Question

Winters inc management estimates that the company will generate after tax free cash flows from the firm(FCFF) of 1.25 million,16.8 million and 19.7 million,respectively,over the next three years. After that fcff are expected to grow at a constant five percent per year forever.The company has five million in non-operational assests. If the appropiate WACC is 8 percent,what is the enterprise value of this business

Answer 1

Value of Enterprise

$ 573.52

Million

Working:

Step-1:Present Value of three year's cash flow
	Year	Cah flow	Discount factor@8%	Present Value
	1	1.25	0.9259	1.16
	2	16.8	0.8573	14.40
	3	19.7	0.7938	15.64
			Total	31.20
Step-2:Present Value of after year 3 cash flow
Present Value		=	(FCF3*(1+g)/(Ke-g))*DF3			Where,
		=	(19.7*(1+0.05)/(0.08-0.05))*0.7938			FCF3	19.7
		=	547.33			g	5%
						Ke	8%
						Discount factor of year 3(DF3)	0.7938
	Step-3:Present Value of operating assets
		Present Value of all cash flows			31.20	+	547.33	=	578.52
		Less: non-operational assets							5.00
		Present Value of operational assets							573.52
	Thus, Value of Enterprise			573.52
Note:All the cash flows are in million.