The free cash flow for the last year is $361M. The expected growth rate is 8%...

The free cash flow for the last year is $361M. The expected growth rate is 8% for the next three years and 2.5% after that. If WACC is 10%, estimate the value of this firm.

A. $3,821M.
B. $5,714M.
C. $6,063M.
D. $7,454M.

Expert Solution

B. $ 5,714M

As per discounted cash flow method, value of firm the present value of cash flows.

Step-1:Present Value of non-constant growing cash flow

Year	Cash flow	Discount factor	Present Value
a	b	c=1.1^-a	d=b*c
1	390	0.909091	354
2	421	0.826446	348
3	455	0.751315	342

Total			1,044

Working:

Cash flow of Year:
1	=	361	*	1.08	=	390
2	=	390	*	1.08	=	421
3	=	421	*	1.08	=	455

Step-2:Present Value of constant growing cash flow

Present Value	=	FCF3(1+g)/(Ke-g)DF3
	=	4,669



Where,
FCF3	=	free cash flow of year 3	=	455
g	=	Growth rate	=	2.50%
Ke	=	Required return	=	10%
DF3	=	Discount factor of year 3	=	0.751315

Step-3:Value of firm calculation

Value of firm	=	Present Value of cash flow of first 3 years	+	Present Value of cash flow of after first 3 years
	=	1,044	+	4,669
	=	5,714

jeff jeffy answered 1 year ago

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