FCFE Question

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heshoos

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Ltd’s most recent FCFE per share amounted to $0.6. An analyst has the following expectations regarding the company’s growth in FCFE:
  • FCFE will grow at a rate of 40% for the next three years, during which investors’ required rate of return will be 20%.
  • During the following two years, FCFE growth will decline by 15% per year towards its stable long‐term growth rate. During this time, investors’ required rate of return will be 16%.
  • From Year 6 onwards, FCFE will grow at a stable long‐term growth rate of 10%, during which investors’ required rate of return will be 12%.
The correct answer is 58…
My question is someone able to post a detailed answer on how do you incorporate the changing required rate of returns in each period??
 
Silly is right Magician, this is one of the practce questions from Wiley. And there is no detailed explanation to the answer either
 
High Growth Period
Transitional Period
Stable Growth

g = 40%
g declines by 15% per year
g = 10%
Years
0
1
2
3
4
5
6
FCFE ($)
0.60
0.84
1.18
1.65
2.06
2.26
2.49
Terminal value in Year 5





124.51

Discount factors

0.8333
0.6944
0.5787
0.4989
0.4301

Present values

0.70
0.82
0.95
1.03
54.52

Sum of present values
58.02






This is the answer… but i cannot get the TV5 of $124.51. Are you able to comment on how is one suppose to take the different discount rates into consideration? do you just discount each cashflow with the appropriate cost of equity during that period??
 
Thanks.. was not reading the question properly.
 
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