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?
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
Hence Terminal Value at time 3 = $786,727.08
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