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 6%. The company's weighted average cost of capital is 14%.

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.

$

Calculate the value of Kendra's operations. Round your answer to the nearest cent. Do not round intermediate calculations.

Answer 1

1.terminal or horizon value of operations:

since we have a constant growth rate of 6%, after year 2:

horizon value after year 2 = cash flow of year 2 *(1 + growth rate) / (cost of capital - growth rate)

=>$100,000 * (1+0.06) / (0.14-0.06)

=>$106,000 / 0.08

=>$1,325,000.

b.value of kendra's operations:

year	cash flow	present value factor @14%	Present value of cash flow
1	$80,000	1/(1+0.14) =>0.8771929845	$70,175.43876
2	$100,000	1/(1+0.14)^2=>0.76946752846	$76,946.752846
2	$1,325,000 (horizon value)	1/(1+0.14)^2=>0.76946752846	$1,019,544.4752
		Value of operations	$1,166,666.67

therfore value of kendra's operations = $1,166,666.67.