Question

An analyst gathered the following information regarding Darius Investments:

Current year FCFF = $5.2 million

Expected growth rate in FCFF for the next three years = 14%

Long-term constant growth rate from Year 4 onward = 6%

WACC during the high-growth phase = 18%

WACC during the mature phase = 11%

The value of the firm today is closest to:

Select one:

a. $114 million

b. $56 million

c. $136 million

Answer 1

FCFF at Year 0 = $5.2 million;

FCFF at the end of Year 1 = $5.2 x 114% = $5.928 million

FCFF at the end of Year 2 = $5.928 x 114% = $6.758 million

FCFF at the end of Year 3 = $6.758 x 114% = $7.704 million

Value of the firm at the end of the Year 3 =

$7.704 ( 1+0.06) / (0.11-0.06) = $163.325 million

We need to find the Value of the Firm at Year 0. The following is the calculation:

Therefore, the value of the firm today is $114 million.

Option A is correct answer.