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Dear Sir,
I need some help understanding the Free Cash Flow Valuation to Equity for Staple View (Mar/Jun16 q2). The growth rate is 4% and the required increase in annual investment is also 4%, but the answer formula seems to suggest that FCFE will grow by 4% every year. How does the answer reflect the 4% growth in operating profits and 4% increase in annual investment ?
Since both the profit and the annual investment both grow at 4%, then the net cash flow (one less the other) will grow at 4% as well.
Try it yourself with some invented figures. Suppose the operating profit is 100 and the extra investment needed is 20. Then the net cash flow is 80.
Inflate both by 4% and see what happens to the net cash flow 🙂
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