Respuesta :
Answer:
$36.98
Explanation:
The price of the stock today is computed by discounting the FCFE for all years up to the 6th year.
Step 1: The FCFE for each year will be computed by compounding the FCFE of the preceding year by the appropriate growth rate.
[tex]FCFE_{n} = FCFE_{n-1}* (1+Growth Rate)[/tex]
Therefore,
FCFE (year 1) = 2.75 * 1.08 = $2.97 (growth rate for the 1st 2 years is 8%)
FCFE (year 2) = 2.97 * 1.08 = $3.2076
FCFE (year 3) = 3.2076 * 1.04 = $3.3359 (growth rate for the next 3 years is 4%)
FCFE (year 4) = 3.3359 * 1.04 = $3.4693
FCFE (year 5) = 3.4693 * 1.04 = $3.6081
The FCFE for year 6 to infinity will be computed using the annuity formula to infinity since growth rate will remain constant henceforth.
FCFE (year 6 to infinity) = [tex]\frac{FCFE_{Year5} * (1 + GrowthRate)}{Rate Of Return - Growth Rate}[/tex]
= [tex]\frac{3.6081 * (1.03)}{0.11 - 0.03}[/tex]
= $46.4543.
Step 2: Discounting the FCFE (using the 11% rate of return) to get the price
Price = [tex]\frac{FCFE_{1} }{(1.11^{1})}[/tex] + [tex]\frac{FCFE_{2} }{(1.11^{2})}[/tex] + ... + [tex]\frac{FCFE_{6} }{(1.11^{6})}[/tex]
Price = [tex]\frac{2.97}{1.11^{1}}[/tex] + [tex]\frac{3.2076}{1.11^{2}}[/tex] + [tex]\frac{3.3359}{1.11^{3}}[/tex] + [tex]\frac{3.4693}{1.11^{4}}[/tex] + [tex]\frac{3.6081}{1.11^{5}}[/tex] + [tex]\frac{46.4543}{1.11^{6}}[/tex]
Price = 2.6757 + 2.6034 + 2.4392 + 2.2853 + 2.1412 + 24.8364
Price = 36.9812
= $36.98.
