Question

Group of answer choicesThe horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the cost of debt. The horizon value is calculated by discounting the expected earnings at the WACC. The horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the WACC. The horizon value must always be more than 20 years in the future. The horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the levered cost of equity.

Answer 1

Answer:

The horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the WACC

Explanation:

Horizon value

This is simply known as the value of a security. It is regarded as present value usually at future point in time of all cash flows when we stable growth rate is anticipated forever. Its simply known also as present value of all free cash flows beyond the horizon date discounted back to the horizon date. It is also called the terminal value due to it being regarded as end of the explicit forecast period or the continuing value due to the fact that it is the value if operations continue to be used rather than be liquidated.

The growth in free cash flows is usually not constant so modification has to be made to the constant growth formula to find the value of free cash flows beyond the horizon date discounted back to the horizon Formula to calculate horizon value.

Mathematically;

HV = V option at time t =FCFt(1+g)

(WACC-g)

The formula for Terminal Value using the Gordon Growth method includes: Terminal Value = Final Year Free Cash Flow * (1 + Growth Rate) / (Discount Rate - Growth Rate)