I am doing mistakes by not able to interpretate next year FCFE or dividend to multiply with 1+g . For example I tried following problem at first with $5.25(1.05) In five years, a firm is expected to be operating in a stage of its life cycle wherein its expected growth rate is 5 percent, indefinitely; its required rate of return on equity is 11 percent; its weighted average cost of capital is 9 percent; and the free cash flow to equity is $5.25 per share at the end of year 5. What is its projected terminal value at that time? A) $131.25. B) $51.93. C) $77.89. D) $87.50. Your answer: D was correct! Terminal value = FCFE/(k - g) = $5.25/(0.11 - 0.05) = $87.50
i’m not exactly sure what you are asking since you answered the problem correctly, but we use 5.25, because that is the fcfe at the END of year 5, not the beginning. if you were to forecast next year’s fcfe, you would have to make sure that the growth rate is the growth rate of FCFE and nothing else, because a firm can have different growth rates for FCFF and FCFE.
I guess end of 5 year value $5.25 implies end of 4 year value times 1.05. So end of 4 year value should be $5. I tried problem first with 5.25 times 1.05 and did not get listed answer and then tried with just 5.25. I am assuming the growth of 5% starts from 4th year to 5th year and so on.
yeah. tricky wording. at least you came up with the right answer…