Question

A firm's FCFF over the next three years are expected to be £193, £158, and £204 (all figures in millions), respectively. The firm's management estimates that cash flows will grow by 3% after the third year. The firm's weighted average cost of capital is expected to be 16% and 8% for the high and low growth periods, respectively. Calculate the firm’s value.

Group of answer choices

A.£2,040

B.£3,106

C.£5,000

D.£3,500

E.£2,900

Answer 1

The firm value is calculated as follows:

So the correct option is B rounded to the nearest dollar by ignoring the decimal part.

Present value schedule is as follows:

Year	CF	Discount Factor	Discounted CF
1	$            193.00	1/(1+0.16)^1=	0.862068966	0.862068965517241*193=	$      166.38
2	$            158.00	1/(1+0.16)^2=	0.743162901	0.743162901307967*158=	$      117.42
3	$            204.00	1/(1+0.16)^3=	0.640657674	0.640657673541351*204=	$      130.69
3	$        4,202.40	1/(1+0.16)^3=	0.640657674	0.640657673541351*4202.4=	$ 2,692.30
				NPV = Sum of all Discounted CF	$ 3,106.79