In this simple question, I will walk you step by step through a FCFE valuation. Ingles Inc., is a slow growing cash cow. Last year, the company saw an ROE of 22.0% (avg., 21.2% over last five years), and reinvested 45% of its Net Income back into the business (avg., 53.5% over last five years) leaving 55% as FCFE (avg., 46.5% over last five years). Last year, FCFE was $679M on Net Income of $1,235M. The closing Shareholders' Equity was $5,620M.

The company needs to restructure its operations over the next three years. In the following 3 years, ROE is expected to fall to 18.0% due to restructuring costs. Furthermore, the company will reinvest 65% of Net Income each year over this three-year period - this represents additional investment needed to upgrade operations.

After the three-year period, the company expects to enter into a long-run trend where ROE will average 24.0%. In addition, over the long-term, the company expects to reinvest at a much lower rate of 20%.

The appropriate discount rate is 10.0%.

What growth rate will the company experience each year over the three-year period ______1.3689%____________ ________________________________?

-Growth Rate = ROE* Retention Rate

oExpected ROE = 18%

oExpected Retention Rate = 65%

o=11.70%(18%*65%) =

o.117(.18*.65)=

Particulars

Previous Year

1^st Year

2^nd Year

3^rd Year

Closing Shareholder's Equity

5620

6632

7825

9234

Net Income

1235

1012

1194

1409

FCFE

679

354

418

493

Re-investment

556

658

776

916

Re-investment %

45%

65%

65%

65%

ROE

22%

18%

18%

18%

-Net Income = Previous Year Closing Shareholder's Equity * ROE

-Closing Share Holder's Equity = Current Year Net Income + Previous Year Share Holder's Equity

-FCFE = Net Income * (100%-Re-investment Rate)

What is the closing Shareholders' Equity at end of next three years ____________6632_______________ and __________7824________________ and ___________9234______________?

What is the Net Income for next three years ________1012_____________ and ___________1194_______________ and __________1409_______________?

What is the FCFE for next three years ________354_____________ and ____________418______________ and ___________493______________?

What growth rate will the company experience each year over the long-term __________________ ________________________________?

Estimate a Terminal Value using a Gordon's Model_______________________________?

What is the present value of FCFE in years one through three _______________________________ __________________________________?

What is the present value of the Terminal Value calculated above __________________________ _____________________________________________?

What is the Market Cap of the company _____________________________________________________?