Question

Vasudevan, Inc. forecasts the free cash flows (in millions) shown below. If the weighted average cost of capital is 15% and the free cash flows are expected to continue growing at the same rate after Year 3 as from Year 2 to Year 3, what is the Year 0 value of operations, in millions? Enter your answer rounded to two decimal places. Do not enter $ or comma in the answer box. For example, if your answer is $12,300.456 then enter as 12300.46 in the answer box.                           

Year	Free Cash Flow
1	$         (22.00)
2	$          42.00
3	$          45.00

Answer 1

Solution:
	Answer is Year 0 value of operations	445.69	millions
Working Notes:
	constant growth rate
	= (year 3 value - Year 2 value)/year 2 value
	=(45-42)/42
	=3/42
	=0.07142857
	g=7.14285714%
	cost of capital (Ke) = 15%
	Value of operation at end of 3rd year
	= year 3 cash flow x (1+g)/(ke - g)
	=45 x (1.0714285714)/(0.15-0.07142857)
	=613.6363525
	Calculation of value of operation at year 0
Year	Cash flow	PVF @15%	Present value
1	-22	0.869565217	-19.13043478
2	42	0.756143667	31.75803403
3	45	0.657516232	29.58823046
3	613.6363525	0.657516232	403.4758626
		value of operation at year 0	445.69
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