A company forecasts the free cash flows (in millions) shown below. The weighted

Question

A company forecasts the free cash flows (in millions) shown below. The weighted average cost of capital is 13% and the FCF's 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 one frees cash flow-$15, two $10 and third year $40

Please, explain all solution in details. Note that it is in class task and excel is prohibited to use so I have to understand all steps and do them by hand.

Explanation / Answer

Terminal value at year 3 = CF3 (1+G) /(WACC -G)

                                             = 40 (1+.05) /(.13 -.05)

                                            = 40* 1.05 / .08

                                            = 525

year cash flow Present value at 13% present value *cash flow 1 - 15 .88496 -13.2744 2 10 .78315 7.8315 3 40 .69305 27.722 Terminal value at year 3 525 .69305 363.85125 Value of operation at 0 $ 386.13

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