An analyst forecasts a firm's nominal Equity Free Cash Flow (EFCF) to be: $10 million next year
Question:
An analyst forecasts a firm's nominal Equity Free Cash Flow (EFCF) to be:
$10 million next year (t=1);
$20 million the year after (t=2);
$30 million in 3 years (t=3); and
As at year 3, the terminal value can be calculated based on similar firms' expected price-to-earnings multiple of 10.
The earnings over year 3 are twice the year 3 EFCF since the payout ratio is 50% and all EFCF is comprised of dividends.
Note that the year 3 terminal valuation price-to-earnings multiple excludes the cash flows paid at year 3 as is normal.
The nominal required return on equity is 6% pa.
All rates are effective annual rates.
What is the firm's current market capitalisation of equity?
Select one:
a. $660 million
b. $604.3905 million
c. $600 million
d. $556.1940 million
e. $531.0055 million