A company forecasts growth of 6 percent for the next five years and 3 percent thereafter. Given last year's free cash flow was $

Question

3 years ago

6

100, what is its horizon value (PV looking forward from year 4) if the company cost of capital is 8 percent?
a. $0
b. $1,672
c. $2,000
d. $2,676

1 answer:

Ilya [14] · Answer 1 · 2022-08-19T04:31:50+03:00

Answer:

d. $2,676

Explanation:

The computation of the horizontal value is shown below:

FCF1 = (100 × 1.06) = 106

FCF2 = (106 × 1.06) = 112.36

FCF3 = (112.36 × 1.06) = 119.1016

FCF4 = (119.1016 × 1.06) = 126.247696

FCF5 = (126.247696 × 1.06) = 133.8225578

Now

Horizon value is

= FCF5 ÷ (Cost of capital - Growth rate)

= 133.8225578 ÷ (0.08 - 0.03)

= $2,676

Hence, the correct option is d.