Question

Underline Electronics had a free cash flow for FY 2018 of $2,150 (all amounts are in $000). Rand McDandy, CEO, projected a free cash flow growth of 3% per years for the next 5 fiscal years (FY2019 - FY2023). Beginning at the end of FY2023, free cash flow was expected to slow grow at only .5% in perpetuity. McDandy expected Underline Electronics cost of capital to remain constant at 6.12% until the end of the beginning of FY2024 at which point he projected the cost of capital to lower and remain at 4.25% in perpetuity. Considering this forecast he asked his CFO (you) to determine the fair market value (NPV) of the company. Choose the best answer from the list of options below. For this question consider FY2019 as Year 1 and FY2023 as Year 5.

$66,797

$59,588

$43,073

$64,696

$63,702

Answer 1

Ans: $63,702 (Fair market value (NPV) of the company = $63,627,987.9103)

Cost of Capital Infinite growth rate Infinite Cost of capital 6-12% 0.50% 4.25% FCF Growth Rate FY2018 FY2019 FY2020 FY2021 FY2022 FY2023 FY2024 $21,50,000.00 0.50% $22,14,500.00 $22,80,935.00 $23,49,363.05 $24,19,843.94 $24,92,439.26 $25,04,901.46 0 $6,67,97,372.16 396 3% 3% 3% 3% FCF Terminal value as of 2024 NPV of explicit period NPV of terminal value Enterprise Value 0 0 0 0 1,15,92,096.87 $5,20,35,891.04 $6,36,27,987.91

Cust of Capital Intinite growth rate Infinite Cost of capital 425 0.U612 FY2018 FY2019 FY2021 FY2024 FCF Growth Ratc 16"K5) BS-BA Terminal valuo a of 2024 NPV of explicit period NPV of tenminal value Enterprise Velue -6945