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.
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.
Get Answers For Free
Most questions answered within 1 hours.