Question

Kedia Inc. forecasts a negative free cash flow for the coming year, FCF1 = -$10 million, but it expects positive numbers thereafter, with FCF2 = $25 million. After Year 2, FCF is expected to grow at a constant rate of 4% forever. If the weighted average cost of capital is 14.0%, what is the firm's total corporate value, in millions?

Answer 1

Answer:

Kedia Inc value:

$228.070.175,43

228.07 millions dollars

Explanation:

Next year Free Cash Flow: 10,000,000

Folllowing year: 25,000,000

from there, 4% increase

WACC = return = 14%

We use gordon model to know the present value of the future free cash flow growing at 4%:

FCF_0: 25,000,000

FCF_1: 25,000,000 x (1.04) = 26,000,000

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

$\frac{26,000,000}{0.14-0.04} = Intrinsic \: Value$

future FCF: 260,000,000

This is calculated 2 years ahead, thus we need to discount this by 2 years to ge the value today.

We also need to discount the 10,000,000 million in one year and the 25,000,000 millions in two year:

For this task we use the present value of a lump sum:

Discounted future cash flow:

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

future dividends growing at 4%: 260,000,000.00

time  2.00

rate  0.14

$\frac{260000000}{(1 + 0.14)^{2} } = PV$  

PV   200,061,557.40

$\frac{25000000}{(1 + 0.14)^{2} } = PV$  

future dividends of 25,000,000

PV      19,236,688.21

$\frac{10000000}{(1 + 0.14)^{1} } = PV$

future dividends of 10,000,000

PV        8,771,929.82

Total value: 200,061,557.4 + 19,236,688.21 + 8,771,929.82 = 228.070.175,43