Judd Corporation has a weighted average cost of capital of 10.25%, and its value of operations is $57.50 million. Free cash flow

Question

2 years ago

15

is expected to grow at a constant rate of 6.00% per year. What is the expected year-end free cash flow, FCF1 in millions?

1 answer:

earnstyle [38] · Answer 1 · 2022-05-17T01:32:13+03:00

Answer:

The expected year-end free cash flow is $2.44 million

Explanation:

The formula to compute free cash flow is shown below:

Value of operations = (free cash flow) ÷ (weighted average cost of capital - growth rate)

$57.50 million = free cash flow ÷ (10.25% - 6.00%)

$57.50 million = free cash flow ÷ 4.25%

So, free cash flow equal to

= $2.44 million

The growth rate should always be deducted from the weighted average cost of capital in computing the year ending free cash flow.