Question

Today is January 31, 2018. You forecasted the following cash flows (in millions) for a firm:

Cash flow from operations
January 31, 2019	$4,822.32
January 31, 2020	$5,342.00
January 31, 2021	$4,525.11
Cash investment in operations
January 31, 2019	$800.44
January 31, 2020	$913.21
January 31, 2021	$874.14

In addition, you are given the following data:

Net debt
January 31, 2018	$342.11

and

Free cash flow growth after 2021	3.00%
Required return	10.00%

What is the equity value of the firm (in millions) using Discounted Cash Flow model? Hint: First, calculate the free cash flows and discount the free cash flows. Finally, subtract the net debt to obtain equity value.

		$46,434.11
		$48,111.02
		$50,079.02
		$52,515.77

Answer 1

			Years Ending
			Jan31,2019	Jan31,2020	Jan31,2021	Jan31,2022
	N	Years from today(Jan,312018)	1	2	3	4
	A	Cash Flow from Operations ($ million)	$4,822.32	$5,342.00	$4,525.11
	B	Cash Flow for investment ($ million)	($800.44)	($913.21)	($874.14)
	C=A+B	Free Cash Flow ($ million)	$4,021.88	$4,428.79	$3,650.97
	D	Expected Free Cah flow in year 4=3650.97*1.03				$3,760.50
	E=D/(0.1-0.03)	Horizontal Value of the firm in year3			$53,721.42	SUM
	F=C/((1+0.1)^N)	Present Value of Expected Free Cash Flow	3656.2545	3660.15702	2743.0278	10059.4394
	G	Net Present Value of Free Cash flows of Year1-3	10059.439
	H=E/(1.1^3)	Present Value of Horizontal Value	40361.695
	I=G+H	Present Value of the firm($ million)	$50,421.13
	J	Present Value of Debt in Jan31.2018	$342.11
	K=I-J	Equity Value of the firm ($ million)	$50,079.02
		ANSWER: $50,079.02(million)