Question
8 An analyst is evaluating a company based on the information below: Equity beta = 1.3, risk-free rate = 2%, equity risk premium = 7.5%
8 An analyst is evaluating a company based on the information below:
Equity beta = 1.3, risk-free rate = 2%, equity risk premium = 7.5% Cost of debt = 6.5% Marginal tax rate = 35% Capital structure = 30% debt, 70% equity Outstanding shares = 200 million Long-term debt = $1.2 billion Current free cash flow to the firm () = $450 million
The analyst believes that the future growth of the companys free cash flow to the firm (FCFF) can be modelled with the second version of the three-stage model where the second stage follows a smooth, linear transition in the growth rate. The forecast growth rates in the first and third stages are as follows.
Years 1 to 4: 25.0% annually Year 12 and thereafter: 1.5% annually
Which of the following is not consistent with the analysts belief?
Select one:
a.
The forecast growth rate of Year 10 is 4.9%.
b.
The forecast growth rate of Year 7 is 16.2%.
c.
The forecast growth rate of Year 8 is 13.2%.
d.
The forecast growth rate of Year 6 is 19.1%.
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