Seeing is believing!
Before you order, simply sign up for a free user account and in seconds you'll be experiencing the best in CFA exam preparation.
Basic Question 3 of 3
Consider the following information about a firm:
- Target debt ratio: 40%.
- Cost of equity: 0.18.
- Cost of debt: 8%.
- Tax rate: 35%.
The FCFF over the next three years and the terminal value of these cash flows at the end of year three are forecasted as shown below:
What is the value of the firm?
User Contributed Comments 2
| User | Comment |
|---|---|
| past1sttime | if the debt ratio is 40% then the debt % would be .2857 and equity is 1-.2857. |
| Nando1 | Don't get confused on the target debt ratio. This is already in reference to assets so no ajustment is needed....If they gave the debt/equity ratio then your ajustment above would be correct. |
I used your notes and passed ... highly recommended!
Lauren
Learning Outcome Statements
explain the single-stage (stable-growth), two-stage, and three-stage FCFF and FCFE models and select and justify the selection of the appropriate model given a company's characteristics;
estimate a company's value using the appropriate free cash flow model(s);
explain the use of sensitivity analysis in FCFF and FCFE valuations;
evaluate whether a stock is overvalued, fairly valued, or undervalued based on a free cash flow valuation model.
CFA® 2025 Level II Curriculum, Volume 4, Module 22.