Question

Given free cash flow forecasts for the next four years are $50,000, $90,000, $70,000, and $100,000 and there is a terminal value of $800,000.

If the weighted average cost of capital is 12%, what is the value of the firm, using the absolute valuation method if the terminal value of the firm (at the end of four years from today) is estimated to be ____

A.) $698,234

B.) $758,172

C.) $738,181

Answer 1

Present Value = Amount/(1+rate)^years

Year Cashflow Present Value

1 50000 50000/(1+0.12)^1

2 90000 90000/(1+0.12)^2

3 70000 70000/(1+0.12)^3

4 100000 100000/(1+0.12)^4

Terminal Value for Year 4 800000 800000/(1+0.12)^4

Value of the firm = 50000/(1+0.12)^1 +  90000/(1+0.12)^2 + 70000/(1+0.12)^3 + 100000/(1+0.12)^4 + 800000/(1+0.12)^4

=738181.19 Answer

The option C is correct.

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