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Question
Ralph Smith, CFA, has been directed to determine the value of ChipTech's stock using the Free Cash Flow to Equity (FCFE) model. Smith believes that ChipTech's FCFE will grow at 30% for three years and 15% 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 17%.
1. Calculate the amount of FCFE per share for the year 2019, using the table above.
2. What is projected 2022 terminal value per share based on constant growth of 15%?
3. Calculate the current value of a share of the stock based on the two-stage FCFE model.
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