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FCF $8 million, WACC 10%, g 5% What is the valuation at 10%WACC, g3%? (explain)

FCF $8 million, WACC 10%, g 5% What is the valuation at 10%WACC, g3%? (explain)

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Answer #1

The valuation can be done with the help of Constant growth FCF model.

Value = FCF ( 1 + g) / (R-g)

g= growth rate for the free cash flows = 5%

R= WACC OR Weighted average cost of capital = 10%

Valuation = 8 * 1.05/ ( 0.10 - 0.05)

= 8.40/ 0.05

= $ 168 million

Valuation at g= 3% = 8 *1.03 /(0.10 - 0.03 )

= 8.24/ 0.07

= $ 117.71. million

We see that once the growth rate comes down the valuation also drops. The growth mainly derives the valuation. Higher growth rate means higher earnings in futures which will increase the future free cash flows. These in turn will lead to higher valuations.

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