Question

Current and projected free cash flows for Radell Global Operations are shown below. Actual 2018 2019 Projected 2020 2021 Free cash flow $619.28 $679.96 $720.01 $770.41 (millions of dollars) Growth is expected to be constant after 2020, and the weighted average cost of capital is 11.85%. What is the horizon (continuing) value at 2021 if growth from 2020 remains constant? Do not round intermediate calculations. Enter your answer in millions. For example, an answer of $1 million should be entered as 1, not 1,000,000. Round your answer to the nearest whole number.

Answer 1

FCF 2020 = $720.01 million

FCF 2021 = $770.41 million

growth rate = [FCF 2021 - FCF 2020] / FCF 2020

= ($770.41 million - $720.01 million] / $720.01 million

= 0.06999902768

= 7%

g = 7%

WACC = 11.28%

FCF 2022 = FCF 2021 * (1+g) = $770.41 million * (1+7%) = $824.3387 million

Horizon value in 2021 = FCF 2022 / (WACC - g)

= $824.3387 million / (11.28% - 7%)

= $824.3387 million / 0.0428

= $19,260.25 million

Therefore, Horizon Value (continuing value in 2011) is $19,260 million