Question

eBook Horizon Value of Free Cash Flows JenBritt Incorporated had a free cash flow (FCF) of $72 million in 2019. The firm projects FCF of $235 million in 2020 and $650 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 10%. 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. $ million

Answer 1

The price per share is computed as shown below:

= FCF in 2020 / (1 + WACC) + FCF in 2021 / (1 + WACC)² + 1 / (1 + WACC)² [ ( FCF in year 2021 (1 + growth rate) / (WACC - growth rate) ]

= $ 235 million / 1.10 + $ 650 million / 1.10² + 1 / 1.10² x [ ($ 650 million x 1.04) / (0.10 - 0.04) ]

= $ 235 million / 1.10 + $ 650 million / 1.10² + 1 / 1.10² x [ ($ 11,266.666667 million) ]

= $ 235 million / 1.10 + $ 11,916.66667 million / 1.10²

= $ 10,062.12 million Approximately

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