Question

Horizon Value of Free Cash Flows

Current and projected free cash flows for Radell Global Operations are shown below.

	Actual	Projected
	2019	2020	2021	2022
Free cash flow	$616.960	$677.640	$717.687	$775.100
(millions of dollars)

Growth is expected to be constant after 2021, and the weighted average cost of capital is 10.1%. What is the horizon (continuing) value at 2022 if growth from 2021 remains constant? 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 the nearest whole number.

Answer 1

Answer :

To calculate the horizon value, we first need to determine the growth rate with effect from the year 2021 (since after that year, the growth is expected to be constant). The growth rate can be determined with the use of following formula :

Growth Rate = Free Cash Flow of Year 2022 / Free Cash Flow of Year 2021 - 1

= 775.100 / 717.687 - 1 = 8%

Now, we can calculate the horizon value with the use of following formula :

Horizon Value = Free cash flow of 2022 * ( 1 + Growth rate ) / ( WACC - Growth rate )

= 775.100 * ( 1 + 8% ) / ( 10.1% - 8% )

Horizon Value = $ 39,862.29 millions