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. Actual 2016 2017 Projected 2018 2019 Free cash flow $613.64 $674.32 $714.37 $771.52 (millions of dollars) Growth is expected to be constant after 2018, and the weighted average cost of capital is 10.85%. What is the horizon (continuing) value at 2019 if growth from 2018 remains constant? Round your answer to the nearest dollar. Round intermediate calculations to two decimal places.

Explanation / Answer

Growth rate from 2018 to 2019:

Growth rate = (771.52-714.37)/714.37 = 0.0800 = 8%

According to dividend discount model,

P0 = D1/(R-g)

Horizon value at 2019 = FCF at 2020/(R-g) = 771.52*(1+0.08)/(0.1085-0.08) = 29236.55

Horizon value = $29236.55

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