Question

High Towers Inc Inc. forecasts that its free cash flow in the coming year, i.e., at t = 1, will be $11 million, but its FCF at t = 2 will be $16 million. After Year 2, its FCFs are expected to grow at a constant rate of 3% forever. If the weighted average cost of capital is 8%, what is the firm’s value of operations, in millions?

Answer 1

Present Value of Free cash flow in Year 1 = 11*1/(1.08)^1

= $ 10.18518519

Present Value of Free cash flow in Year 2= 16*1/(1.08)^1

= $ 14.81481481481480

Value At year 2 = Expected Free cash flow in year 3 / (required return-growth rate)

= [16*1.03]/(8%-3%)

= 16.48/5%

= $ 329.60

Present Value of Value At year 2 =Value At year 2 * Present Value of Discounting Factor(Rate, Time)

= 329.60*1/(1.08)^2

= $ 282.578875171468  

The firm’s value of operations= 10.18518519+14.81481481481480+282.578875171468

= $ 306.48

Answer = $ 306.48