SOX Inc. expects high growth in the next 4 years before slowing to a stable future growth of 3%. The firm is assumed to pay no dividends in the near future and has the following forecasted free cash flow to equity (FCFE) information on a per share basis in the high-growth period:
|
Year 1 |
Year 2 |
Year 3 |
Year 4 |
| FCFE |
$3.05 |
$4.10 |
$5.24 |
$6.71 |
High-growth period assumptions:
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SOX Inc.'s target debt ratio is 40% and a beta of 1.3.
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The long-term Treasury Bond Rate is 4.0%, and the expected equity risk premium is 6%.
Stable-growth period assumptions:
-
SOX Inc.'s target debt ratio is 40% and a beta of 1.0.
-
The long-term Treasury Bond Rate is 4.0% and the expected equity risk premium is 6%.
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Capital expenditures are assumed to equal depreciation.
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In year 5, earnings are $8.10 per share while the change in working capital is $2.00 per share.
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Earnings and working capital are expected to grow by 3% a year in the future.
In year 5, what is the free cash flow to equity (FCFE) for SOX Inc.?
A. $7.30.
B. $6.90.
C. $6.10.
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