Question

A company has expected free cash flows of $1.45 million, $2.93 million, and $3.2 million in the next three years. Beginning in Year 4, the expected cash flows will grow (or decrease) by -5% in perpetuity. Measure the value of this company as of today using both a 10% and 12% discount rate.

Answer 1

a.	$    21.37	million
Working:
Present Value of cash flow of next 3 years:
Year	Cash flow	Discount factor	Present Value
a	b	c=1.10^-a	d=b*c
1	$ 1.45	0.909091	$       1.32
2	$ 2.93	0.826446	$       2.42
3	$ 3.20	0.751315	$       2.40
	Total		$       6.14
Present Value of cash flow of after 3 years:
Present Value	=	D3*(1+g)/(Ke-g)*DF3
	=	$    15.23
Where,
D3	=	$       3.20
g	=	-5%
Ke	=	10%
DF3	=	0.751315
Value of company	=	$       6.14	+	$    15.23
	=	$    21.37
b.	$    18.64	million
Working:
Present Value of cash flow of next 3 years:
Year	Cash flow	Discount factor	Present Value
a	b	c=1.12^-a	d=b*c
1	$       1.45	0.892857	$       1.29
2	$       2.93	0.797194	$       2.34
3	$       3.20	0.71178	$       2.28
	Total		$       5.91
Present Value of cash flow of after 3 years:
Present Value	=	D3*(1+g)/(Ke-g)*DF3
	=	$    12.73
Where,
D3	=	$       3.20
g	=	-5%
Ke	=	12%
DF3	=	0.71178
Value of company	=	$       5.91	+	$    12.73
	=	$    18.64