Question

Pick a CFFA0 between $2,000,000 and $3,500,000 annually for a constant growth firm.  We will call this...

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.  

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Answer #1
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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