Question

Zhdanov, Inc. forecasts that its free cash flow in the coming year, i.e., at t = 1, will be -$15 million (negative), but its FCF at t = 2 will be $30 million. After Year 2, FCF is expected to grow at a constant rate of 3% forever. If the weighted average cost of capital is 20%, what is the firm's value of operations, in millions? Enter your answer rounded to two decimal places. Do not enter $ or comma in the answer box. For example, if your answer is $12,300.456 then enter as 12300.46 in the answer box.  

Answer 1

The value is computed as shown below:

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

= - $ 15 million / 1.20 + $ 30 million / 1.20² + 1 / 1.20² x [ ($ 30 million x 1.03) / (0.20 - 0.03) ]

= - $ 15 million / 1.20 + $ 30 million / 1.20² + $ 181.7647059 million / 1.20²

= - $ 15 million / 1.20 + $ 211.7647059 million / 1.20²

= $ 134.56 million Approximately

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