Question

Company has the following cash flow stream.

CF1 = 346

CF2 = 622

CF3 = 935

CF4 = 941

Cash flow is expected to be constant after year 4, with a growth rate of 4%. If the WACC is 10%, what is the Value of Operations (Firm Value) - Vop₀ today?

Answer 1

CF1 = 346

CF2 = 622

CF3 = 935

CF4 = 941

g = growth rate = 4%

r = WACC = 10%

CF5 = CF4 * (1+g) = 941 * (1+4%) = 978.64

Horizon value at the end of year 4 = CF5 / (r-g)

= 978.64 / (10%-4%)

= 978.64 / 0.06

= 16,310.66667

Value of Operations today = Present Value of future cash flows

= [CF1 / (1+r)^1] + [CF2 / (1+r)^2] + [CF3 / (1+r)^3] + [CF4 / (1+r)^4] + [Horizon Value / (1+r)^4]

= [346 / (1+10%)^1] + [622 / (1+10%)^2] + [935 / (1+10%)^3] + [941 / (1+10%)^4] + [16,310.66667 / (1+10%)^4]

= [346 / 1.1] + [622 / 1.21] + [935 / 1.331] + [941 / 1.4641] + [16,310.66667 / 1.4641]

= 314.545455 + 514.049587 + 702.479339 + 642.715661 + 11,140.4048

= 13,314.1948

Therefore, Value of Operations (Firm value) - VoP0 today is 13,314.19