Question

Vasudevan, Inc. forecasts the free cash flows (in millions) shown below. If the weighted average cost of capital is 18% 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

	i	ii	iii	iv=ii+iii	v	vi=v*iv
	year	Cash flow	terminal value	Total cash flow	PVIF @ 18%	present value
	1	-22		(22.00)	1.0000	(22.00)
	2	42		42.00	0.8475	35.59
	3	45	444.08	489.08	0.7182	351.25
						364.84
therefore answer =			364.84
Growth % =		=45/42-1
		7.14%
Terminal value =			45*(1+7.14%)/(18%-7.14%)
			444.08