Question

You are using the FCFF approach to value a business. You have estimated that the FCFF for next year will be $146.50 million and that it will increase at a rate of 10 percent for each of the following four years. After that point, the FCFF will increase at a rate of 4 percent forever. If the WACC for this firm is 13 percent and it has no NOA, what is it worth? (Round answer to 2 decimal places, e.g. 524.25.) Excel Template (Note: This template includes the problem statement as it appears in your textbook. The problem assigned to you here may have different values. When using this template, copy the problem statement from this screen for easy reference to the values you’ve been given here, and be sure to update any values that may have been pre-entered in the template based on the textbook version of the problem.) The firm is worth $enter the value of the firm in millions of dollars rounded to 2 decimal places million.

Answer 1

Value of firm = present value of FCFF of next 4 years + present value of terminal value at end of year 4

Terminal value at end of year 4 = Year 5 FCFF / (WACC - constant growth rate after 4 years)

Present value = future value / (1 + WACC)^{number of years}

The FCFF of next 4 years, the terminal value and their present values are calculated as below :

Firm value = $1,517,616,513.55