Question

JenBritt Incorporated had a free cash flow (FCF) of $98 million in 2019. The firm projects FCF of $235 million in 2020 and $520 million in 2021. FCF is expected to grow at a constant rate of 6% in 2022 and thereafter. The weighted average cost of capital is 9%. What is the current (i.e., beginning of 2020) value of operations? Do not round intermediate calculations. Enter your answer in millions. For example, an answer of $1 million should be entered as 1, not 1,000,000. Round your answer to two decimal places.

Answer 1

Answer:

Value of the Firm: $  16,  117,737,003.06‬

Explanation:

We need to calculate the present value of all the future cash flow of the company at his WACC.

For the years 2020 and 2021 we will do the present value of a lump sum:

$\frac{Principal}{(1 + rate)^{time} } = PV$

$\frac{235000000}{(1 + 0.09)^{1} } = PV$  

PV_2020   215,596,330.28

$\frac{520000000}{(1 + 0.09)^{2} } = PV$  

PV_2021         437,673,596.50

Now for the following cash flow, which are perpetuity, we use the Gordon model:

$\frac{FCF_1}{return-growth} = Intrinsic \: Value$

we know grow = 6%

and return = 9%

now for the FCF:

520,000,000 will be for the starting point (0) at which the dividends grow at a certain rate, we calculate next year:

we do 520,000 x (1+ g) = 520,000,000 x 1.06 = 551,200,000

we now solve:

$\frac{551,200,000}{0.09-0.06} = Intrinsic \: Value$

18,373,333,333.33

As this is 2 years into the future we calculate the present value:

$\frac{18373333333.33}{(1 + 0.09)^{2} } = PV$  

PV   15,464,467,076.28

We add them and get the total value of the company:

    215,596,330.28

    437,673,596.50

15,464,467,076.28

16,  117,737,003.06‬