Question

Ankh-Sto Associates Co. is expected to generate a free cash flow (FCF) of $14,835.00 million this year ( FCF1 = $14,835.00 million), and the FCF is expected to grow at a rate of 25.00% over the following two years ( FCF 2 and FCF3 ). After the third year, however, the FCF is expected to grow at a constant rate of 3.90% per year, which will last forever ( FCF 4 ). Of Ankh-Sto Associates Co.’s weighted average cost of capital (WACC) is 11.70%, what is the current total firm value of Ankh-Sto Associates Co.

Answer 1

Answer:

Value of Ankh-So = $266,324.32  millions

Explanation:

The value of a firm can be derived as the present value of this free cash flow discounted at the weighted average cost of capital

Year        workings                           Present Value (Millions)

1         14,835.00×  1.117^(-1) =                    13,281.11

2        14,835.00× 1.25× 1.117^(-2)=            14,862.48

3         14,835.00× 1.25^2× 1.117^(-3)=        16,632.14

Year 4 and beyond

This will be done in two steps

PV  in year 3

=     14,835.00× 1.25^2 × 1.039/(0.117-0.039)

=   308,765.32

PV in year 0

308,765.32 × 1.117^(-3) = 221,548.596

Value of Ankh-So

=13,281.11  +  14,862.48 + 16,632.14 + 221,548.596

= $266,324.32  millions