The following financial information is available for Alpha Technologies: 

• Net Income for the most recent year: $15,000,000 

• The company's Net Income is expected to grow at a constant rate of 7% per year for the next 5 years, after which growth is expected to slow to a constant rate of 3% per year indefinitely. 

• Alpha Technologies has 1,000,000 shares outstanding. 

• The company's reinvestment needs (for maintaining current growth rates) stand at 30% of the Net Income for the next 5 years, and 25% thereafter. 

• In the most recent year, the company repaid $1,000,000 of debt and issued $1,200,000 of new debt. 

• These debt movements are expected to remain relatively consistent for the foreseeable future. 

• The risk-free rate is 2%, and you estimate Alpha Technologies' equity cost of capital to be 7%. You are aware that there are numerous methods to value a company and its equity. For this task, you are required to compute the Free Cash Flow to Equity (FCFE) and then use the two-stage FCFE model to value the company's equity. 

Questions: 

(a) Calculate the Free Cash Flow to Equity (FCFE) for the most recent year. 

(b) What is the company's intrinsic value per share using the two-stage FCFE model?

(c) Based on your calculations and the current market price, would you recommend purchasing the company's stock? Please explain your reasoning?

(d) What assumptions are you making in your analysis, and how could changes in these assumptions impact your recommendation? 

(e) Based on the information given, what additional financial or non-financial information would you seek to make a more informed investment decision? 

(f) How would your recommendation change if Alpha Technologies' equity cost of capital were to increase to 9%?

Answer rating: 100% (QA)

a To calculate the Free Cash Flow to Equity FCFE for the most recent year we need to find the cash flows available to equity shareholders after accounting for reinvestment needs and debt movements FCF... View the full answer