Question

# Ryan Enterprises forecasts the free cash flows (in millions) shown below. The weighted average cost of...

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

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

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.

Feel free to ask in case of any query relating to this question