Question

Given the following data:
FCF₁ = $20 million; FCF₂ = $30 million; free cash flow grows at a rate of 2% for year 3 and beyond. If the weighted average cost of capital is 12%, calculate the value of the firm.

		$270.72 million
		$266.73 million
		$285.71 million
		$253.33 million

Answer 1

Value at the end of year 2
Terminal value = D1 / r - g
Where,
D1 = Expected cash flow
r= required rate of return
g= growth rate
=30.6/0.12-0.02
=306

Value of firm today

Year	Cash Flow	PV Factor	PV Of Cash Flow
a	b	c=1/1.12^a	d=b*c
1	$          20	0.892857	$                   17.86
2	$          30	0.797194	$                   23.92
2	$        306	0.797194	$                 243.94
Value of the firm			$                 285.71