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horrorfan [7]
2 years ago
15

Gonzales Corporation generated free cash flow of $88 million this year. For the next two years,the companyʹs free cash flow is e

xpected to grow at a rate of 10%. After that time, the companyʹsfree cash flow is expected to level off to the industry long-term growth rate of 4% per year. Ifthe weighted average cost of capital is 12% and Gonzales Corporation has cash of $100 million,debt of $300 million, and 100 million shares outstanding, what is Gonzales Corporationʹsexpected terminal enterprise value in year 2?
A) $1384.24
B) $1245.82
C) $1107.39
D) $968.97
Business
1 answer:
vodka [1.7K]2 years ago
6 0

Answer:

A) $1384.24

Explanation:

Terminal Value = Free Cash Flow (FCF) of last forecast *(1+ perpetual growth rate)/(discount rate – perpetual growth rate)

FCF of last forecast = $88*(1+10%)^2 = $106.48

Gonzales Corporationʹs expected terminal enterprise value in year 2 = $106.48 * (1+4%)/(12%-4%) = $1382.24

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