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Hi John, I have some problems with this question
In the solution it subtracts investment in non current assets after highlighting free cashflow to equity but why? Isn’t that supposed to be subtracted before it because the resultant figure would be what’s left for equity holders? As far as my knowledge is concerned free cashflow to equity comes after deducting investments in non current assets?
Secondly the terminal value of $2546 does not give $2043 if we discount it at 10% neither for 3 years nor 2 or 4 years, so how that figure of 2043 came?
thanksHe has labelled it wrong – the FCFE is after investment in non-current assets (and that is what he has used in the later part of the question).
The flow at time 3 is not just the terminal value of 2546, but also the 173 (FCFE at time 3).
This gives a total of 2546 + 173 = 2719, and this does have a present value of 2043.
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