Question

JenBritt Incorporated had a free cash flow (FCF) of $96 million in 2019. The firm projects FCF of $250 million in 2020 and $590 million in 2021. FCF is expected to grow at a constant rate of 4% in 2022 and thereafter. The weighted average cost of capital is 9%. What is the current (i.e., beginning of 2020) value of operations? Do not round intermediate calculations. Enter your answer in millions. For example, an answer of $1 million should be entered as 1, not 1,000,000. Round your answer to two decimal places.

Answer 1

Step-1, The Terminal or horizon

Horizon Value = FCF2020(1 + g) / (WACC – g)

= $590 Million(1 + 0.04) / (0.09 – 0.04)

= $613.60 Million / 0.05

= $12,272.00 Million

Step-2, The Current value of operation

The firm’s Current value of operation is the Present Value of the Free Cash flows and the Terminal Value

Year	Cash flow ($ in Millions)	Present Value factor at 9.00%	Stock price ($ in Millions)
2020	250.00	0.9174312	229.36
2021	590.00	0.8416800	496.59
2021	12,272.00	0.8416800	10,329.10
TOTAL	11,055.05

Hence, the Current value of operations will be $11,055.05 Million

NOTE

The Formula for calculating the Present Value Factor is [1/(1 + r)ⁿ], Where “r” is the Discount/Interest Rate and “n” is the number of years.