Question

Company is projected to generate free cash flows of $179 million per year for the next 3 years (FCFF1, FCFF2 and FCFF3). Thereafter, the cash flows are expected to grow at a 1.8% rate in perpetuity. The company's cost of capital is 10.9%. What is your estimate for its enterprise value? Answer in millions, rounded to one decimal place

Answer 1

Use the discounted cash flow valuation to estimate the enterprise value of the company.
Find the present value of the growing perpetuity in year 3.
The cash flow in year 3 is calculated by adding the present value of the growing perpetuity in year 3 to the free cash flow in year 3.
Discount all cash flows to the present.
The enterprise value is the sum of the present values.
Present value of growing perpetuity in year 3 = free cash flow in year 4/(R - g)
free cash flow in year 4 = (free cash flow in year 3) * (1.018)
free cash flow in year 4 = 179000000*(1.018)
free cash flow in year 4 = 182222000
R is the discount rate that is 10.9%.
g is the growth rate of the perpetuity that is 1.8%.
Present value of growing perpetuity in year 3	182222000/(.109 - .018)
Present value of growing perpetuity in year 3	2002439560
Cash flow in year 3 = 2002439560 + 179000000
cash flow in year 3	2181439560
Present Value = Future value/ ((1+r)^t)
where r is the discount rate that is 10.9% and t is the time period in years.
Enterprise value = sum of the present values
Year	1	2	3
Cash flow	179000000	179000000	2181439560
Present value	161406672.7	145542536.2	1599368530
sum of the present values	1906317739
The estimate for the enterprise value is $1906317739.
The estimate for the enterprise value (in millions rounded to one decimal place) is $1906.3 million.