Question

Computing Present Value of Terminal Period FCFF

Use the following data to compute the present value of the terminal period free cash flows to the firm for each of the four firms A, B, C, and D. The forecast horizon included four years.

					A	B	C	D
Terminal period free cash flow to the firm (FCFF)					$72,670	$16,813	$101,517	$44,672
WACC					5.0%	6.2%	4.3%	11.0%
Terminal period growth rate					1.0%	1.0%	2.0%	1.5%

Round answers to the nearest whole number.

					A	B	C	D
Present value of terminal cash flows

Answer 1

Answer :

Calculation Present Value of Terminal Cash Flow

PV of Terminal Cash Flow = {[Terminal Period free cash Flow to firm * (1+growth rate) ] / (WACC - growth rate)} * [1 / (1+WACC)^n ]

Firm A Terminal Period free cash Flow to firm = 72,670

Growth rate = 1% or 0.01

WACC = 5% or 0.05

n = 4

PV of Terminal Period FCFF of Firm A = {[72670 * (1+ 0.01) ] / (0.05 - 0.01)} * [1 / (1+0.05)⁴ ]

= {73396.7 / 0.04 } * [0.82270247478]

= $1,509,591.16826 or $1,509,591

Firm B Terminal Period free cash Flow to firm = 16813

Growth rate = 1% or 0.01

WACC = 6.2% or 0.062

n = 4

PV of Terminal Period FCFF of Firm B = {[16813 * (1+ 0.01) ] / (0.062 - 0.01)} * [1 / (1+0.062)⁴ ]

= {16981.13 / 0.052 } * [0.7861436902]

= $256,723.234652 or $256,723

Firm C Terminal Period free cash Flow to firm = 101517

Growth rate = 2% or 0.02

WACC = 4.3% or 0.043

n = 4

PV of Terminal Period FCFF of Firm C = {[101517 * (1+ 0.02) ] / (0.043 - 0.02)} * [1 / (1+0.043)⁴ ]

= {103,547.34 / 0.023 } * [0.84501178575]

= $3,804,292.29055 or $3,804,292

Firm D Terminal Period free cash Flow to firm = 44672

Growth rate = 1.5% or 0.015

WACC = 11% or 0.11

n = 4

PV of Terminal Period FCFF of Firm D = {[44672 * (1+ 0.015) ] / (0.11 - 0.015)} * [1 / (1+0.11)⁴ ]

= {45342.08 / 0.095 } * [0.65873097413]

= $314,402.447657 or $314,402