Question

A company's free cash flow has been growing at 6 percent per year and is expected...

A company's free cash flow has been growing at 6 percent per year and is expected to maintain that level of growth in the future. Next year’s FCF is expected to be $12m. If the company’s discount rate is 11 percent, what is its fair value (assuming no other data are available)?:

a. $254.4m

b. $240m

c. $280m

d. Cannot be determined

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Homework Answers

Answer #1

Solution :

The formula for calculation of Fair Value of the firm as per the Corporate Valuation model is

Value of the firm = FCFF1 / ( r – g )

Where

FCFF1 = Free cash Flow next year ; r = discount rate ; g = constant growth rate of free cash flow

As per the information given in the question we have

FCFF1 = $ 12 Million = $ 12,000,000    ;   r = 11 % = 0.11   ; g = 6 % = 0.06   ;

Applying the above information in the formula we have the value of the firm as

= $ 12,000,000 / ( 0.11 – 0.06 )

= $ 12,000,000 / 0.05

= $ 240,000,000

= $ 240 million

Thus the Fair Value of the firm = $ 240 million

The solution is option b. $ 240m

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