Question

Use the following information for the next 2 questions:

Megatron Corp. estimates their future free cash flows as followed:

Year 1: $7,000; Year 2: $6,500; Year 3: $8,900; and they expect a 6% growth rate beyond year 3. If investors require 15% return, what is their current total company value (V0)?

Question 2 options:

	$168,537.85
	$85,776.10
	$79,924.21
	$104,822.22

Answer 1

Compute the value of the company at year 3 using the equation as shown below:

Value = Future free cash flows / ( Rate of return – Growth rate)

          = Free cash flow of year 3 * ( 1 + Growth rate ) / ( Rate of return – Growth rate)

          = $8,900 * ( 1 + 6%) / (15% - 6%)

          = $104,822.2222

Hence, the value of the company in year 3 is $104,822.2222

The current value of the company would be the present value of the free cash flows of the next 3 years and the present value of the company in year 3.

Prepare the table to compute the current value of the company using MS-Excel as follows:

The result of the above table is as follows:

Hence, the total current value is $85,776.097443906 or $85,776.10