Mexican Motors ' market cap is 200 billion pesos Next year 's free cash flow is 8 5 billion pesos Security analysts are forecasting that free cash flow will grow by 7 5 per year for the next five years a Assume that the 7 5 growth rate is expected to continue forever What rate of return are investo...

a The constant growth formula P DIVr g can be used here 200 85r 075 Solving for r r 01175 Tha ...

Mexican Motors' market cap is 200 billion pesos. Next year's free cash flow is 8.5 billion pesos.

Question:

Mexican Motors' market cap is 200 billion pesos. Next year's is 8.5 billion pesos. Security analysts are forecasting that will grow by 7.5% per year for the next five years.
a. Assume that the 7.5% growth rate is expected to continue forever. What rate of return are investors expecting?
b. Mexican Motors has generally earned about 12% on book equity (ROE = 12%) and reinvested 50% of earnings. The remaining 50% of earnings has gone to Suppose the company maintains the same ROE and investment rate for the long run. What is the implication for the growth rate of earnings and For the cost of equity? Should you revise your answer to part (a) of this question?
Free Cash Flow
Free cash flow (FCF) represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets. Unlike earnings or net income, free cash flow is a measure of profitability that excludes the...