I have just finished the am session of the CFA Mock exam (did ok, just under 80%) and don’t understand the answers to questions 57 and 58. Both ask you to calculate the value of common stock, once based on FCFF and once on FCFE. FCFF is given and I was able to calculate FCFE no problems, but don’t understand why in the solution they multiply FCFF (Q 57) by the growth rate but don’t do the same for FCFE in question 58. In Q57 they use: Value = FCFF / (WACC - g) In Q58 they use: Value = [FCFE * (1+g)] / (k - g) I don’t get it…but am probably overlooking something really obvious!!!

read the vignette…they’re giving you FCFF1

yes, but the FCFE that you calculate in the second part is FCFE1 too…You are using data for 2010 to calculate it, so where it the difference?

The have definitely made a mistake: this is the given solution for question 58: FCFE = Net income – (1 – DR) (FCInv – Depreciation) – (1 – DR) (WCInv) FCFE1 = 1.80 – (1 – 0.40) (0.30 ×1.80) – (1 – 0.40) (0.10 ×1.80) FCFE1 = 1.80 – 0.324 – 0.108 = 1.368. Equity value = FCFE(1) / (k - g) = [FCFE(0) * (1+g)] / (k-g) = [1,368 * 1,06] / 0,06 But 1,368 is FCFE(1) not FCFE(0) according to their calculations above, so no need to multiply by 1,06!