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A company forecasts the free cash flows (in millions) shown

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below. The weighted average...
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: 8 years ago.Category: Finance
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11/23/2009
Financial Professional: Falak Naz, Accountant replied 8 years ago
Falak Naz
Falak Naz, Accountant
Category: Finance
Satisfied Customers: 532
Experience: I am a qualified Chartered Accountant. Currently i am working in financial institution.
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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
Falak Naz, Accountant
Category: Finance
Satisfied Customers: 532
Experience: I am a qualified Chartered Accountant. Currently i am working in financial institution.
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Financial Professional: Falak Naz, Accountant replied 8 years ago

hi ryan,

 

If you have any query please feel free to contact, else click the green button to ACCEPT so i can be paid for my efforts and expertise.

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