Question

Ryan Enterprises forecasts the free cash flows (in millions) shown below. The weighted average cost of capital is 13.0%, and the FCFs are expected to continue growing at a 5.0% rate after Year 3. What is the firm's total corporate value, in millions?

Year	1	2	3
FCF	−$15.0	$10.0	$40.0

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	a.	$386.13
	b.	$314.51
	c.	$348.48
	d.	$366.82
	e.	$331.06

Answer 1

The value of the firm is computed as shown below:

= FCF1 / (1 + WACC) + FCF 2 / (1 + WACC)² + FCF3 / (1 + WACC)³ + 1 / (1 + WACC)³ [ ( FCF in year 3 (1 + growth rate) / (WACC - growth rate) ]

= - $ 15 million / 1.13 + $ 10 million / 1.13² + $ 40 million / 1.13³ + 1 / 1.13³ [ ($ 40 million (1 + 0.05) / (0.13 - 0.05) ]

= - $ 15 million / 1.13 + $ 10 million / 1.13² + $ 40 million / 1.13³ + $ 525 million / 1.13³

= $ 386.13 million Approximately

So, the correct answer is option a.

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