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Kendra Enterprises has never paid a dividend. Free cash flow is projected to be

ID: 2808092 • Letter: K

Question

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 5%. The company's weighted average cost of capital is 17%. 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. Do not round intermediate calculations. Round your answer to the nearest cent. $

Explanation / Answer

a Horizon value of operations=(FCF for year 2*Growth rate)/(WACC-Growth rate)

=(100,000*1.05)/(0.17-0.05)

which is equal to

=$875,000

b.value of Kendra's operations=Future FCF*Present value of discounting factor(17%,time period)

=80000/1.17+100,000/1.17^2+875000/1.17^2

which is equal to

=$780626.78(Approx).