Use the following information to calculate the value of a business that your firm is considering...

Use the following information to calculate the value of a business that your firm is considering acquiring. Firm's WACC: 12.5% Firm's Cash Flows: $1 million FCF, years 1-4 $1.05 million FCF, year 5 5% growth after 4 years Please show step by step solution. Answer should be 8,462,060.

Expert Solution

Here

Firm's WACC = 12.5% = 0.125

Firm's Cash Flows:

$1 million FCF, years 1-4

$1.05 million FCF, year 5

5% growth after 4 years

The value of the firm can be calculated using DCF model

Value of firm = (Cash flow for the first year / (1+r)¹)+(Cash flow for the second year / (1+r)²)+(Cash flow for N year / (1+r)^N)+(Cash flow for final year / (1+r)

= 1000000/ (1+0.125) + 1000000/ (1+0.125)² + 1000000/ (1+0.125)³ + 1000000/ (1+0.125)⁴ + 1000000 * (1+ 0.05)/ [(0.125 – 0.05) * (1+0.125)⁴]

= 888,889 + 790,123 + 702,331 + 624,295 + 8,740,131

= $11,745,769

So the present value of the business = $11,745,769

jeff jeffy answered 1 year ago

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