Question

Jeanette's Medical Supply has a beta of 1.47 and its RWACC is 11.8 percent. The market...

Jeanette's Medical Supply has a beta of 1.47 and its RWACC is 11.8 percent. The market risk premium is 7.4 percent, and the risk-free rate is 3.6 percent. The firm's cash flow at Time 3 is $73,900 with a growth rate of 2.2 percent. What is the terminal value of the firm at Time 3?

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Answer #1

We are given,

WACC = 11.8%

Cash flow in yr 3 = $73,900

Growth rate(g) = 2.2%

We can calculate the terminal value by the following formula,

The terminal value of the firm at time 3 = Cash flow in year 3 * (1 + g) / (WACC - g)

Terminal value = 73900 * (1+0.022) / (.118 - 0.022)

Terminal value = $786,727.08

  • We use WACC in calculating terminal value as we are given free cash flow to the firm. If we were given free cash flow to equity then we would have taken return on equity to discount the value.

Hence Terminal Value at time 3 = $786,727.08

If you have any doubts please let me know in the comments. Please give a positive rating if the answer is helpful to you. Thanks.

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