I encountered this question in Schweser on end of chapter…after studying free cash flow I do not remember if involving debt to asset ratio changes how you approach the question but here it is:
The Gray Furniture Company. earned 3.50 per share last year. Investment in fixed capital was 2.00 per share, depreciation was 1.6 and the investment in working capital was .50 per share. Gray is currently operating at its target debt to asset ratio of 40%, thus 40% of annual investments in working capital and fixed capital will be financed with new borrowings. Share holders require a return of 14% on their investment, and the growth rate is expected to be 4%. The value of Gray’s stock is closest to:
I used FCFE = NI+NCC-WCinv - FC inv +Net borrowing and got 3.5+1.6-2-.5+.1 … I got Net borrowing by multiplaying 40% by FCinv and WCinv… then divided that by rquired return - expected growth rate, and got A. 27.04… however the naswer in the back of the book showed differently and the formula was completely different. Can anyone explain or advise, thanks so much!