Richter Manufacturing has a 7% unlevered cost of equity. Richterforecasts the following free cash flows...

Richter Manufacturing has a 7% unlevered cost of equity. Richter forecasts the following free cash flows (FCFs), which are expected to grow at a constant 2% rate after Year 3.

	Year 1	Year 2	Year 3
FCF	$800	$825	$870

What is the horizon value of the unlevered operations? Do not round intermediate calculations. Round your answer to the nearest dollar.
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What is the total value of unlevered operations at Year 0? Do not round intermediate calculations. Round your answer to the nearest dollar.

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Expert Solution

a). Caculating the Horizon Value at year end 3 of the unlevered operations:-

where, FCF3 = Free Cash flow in year 3 = $870

g = Growth rate of FCF beyond year 3 = 2%

r= Unlevered cost of equity = 7%

Horizon Value at year end 3 = $17,748

b). Calculating the total value of unlevered operations at Year 0 or Enterprise Value today:-

EV = 747.664+ 720.587 + 710.179 + 14,487.655

EV = $16,666.08

So, the total value of unlevered operations at Year 0 is $16,666

jeff jeffy answered 1 year ago

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