Question

Kendra Enterprises has never paid a dividend. Free cash flow is projected to be $80,000 and $100,000 for the next 2 years, respectively; after the second year, FCF is expected to grow at a constant rate of 8%. The company's weighted average cost of capital is 16%.

1. What is the terminal, or horizon, value of operations? (Hint: Find the value of all free cash flows beyond Year 2 discounted back to Year 2.) Round your answer to the nearest cent.
   

   $   
   

2. Calculate the value of Kendra's operations. Round your answer to the nearest cent. Round intermediate calculations to two decimal places.

Answer 1

We can calculate the desired results as follows

Free cash Flow for 1st year = $ 80,000

Free cash Flow for 2nd year = $ 100,000

Growth Rate = 8%

Weighted Cost of Capital = 16%

a) Formula to calculate terminal, or horizon, value of operations is

= Free cash Flow for 2nd year * (1+Growth Rate ) / ( Weighted Cost of Capital - Growth Rate )

= ( 100,000 * 1.08% ) / ( 16% - 8% )

= 108,000 / 8%

= $ 1,350,000

b) Value of Kendra's operations comes out to be

Year	Cash Flows (A)	Present Value Factor (16%)[1 / (1+16%)^n ]    (B)	Present Value ( A * B )
1	$ 80,000	0.862069	$    68,965.52
2	$    100,000	0.743163	$    74,316.30
After 2 years	$ 1,350,000	0.743163	$ 1,003,270.05
Total			$ 1,146,551.87

Value of Kendra's operations is $ 1,146,551.87 (Approx)

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