% \\2015 & 20 \% \\2016 & 15 \% \\2017 & 10 \% \\2018 & 7 \%\end{array}$$
From year 2019 onward growth in FCFE is expected to remain constant at 5% per year. The stock has a beta of 1.3 and the current market price is $55. Currently the yield on 10-year Treasury notes is 5% and the equity risk premium is 4%.
-Refer to Exhibit 14.7.Calculate the required rate of return on equity.

• A) 5%
• B) 9.2%
• C) 10.2%
• D) 10%
• E) 4.3%

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Definitions:

Lemon Crop

The production output of lemons within a particular period.

Consumer Surplus

The differential between the financial amount consumers are willing to allocate for a product or service and the actual payment made.

Price Floor

A government-imposed minimum price charged on goods and services, set above the equilibrium price to prevent market prices from falling too low.

Consumer Surplus

The discrepancy between consumer willingness to pay a total amount for a product or service and the amount they really do pay.