Question

Horizon Value Current and projected free cash flows for Radell Global Operations are shown below. Actual 2013 2014 Projected 2015 2016 Free cash flow $606.96 $667.64 $707.69 $764.31 (millions of dollars) Growth is expected to be constant after 2015, and the weighted average cost of capital is 10.4%. What is the horizon (continuing) value at 2016 if growth from 2015 remains constant? Round your answer to the nearest dollar. Round intermediate calculations to two decimal places.

Answer 1

Step-1, Calculation of the Growth Rate

Here, we have Free Cash Flow in Year 2016 (FCF2016) = $764.31 Million

Free Cash Flow in Year 2015 (FCF2015) = $707.69 Million

Growth Rate = [(FCF2016 - FCF2015) / FCF2015] x 100

= [($764.31 - $707.69) / $707.69] x 100

= [$56.62 / $707.69] x 100

= 8.00%

Step-2, Calculation of Horizon (Continuing) Value

Free Cash Flow in Year 2016 (FCF2016) = $764.31 Million

Growth Rate (g) = 8.00%

Weighted Average Cost of Capital (WACC) = 10.40%

Therefore, the Horizon (Continuing) Value = FCF2016(1 + g) / (WACC – g)

= $764.31(1 + 0.08) / (0.1040 – 0.08)

= $825.4548 / 0.0240

= $34,394 Million

Therefore, the Horizon (Continuing) Value at 2016 is $34,394 Million