# Equity question

A firm currently has sales per share of \$10.00, and expects sales to grow by 25% next year. The net profit margin is expected to be 15%. Fixed capital investment net of depreciation is projected to be 65% of the sales increase, and working capital requirements are 15% of the projected sales increase. Debt will finance 45% of the investments in net capital and working capital. The company has an 11% required rate of return on equity. What is the firm’s expected free cash flow to equity (FCFE) per share next year under these assumptions? A) \$1.88. B) \$0.77. C) \$0.38. D) \$1.63

Sales = 12.5 NI = 1.875 WC & FC Total (80% of 2.5) = 2 WC & RC Paid from Equity (55%) = 1.10 1.875 - 1.10 = .775 B

I also get b. 1.875 net income -1.625 fcinv -.375 nwc +.90 net borrowing .775 not sure if this is the long way, but i got the same answer…

B I just used the formula FCFE = NI - {(1-DR)*FCInv}-{(1-DR)*WCInv)} Sales = 12.5 Net Income = 1.875 Additional sales = 2.5 FCInv = 2.5*.65 = 1.625 WCInv = 2.5*.15 = .375 DR = .45 FCFE = 1.875 - (.55*1.625)-(.55*.375) = .775

i didn’t have that one memorized, mumu. but it’s encouraging that i somehow got to the right answer anyway. it will probably take me 4 hours to get through the first vignette on the test. I don’t have a formula for this memorized either. For some things I find trying to remember a formula harder than actually remembering the concept.

correct ans is B