We are in year 2012. In this question, we will calculate Rosengarten’s enterprise value in 2012...

We are in year 2012. In this question, we will calculate Rosengarten’s enterprise value in 2012 using the discounted cash flow approach (as opposed to the multiples approach). For your convenience, Rosengarten’s projected free cash flows for the next three years are repeated in the table below.

	2013	2014	2015
FCF ($M)	-501.5	101	305.9

Rosengarten projects that its free cash flows will grow at a constant rate of 5% after 2015. The cost of capital for Rosengarten’s assets is 10%.

a) What is Rosengarten’s free cash flow in 2016?
b) What is Rosengarten’s enterprise value in 2015 afterthe firmgenerates the year’s free cash flow?
c) What is Rosengarten’s enterprise value in 2012?

Expert Solution

a) What is Rosengarten’s free cash flow in 2016?

	=305.9*(1+5%)
	321.195	mil

b) What is Rosengarten’s enterprise value in 2015 afterthe firmgenerates the year’s free cash flow?
we can use dividend growth model to compute the terminal value

	Value at 2015 = projected cash flow for 2016/(required rate - growth rate)
	=321.195/(10%-5%)
	6423.90	mil

c)	What is Rosengarten’s enterprise value in 2012

	enterprise value = Present value of future cash flow
		i	ii	iii=i+ii	iv	v=iii*iv
	Year	Cash flow	terminal value	Total cash flow	PVIF @ 10%	present value
	2013	-501.5		-501.5	0.90909	-455.91
	2014	101		101	0.82645	83.4711
	2015	305.9	6423.90	6729.8	0.75131	5056.2
						4683.76

	Therefore value of firm =				4683.76	mil

jeff jeffy answered 1 year ago

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