Sample Solution

a. The Free Cash Flow to Equity (FCFE) for a company is the cash flow available to shareholders after accounting for all necessary investments needed for maintaining operations and growth. It can be calculated using the following formula: FCFE = Net Income + Non-cash Expenses − Capital Expenditures − Changes in Working Capital − Increase/Decrease in Debt.

Using the data provided, we know that net income was 56 dollars in 2020, while non-cash expenses were 30 dollars – so plugging these values into equation gives us FCFE as follows:

FCFE = 56 + 30 – 45 – 70 – 0 = 71

Using this same formula, we calculate 2021’s FCFE by replacing 2020’s numbers with 2021’s corresponding figures; this gives us an FCFE of 115+35−50−100−10= 90

. We must then divide this number by the common shares outstanding (in millions) to get per share value; hence, First American Furniture Company’s FCFE per share for 2021 is 5 15.

b. To calculate Projected 2024 terminal value per share based on constant growth of 11%, we first need to determine what 2024\’s terminal value will be. This can be done using the Constant Growth Model which states that Terminal Value at tn= Earnings at tn+1 divided by required rate of return minus growth rate . Plugging in our known constants – namely 16% required rate of return and 11% expected long term growth rate – into equation gives us Terminal Value as follows :

.Terminal Value = Earnings at tn+1/(Required Rate Of Return – Growth Rate ) or 71/(0 16-0 11)=2515 So ,Projected 2024 terminal value per share based on constant growth of 11 % comes out to 2515.