You are asked to compute the free cash flows of a company for the next 5 years. You receive the following relevant selected

You are asked to compute the free cash flows of a company for the next 5 years. You receive the following relevant selected information from the incremental earnings forecast:

In additon, you know that 15% of sales and costs of goods sold must be allocated to the working capital. The weighted average cost of capital is 7%. The company expects a growth rate of its free cash flows of 2% after year 5.

a) Compute the free cash flows of the company!

b) What is the estimated firm value of the company using the Discounted Free Cash Flow Model?

Expert Solution

	Year	0	1	2	3	4	5
	1.Sales		25.74	25.25	24.96	25.69
	2.Working capital(Sales15%)(Ln.115%)	-3.861	-3.7875	-3.744	-3.8535	0	0

	3.COGS		15.44	15.15	14.98	15.41
	4.Working capital(COGS15%)(Ln.315%)	2.316	2.2725	2.247	2.3115	0	0

	5.NWC (2+4)	-1.545	-1.515	-1.497	-1.542	0	0
	6.Change in NWC(Prev.-Current)		-0.03	-0.018	0.045	-1.542	0

	7.Unlevered net income		7.42	7.9	7.37	5.9	6.84
	8.Depreciation		0.64	0.64	0.64	0.64	0.64
a.	9.Free Cash Flows(6+7+8)		8.03	8.522	8.055	4.998	7.48


	10.Terminal FCFs(7.48*1.02/(7%-2%)						152.592
	11.Total FCFs(9+10)		8.03	8.522	8.055	4.998	160.072
	12.PV F at 7%(1/1.07^ yr.n)		0.93458	0.87344	0.81630	0.76290	0.71299
	13.PV at 7%(Ln.11*12)		7.504673	7.443445	6.575279	3.81295	114.1291
b.	14.NPV at 7%(Sum of Ln.13)	139.46547
	ie.	139.47

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