Pick a CFFA0 between $2,000,000 and $3,500,000 annually for a constant growth firm. We will call this firm the subject firm, and we will assume that this firm’s cash flows from assets are growing at a constant rate of 2% annually. Comparable constant growth firms are selling for $50,000,000 with CFFA0 of $2,750,000 and have a constant growth rate in their Cash Flows from Assets of 3%. Furthermore, assume that you have no reliable way to calculate the subject firm’s WACC. Given all of these conditions, you are to provide an estimate of value for the subject firm.
Solution | |||||||||||||||
Given that , the value of comparable constant growth firm are selling at 50000000 with Annual cash flow of 2750000 with constant growth of 3%. | |||||||||||||||
we have the formula for caculating value of firm: | |||||||||||||||
Value of firm= Cash flows/ WACC- Constant growth | |||||||||||||||
50000000 | = 2750000/wacc-0.03 | ||||||||||||||
wacc | = 2750000/50000000 + 0.03 | ||||||||||||||
wacc | = 0.085 or 8.5% | ||||||||||||||
now to calculate the value of subjected firm, we asssume annual cash flows of 3000000. | |||||||||||||||
value of firm= Annual cash flows/ WACC- growth | |||||||||||||||
= 3000000/8.5%-2% | |||||||||||||||
= 3000000/6.5% | |||||||||||||||
46153846 | |||||||||||||||
Hence value of subjected firm = $46153846 |
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