Question

Problem 7-07
Horizon Value of Free Cash Flows

Current and projected free cash flows for Radell Global Operations are shown below.

	Actual 2016	2017	Projected 2018	2019
Free cash flow	$612.00	$672.68	$712.73	$769.75
(millions of dollars)

Growth is expected to be constant after 2018, and the weighted average cost of capital is 11.2%. What is the horizon (continuing) value at 2019 if growth from 2018 remains constant? Round your answer to the nearest dollar. Round intermediate calculations to two decimal places.

Answer 1

Horizon (continuing) value at 2019

Step-1, Calculation of the Growth Rate (g)

Growth Rate (g) = [(FCF in 2019 – FCF in 2018) / FCF in 2018] x 100

= [($769.75 - $712.73) / $712.73] x 100

= [$57.02 / $712.73] x 100

= 8%

Step-2, Calculation of the Horizon (continuing) value at 2019

Horizon (continuing) value at 2019 = FCF 2018(1 + g) / (WACC – g)

= $712.73(1 + 0.08) / (0.1120 – 0.08)

= $769.75 / 0.032

= $24,054.64 Million

“Hence, the Horizon (continuing) value at 2019 would be $24,054.64 Million”