Question

Listed below are yearly forecasts of “free cash flow” (operating cash flow plus investment-related cash flow) for Tomkat LLC.

Year Cash Flow

2020 -$2.8 million.

2021 -$2.0 million.

2022 -$1.2 million.

2023 -$0.2 million.

2024 $0.9 million.

2025 $2.2 million.

After year 2025, cash flows are anticipated to grow by 3% per year, in perpetuity. For simplicity, assume all that cash flows occur at the end of each year. Assume a discount rate of 8% per year.

What is the value of Tomkat LLC as of the end of 2019?

Answer 1

>>>>

g = growth rate = 3%

r = disc. rate = 8%

FCF in 2020 = -$2.8 million.

FCF in 2021 = -$2.0 million.

FCF in 2022 = -$1.2 million.

FCF in 2023 = -$0.2 million.

FCF in 2024 = $0.9 million.

FCF in 2025 = $2.2 million.

>>>>

FCF in 2026 = FCF in 2025 * (1+g) = $2.2 million * (1+3%) = $2.266 million

FCF in 2025 for years 2026 to forever = FCF in 2026 / (r - g)

= $2.266 million / (8% - 3%)

= $45.32 million

>>>>

Value of Tomkat LLC as of end of 2019 = Present value of FCF for all years

= [FCF in 2020 / (1+r)^1] + [FCF in 2021 / (1+r)^2] + [FCF in 2022 / (1+r)^3] + [FCF in 2023 / (1+r)^4] + [FCF in 2024 / (1+r)^5] + [FCF in 2025 / (1+r)^6] + [FCF in 2025 for year 2026 to forever / (1+r)^6]

= [-$2.8 million / (1+8%)^1] + [-$2.0 million / (1+8%)^2] + [-$1.2 million / (1+8%)^3] + [-$0.2 million / (1+8%)^4] + [$0.9 million / (1+8%)^5] + [$2.2 million / (1+8%)^6] + [$45.32 million / (1+8%)^6]

= [-$2.8 million / 1.08] + [-$2.0 million / 1.1664] + [-$1.2 million / 1.259712] + [-$0.2 million / 1.36048896] + [$0.9 million / 1.46932808] + [$2.2 million / 1.58687432] + [$45.32 million / 1.58687432]

= -$2.59259259 million - 1.71467764 million - 0.952598689 million - $0.147005971 million + 0.612524876 million + $1.38637318 million + $28.5592875 million

= $25.1516107 million

Therefore, Value of Tomkat LLC as of end of 2019 is $25.15 million