MJSProblem 7-17 Value of Operations Kendra Enterprises has never paid a dividend
ID: 2723285 • Letter: M
Question
MJSProblem 7-17
Value of Operations
Kendra Enterprises has never paid a dividend. Free cash flow is projected to be $80,000 and $100,000 for the next 2 years, respectively; after the second year, FCF is expected to grow at a constant rate of 9%. The company's weighted average cost of capital is 15%.
What is the terminal, or horizon, value of operations? (Hint: Find the value of all free cash flows beyond Year 2 discounted back to Year 2.) Round your answer to the nearest cent.
$
Calculate the value of Kendra's operations. Round your answer to the nearest cent. Round intermediate calculations to two decimal places.
$
Explanation / Answer
Kendra Enterprises Value of operations Year 1 Year 2 FCF 80,000 100,000 Growth rate g after yr 2=9% Avg cost of capital =15% 0 Terminal Value =100000*1.09/(0.15-0.09)= 1,816,667 Total FCF = 80,000 1,916,667 PV factor @15% 0.8696 0.7561 PV of FCF = 69,565 1,449,275 Sum of PV of FCF= $ 1,518,840.71 Terminal Value =Future Cash flows beyond yr 2= $ 1,816,666.67 Value of Kendra's Operations = $ 1,518,840.71
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