Assume a firm\'s revenues and net income are projected to grow by 10% per year i

Question

Assume a firm's revenues and net income are projected to grow by 10% per year into the foreseeable future. What terminal value growth rate is most appropriate for the free cash flow valuation model when WACC is 11%? -40% -10% 0% 5% 15% The present value (today) of the terminal (continuation) value cash flow that begins in 11 years is $28,174,758 assuming a WACC equal to 11%. The year 11 free cash flow (beginning of the growing perpetuity) is $4,000,000. What is the growth rate required for the continuation value term? 5% 6% 7% 8% 9% Show all calculations please

Explanation / Answer

1)

Terminal Value = Expected FCFF/(WACC -Growth rate)

- Terminal Value Growth rate = -10% ( Given)

Answer

b) -10%

2)

Horizon Value in year 10 = present Value*(1+wacc)^10

Horizon Value in year 10 = 28174758*(1+11%)^10

Horizon Value in year 10 = 79,999,999

Horison Value in year 10 = free cash flow in year 11/(WACC - growth rate)

Growth rate for continutation value = WACC - free cash flow in year 11/Horizon Value in year 10

Growth rate for continutation value = 11% - 4000000/79,999,999

Growth rate for continutation value = 6%

Answer

b) 6%

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.