The following table lists the Income statement and Balance sheet for First American Furniture Company
Income Statement 2020 2021
Revenue 516 630
Depreciation 30 35
Other operating costs 400 480
Income before taxes 86 115
Taxes 30 44
Net income 56 71
Dividends 20 26
Earnings per share 0.56 0.71
Dividend per share 0.2 0.26
Common shares outstanding (millions) 100 100
Balance Sheet 2020 2021
Current assets 350 420
Net property, plant, and equipment 500 520
Total assets 850 940
Current liabilities 130 150
Long-term debt 50 80
Total liabilities 180 230
Shareholders’ equity 670 710
Total liabilities and equity 850 940
Capital expenditures 45 50
Net Working Capital 220 270
You are a financial analyst at RBC. Using the data above, you want to determine the value of First American Bank’s stock using the Free Cash Flow to Equity (FCFE) model. You believe that the company’s FCFE will grow at 40% for three years and 10% thereafter. Capital expenditures, depreciation, working capital, and net debt are all expected to increase proportionately with FCFE. The required rate of return on equity is 16%.
a. Calculate the amount of FCFE per share for the year 2021
b. Calculate Projected 2024 terminal value per share based on constant growth of 10%
c. Calculate the current value of a share of the stock based on the two-stage FCFE model.
