Question

Praxis Corp. is expected to generate a free cash flow (FCF) of $7,360.00 million this year (FCF₁ = $7,360.00 million), and the FCF is expected to grow at a rate of 20.20% over the following two years (FCF₂ and FCF₃). After the third year, however, the FCF is expected to grow at a constant rate of 2.46% per year, which will last forever (FCF₄). Assume the firm has no nonoperating assets. If Praxis Corp.’s weighted average cost of capital (WACC) is 7.38%, what is the current total firm value of Praxis Corp.? (Note: Round all intermediate calculations to two decimal places.)

Answer 1

Answer:

$202,216.54 million

Explanation:

FCF₁ = $7,360 million

FCF₂ = $8,846.72 million

FCF₃ = $10,633.76 million

FCF₄ = $10,910.24 million and will continue to grow at 2.46%

we must first determine the terminal value at year 3:

terminal value = $10,910.24 million / (7.38% - 2.46%) = $221,752.85 million

firm's current total value = $7,360 million / 1.0738 + $8,846.72 million / 1.0738² + $10,633.76 million / 1.0738³ + $221,752.85 / 1.0738³ = $6,854.16 + $7,672.48 + $8,588.49 + $179,101.41 = $202,216.54