SI International had a free cash flow to equity (FCFE) of $122.1 million last year. The company has 12.43 million shares outstanding. SI’s required return on equity is 11.3% and WACC is 9.8%. If FCFE is expected to grow at 7.0% per year forever, the intrinsic value of SI's share is

Question

BlackTom AI · Accepted Answer

Using the FCFE Gordon-growth model: Price per share = FCFE1 / (r_e − g).

1) Relevant concepts
- Free cash flow to equity (FCFE) models value equity directly by discounting cash flows available to shareholders.
- For perpetual constant growth, the Gordon (perpetuity) formula applies: Equity value = FCFE1 / (r_e − g), where FCFE1 is next year’s FCFE, r_e is the required return on equity, and g is the perpetual growth rate.
- WACC is not used when valuing equity directly with FCFE; r_e is the appropriate discount rate.

2) Step-by-step reasoning and calculations
- Given FCFE0 (last year) = $122.1 million and g = 7.0%:
  FCFE1 = FCFE0 × (1 + g) = 122.1 × 1.07 = 130.647 million.
- Required return on equity r_e = 11.3% (0.113). Compute denominator:
  r_e − g = 0.113 − 0.07 = 0.043.
- Total equity value = FCFE1 / (r_e − g) = 130.647 / 0.043 = 3,038.0698 million.
- Shares outstanding = 12.43 million. Price per share = Total equity value / shares
  = 3,038.0698 / 12.43 = 244.433 (rounds to $244.43).

3) Why this answer is correct
- The calculation correctly grows last year’s FCFE to next year, uses the equity discount rate (r_e) not WACC, and applies the Gordon-growth formula. The arithmetic leads directly to $244.43 per share.

4) Why the other choices are incorrect
- $108.00, $168.29, $145.76, $98.13: these reflect misapplications such as (a) failing to grow FCFE to FCFE1, (b) using WACC instead of r_e, or (c) using the wrong denominator (e.g., r or g swapped). None match the correct FCFE1/(r_e − g) per-share result.

Conclusion: The intrinsic value per share is $244.43, which matches the provided correct answer.

SI International had a free cash flow to equity (FCFE) of $122.1 million last year. The company has 12.43 million shares outstanding. SI’s required return on equity is 11.3% and WACC is 9.8%. If FCFE is expected to grow at 7.0% per year forever, the intrinsic value of SI's share is单项选择题

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