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

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

    $  

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

Solutions

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 2 years ago
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