Question

A company is projected to generate free cash flows of $171 million per year for the next 3 years (FCFF1, FCFF2 and FCFF3). Thereafter, the cash flows are expected to grow at a 1.9% rate in perpetuity. The company's cost of capital is 10.6%. What is your estimate for its enterprise value? Answer in millions, rounded to one decimal place (e.g., $213,456,789 = 213.5).

Answer 1

The value is computed as follows

= FCFF in year 1 / (1 + cost of capital)¹ + FCFF in year 2 / (1 + cost of capital)² + FCFF in year 3 / (1 + cost of capital)³ + 1 / (1 + cost of capital)³ x [ [ (FCFF in year 3 x (1 + growth rate) ] / ( cost of capital - growth rate) ]

= $ 171 million / 1.106 + $ 171 million / 1.106² + $ 171 million / 1.106³ + 1 / 1.106³ x [ ($ 171 million x 1.019) / (0.106 - 0.019) ]
= $ 171 million / 1.106 + $ 171 million / 1.106² + $ 171 million / 1.106³ + $ 2,002.862069 million / 1.106³

= $ 171 million / 1.106 + $ 171 million / 1.106² + $ 2,173.862069 million / 1.106³

= $ 1,901.2 million Approximately

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