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Falak Naz
Falak Naz, Accountant
Category: Finance
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Experience:  I am a qualified Chartered Accountant. Currently i am working in financial institution.
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A company forecasts the free cash flows (in millions) shown

Resolved Question:

A company forecasts the free cash flows (in millions) shown below. The weighted average cost of capital is 13%, and the FCFs are expected to continue growing at a 5% rate after Year 3. Assuming that the ROIC is expected to remain constant in Year 3 and beyond, what is the Year 0 value of operations, in millions?
Year: 1 2 3

Free cash flow: -$15 $10 $40
Submitted: 6 years ago.
Category: Finance
Expert:  Falak Naz replied 6 years ago.

hi ryan,

 

 

We need to discount the future cash flows at 13% with the growth of 5%

 

= -15X(1+13%)^-1 + 10X(1+13%)^-2 + 40X(1+13%)^-3 + 42/(13%-5%)X(1+13%)^-3

 

= -13.27 + 7.83 + 27.72 + 363.85

 

= $ 386.13 is the worth of the business

Falak Naz and other Finance Specialists are ready to help you
Expert:  Falak Naz replied 6 years ago.

hi ryan,

 

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