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In: Finance

You have to value a company based on its expected future cash flows. Interest rates are...

You have to value a company based on its expected future cash flows. Interest rates are currently 9%. If this company expects cash flow of $100000 next year (it is the end of year 0 or equivalently the beginning of the first year), growing at 7.8% each year until the end of the fifth year. Then, cash flow growth is expected to slow to 1.9 forever-after. What is the value of this company today, in thousands of dollars?

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Expert Solution

Value of the company today based on the future expected cash flows is calculated by arriving at the present value of given future cash flows. Present value of growing perpetuity is calculated by dividing first cash flow at a particular growth rate with the discount rate minus the growth rate. If cash flow is expected to grow at the rate g forever after and our first cash flow at that rate is C and our interest rate is r then present value of growing perpetuity will be = C / (r - g).

Calculation of the value of the company today is shown below -

Thus, value of the company today is $2,673 thousand.

Formulas used in the above table are presented as follows -

I hope this solution will help you in your task. Thank you.

jeff jeffy answered 1 year ago
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