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

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 9%. The company's weighted average cost of capital is 14%.

a. 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.

b. 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*1.09)/(0.14-0.09)

=$2,180,000

b.value of Kendra's operations=Future FCF*Present value of discounting factor(14%,time period)

=80000/1.14+100,000/1.14^2+2,180,000/1.14^2

which is equal to

=$1,824,561.40(Approx).

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