Question

Wall Inc. forecasts that it will have the free cash flows (in millions) shown below. Assume the firm has zero non-operating assets. If the weighted average cost of capital is 14% and the free cash flows are expected to continue growing at the same rate after Year 3 as from Year 2 to Year 3, what is the firm’s total corporate value, in millions? Do not round intermediate calculationsYear 1 2 3
Free cash flow -$20.00 $48.00 $50.50

Answer 1

Answer:

$461.38

Explanation:

Calculation to determine the firm’s total corporate value, in millions

First step is to find the growth rate

Using this formula

g = FCF3/FCF2 - 1

Let plug in the formula

g=($50.50/$48.00)-1

g=1.05208333-1

g= 5.208333%

Second step is to calculate the horizon or value at Year 2

Using this formula

Year 2 Horizon value = FCF3/(WACC – g)

Let plug in the formula

Year 2 Horizon value (HV2)=$50.50/(14%-5.208333%)

Year 2 Horizon value=$50.50/8.791667%

Year 2 Horizon value= $574.41

Now let calculate the Total corporate value using this formula

Total corporate value = FCF1/(1.14) +(FCF2 + HV2)/(1.14)^2

Let plug in the formula

Total corporate value=-$20/(1+.14)+($48+$574.39)/(1+.14)^2

Total corporate value=-$20/(1.14)+($48+$574.39)/(1.14)^2

Total corporate value=-$17.54+($622.41)/(1.14)^2

Total corporate value=-$17.54+$478.92

Total corporate value= $461.38

Therefore the firm’s total corporate value, in millions is $461.38