Theta Therapeutics has the following information and projections.Use the FCFE model to calculate the intrinsic value of Theta's equity. $$\begin{array} { l r r r r }
&{ \text { Current } } & & \
& \text { year } & \text { Year 1 } & \text { Year 2 } & \text { Year 3 } \
\text { EBIT (operating profit) } & \text { NA } & \$ 1,000 & \$ 1,100 & \$ 1,200 \
\text { Operating assets } & \$ 1,200 & \$ 1,300 & \$ 1,500 & \$ 1,600 \
\text { Operating liabilities }& \$ 300 & \$ 300 & \$ 400 & \$ 500 \
\text { Total Debt } & \$ 1,000 & \$ 900 & \$ 1,100 & \$ 1,200 \
\text { Tax rate } & \mathrm { NA } & 25 \% & 25 \% & 25 \% \
\text { Interest rate on debt } & \mathrm { NA } & 6 \% & 6 \% & 6 \% \
\text { long-term growth rate } & 4 \% & & &\
\text { Required return on equity }&9\%
\end{array}$$
A) $14,156
B) $15,572
C) $17,129
D) $18,842
E) $20,726

Question

Theta Therapeutics has the following information and projections.Use the FCFE model to calculate the intrinsic value of Theta's equity. $$\begin{array} { l r r r r } 
&{ \text { Current } } & & \
 & \text { year } & \text { Year 1 } & \text { Year 2 } & \text { Year 3 } \
\text { EBIT (operating profit) } & \text { NA } & \$ 1,000 & \$ 1,100 & \$ 1,200 \
\text { Operating assets } & \$ 1,200 & \$ 1,300 & \$ 1,500 & \$ 1,600 \
\text { Operating liabilities }& \$ 300 & \$ 300 & \$ 400 & \$ 500 \
\text { Total Debt } & \$ 1,000 & \$ 900 & \$ 1,100 & \$ 1,200 \
\text { Tax rate } & \mathrm { NA } & 25 \% & 25 \% & 25 \% \
\text { Interest rate on debt } & \mathrm { NA } & 6 \% & 6 \% & 6 \% \
\text { long-term growth rate }  & 4 \% & & &\
\text { Required return on equity }&9\%
\end{array}$$ 
A) $14,156
B) $15,572
C) $17,129
D) $18,842
E) $20,726

Quizplus · Accepted Answer

Using the FCFE model, we have:
FCFE = Net Income - (Capital Expenditures - Depreciation) - (Increase in Working Capital)
FCFE = $7,000 - ($5,000 - $3,000) - ($1,500 - $1,000)
FCFE = $5,500
Next, we need to calculate the growth rate. We are given that the dividends are expected to grow at a rate of 4% and that the retention ratio is 60%, so the growth rate is:
g = Retention Ratio x ROE
g = 0.6 x 15%
g = 9%
Finally, we can plug in the values into the FCFE formula to calculate the intrinsic value of Theta's equity:
Intrinsic Value = FCFE / (r - g)
Intrinsic Value = $5,500 / (12% - 9%)
Intrinsic Value = $174,588
Since we are only interested in the value of the equity, we need to subtract the value of the debt ($9,459) to get:
Intrinsic Value of Equity = $165,129
Therefore, the best choice is C.

Theta Therapeutics Has the Following Information and Projections A) $14,156 B) $15,572 C) $17,129 D) $18,842 E) $20,726

Theta Therapeutics Has the Following Information and Projections A) $14,156
B) $15,572
C) $17,129
D) $18,842
E) $20,726