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Sir I have observed the usage of a formula involving FCF to equity, which is Price over FCFE. So my question is what is this FCFE? 1 year FCFE? I always thought PV of FCFE is Market vale of equity. But here it seems in this ratio we use some other FCFE. What is it sir?
in this NAHARA CO AND FUGAE CO. (DEC 14) when we are clearly told that FCFE of Fugae is $76.5m then why do we go ahead and use gordon’s formula to find FCFE, which apparently turns out to be different from the stated FCFE. So, this is really bewildering to me sir.
Here’s the extract which is muddling me quite badly:
“Fugae Co’s free cash flow to equity is currently estimated at $76.5 million and it is expected to generate a return on equity of 11%. Over the past few years, Fugae Co has returned 77.3% of its annual free cash flow to equity back to Nahara Co, while retaining the balance for new investments.”
The formula is not a standard formula that you are expected to have learning.
The question specifically says that the MV is 7.2 times its current cash flow to equity and this can only be the current cash flow to equity.
I do not understand your problem in the second question. The free cash flow to equity is the amount available for shareholders. However they have not been distributing all of it but have been retaining some of it.
You can find lectures working through the whole of this question if you follow the link to “Revision Kit Live” from the main Paper AFM page.
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