FCFE Calculating the required return to equity.

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cdealbuquerque

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I came agross this QBank question.

Total equity = $6.0 billion,
Next year FCFE $420 million
Growth rate is 8%
We are asked to compute return on equity.

My answer is (420/6,000) + 0.08 = 0.15

The correct solution by Schweser is 15.56% calculated as 420(1.08)/6,000 + 0.08

I don’t see why we multiply next year’s FCFE by the growth rate.

Am I wrong?

Thanks in advance.
 
Do you have the QBank question number? I got caught on a few of those based on the wording, so read carefully. For instance the question might say “currently” for the data or it may ask for the “following” year’s FCFE or firm value. Thus you will have to apply the right growth rate.
 
The question ID only pulls up the question and not the vingette that goes with it. It looks you have the formula down so don’t worry. It’s very possible it’s an error on their part. If it said FCFE was for next year, then I think you did it correctly.
 
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