### Troy is preparing a valuation of Logistic Solutions using a multiple-stage FCFE valuation

## Question: Troy is preparing a valuation of Logistic Solution…

Troy is preparing a valuation of Logistic Solutions using a multiple-stage FCFE valuation model with the following estimates. The FCFE per share for the current year is $2.00. The FCFE is expected to grow at 15 percent for the next three years, then at 11 percent annually for the following five years, and finally at a constant growth rate of 6 percent starting the ninth year. Logistic Solutions’ estimated beta is 1.12, and Troy believes that the current market conditions dictate a 2.15% risk free rate and an 11% expected market return.

**The following are five independent questions.**

**a)** Given Troy’s assumptions and approach, estimate the value of a share of Logistic Solutions.

**b)** If the terminal growth rate is projected to be 7%, rather than 6%, re-estimate the value of a share of Logistic Solutions. Does this new estimate make sense?

**c)** If the expected market return is assumed to be 9%, rather than 11%, re-estimate the value of a share of Logistic Solutions. Does this new estimate make sense?

**d)** If the systematic risk coefficient (beta) of the stock increases from 1.12 to 1.48, re-estimate the value of a share of Logistic Solutions. Does this new estimate make sense.

**e)** If Logistic Solutions’ estimated beta is statistically insignificant, suggest an alternative approach to arrive at the required rate of return (k) on the stock and use this new k to re-estimate the value of a share of Logistic Solutions. Assume Logistic Solutions’ bonds outstanding are traded at a yield of 6.5% and the risk premium required for Logistic Solutions’ equity shareholders over bond holders is 5%.