Question

P1.4 Basic DCF Valuation #2: A company has expected free cash flows of $1.45 million, $2.93 million, and $3.2

million in the next three years. Beginning in Year 4, the expected cash flows will grow (or decrease) by 25%

in perpetuity. Measure the value of this company as of today using both a 10% and 12% discount rate.

Answer 1

Free Cash Flow(FCF1) = $1.45 million

Free Cash Flow(FCF2) = $2.93 million

Free Cash Flow(FCF3) = $3.2 million

Growth rate therafter of expected cash flows(g) = -25%

- Calculating the Value of Firm using discount rate(r) as 10%:-

Value of Firm = 1.3182 + 2.4215 + 2.4042 + 5.1519

Value of Firm is $ 11.30

So, value of firm at discount rate 10% is $ 11.30

- Calculating the Value of Firm using discount rate(r) as 12%:-

Value of Firm = 1.2946 + 2.3358 + 2.2777 + 4.6170

Value of Firm is $ 10.53

So, value of firm at discount rate 12% is $ 10.53

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