Horizon Value of Free Cash Flows Current and projected free cash flows for Radel

Question

Horizon Value of Free Cash Flows

Current and projected free cash flows for Radell Global Operations are shown below.

Growth is expected to be constant after 2017, and the weighted average cost of capital is 11.1%. What is the horizon (continuing) value at 2018 if growth from 2017 remains constant? Round your answer to the nearest dollar. Round intermediate calculations to two decimal places. Enter your answer in millions of dollars.

Explanation / Answer

To calculate the horizon value, we first need to determine the growth rate with effect from the year 2017 (since after that year, the growth is expected to be constant). The growth rate can be determined with the use of following formula:

Growth Rate = Free Cash Flow Year 2018/Free Cash Flow Year 2018 - 1

Once, we have determined the growth rate, we can calculate the horizon value with the use of following formula:

Horizon Value = Free Cash Flow Year 2018*(1+Growth Rate)/(WACC - Growth Rate)

____________

Solution:

Using the values provided in the question, we get,

Growth Rate = 744.13/702.01 - 1 = 6%

Using this growth rate, we get,

Horizon Value = 744.13*(1+6%)/(11.1% - 6%) = $15,466.13 (answer)

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