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	$606.82	$667.50	$707.55	$750.00
(millions of dollars)

Growth is expected to be constant after 2018, and the weighted average cost of capital is 11.05%. What is the horizon (continuing) value at 2019 if growth from 2018 remains constant? Round your answer to the nearest dollar. Do not round intermediate calculations

Answer 1

Step-1, Calculation of the Growth Rate

Here, we have Free Cash Flow in Year 2019 (FCF₂₀₁₉) = $750.00 Million

Free Cash Flow in Year 2018 (FCF₂₀₁₈) = $707.55 Million

Growth Rate = [(FCF₂₀₁₉ - FCF₂₀₁₈) / FCF₂₀₁₈] x 100

= [($750.00 - $707.55) / $707.55] x 100

= [$42.45 / $707.55] x 100

= 6.00%

Step-2, Calculation of Horizon (Continuing) Value

Free Cash Flow in Year 2019 (FCF₂₀₁₉) = $750.00 Million

Growth Rate (g) = 6.00%

Weighted Average Cost of Capital (WACC) = 11.05%

Therefore, the Horizon (Continuing) Value = FCF₂₀₁₉(1 + g) / (WACC – g)

= $750.00(1 + 0.06) / (0.1105 – 0.06)

= $795.00 Million / 0.0505

= $15,743 Million

Therefore, the Horizon (Continuing) Value at 2019 will be $15,743 Million”

answered by: anonymous